IFRS 16 applies to any periods on or after 1 January 2019.
The new standard modifies the accounting treatment of the lessee, but keeps the approach to the lessor accounting the same. The sale and leaseback accounting treatment is also going to be different.
At the commencement date the lessee recognizes:
- A lease liability and
- A right-of-use asset.
The lease liability is initially measured at the present value of lease payments not paid at the commencement date, discounted at the interest rate implicit in the lease. The lease liability is subsequently measured under the amortized cost method.
The lease liability is remeasured (if necessary) for any reassessment of amounts payable.
The change in the lease liability is recognized as an adjustment to the right-of-use asset.
IFRS 16 provides an optional exemption from the full requirements of the standard for:
- Short-term leases (leases with a lease term of 12 months or less)
- Leases for which the underlying asset is low value (e.g. tablet and personal computers etc.).
- The assessment of ‘low value’ for a leased asset is to be made on the basis of the value of an asset when it is (or was) new, regardless of whether the actual asset being leased is new.
- The standard does not provide very much guidance to assist in assessing what ‘low value’ means. The Basis for Conclusions to the standard notes the value of $ 5.000 as being an amount the IASB had in mind when finalising IFRS 16 towards the end of 2015, but this was not included in the standard itself.
- The assessment of low value should be applied consistently, regardless of the lessee’s size and nature.
If the entity elects to take the exemption, lease payments are recognized as an expense on a straight-line basis over the lease term or another systematic basis.
An entity leases a second-hand car which has a market value of $2,000. When new it would have cost $15,000.
The lease would not qualify as a lease of a low-value asset because the car would not have been low value when new.
The approach to lessor accounting, as in IAS 17, classifies leases into two types:
- Finance leases (where a lease receivable is recognized in the statement of financial position), and
- Operating leases (which are accounted for as rental income).
A lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset.
For a finance lease, at the commencement date the lessor derecognizes the underlying asset and recognizes a receivable at amount equal to the net investment in the lease.
A lease that does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset.
For an operating lease the asset is not derecognized. The lease payments from operating leases are recognized as income on either a straight-line basis or another systematic basis.