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, small items of furniture etc.).
In this article we shall focus on the second exemption.
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 finalizing IFRS 16, 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.
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.
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.
Additionally, the assessment is made regardless of whether the leased asset is material to the lessee.
ABC Ltd is a large, multi-national technology company with approximately $20 billion in its annual operating budget. It enters into a contract to lease one floor of an office building in a major city in Europe for total lease cost of $30.000 per annum for 6 years. The operations of the facility and the lease cost are immaterial to ABC Ltd.
Despite the fact that the lease is clearly immaterial to ABC Ltd, a floor of an office building is not generally considered to be of ‘low value’ on an absolute basis. Therefore, the lease does not meet the low value lease exemption.
ABC Ltd has decided to lease 150 new minibuses. The finance director intends to treat the leases of the engines, seats and bodies as separate leases. As the seats for each minibus have a cost when new of $3.000, the finance director intends to treat each of these leases as leases of low value assets.
IFRS 16 states that an underlying asset can be treated as a separate lease component only if:
- The lessee can benefit from use of the underlying asset on its own or together with other resources that are readily available to the lessee; and
- The underlying asset is not highly dependent on, or highly interrelated with, other assets.
In this instance ABC Ltd would not be able to take advantage of the exemption for low value assets, since the minibus and the seats can only be used together with each other and are dependent upon each other.