Question

Discuss whether you agree with the following exemptions in new lessee accounting. Also identify any potential loophole concerning these exemptions. Please answer in detail

Exemptions for IFRS 16 does not require a company to recognise assets and liabilities for

(a) short-term leases (ie leases of 12 months or less)

(b) leases of low-value assets(for example, a lease of a personal computer).

Answer 1

The new IFRS accounting standard for leases, 'IFRS 16' includes several exemptions which a lessee has the option to apply when implementing the new guidelines.

EXEMPTION FOR SHORT TERM LEASES

The lease accounting exemption for short-term leases is included in IFRS 16 to ease the financial burden of the new standard. It’s an accounting policy choice which a lessee may elect to apply, but they can only have that option if the lease meets certain criteria.

Also, all items of a similar class must be treated equally. For example, if a lessee applies the exemption to the lease of a franking machine, using the above criteria, it must apply the exemption to all other franking machinery the business has on lease. But being the case and the agreement being shorter than 12 months in duration is not enough

Beyond all this, the lessee will have to compare the lease contract against the new standard, paying particular attention to any lease extension options or break clauses

This means, a lessee could not treat a lease as exempt simply because it had a break clause option inside 12 months, if that option would not pass the reasonably certain assessment criteria to be activated. For example, a major civil engineering contractor involved in a five-year motorway contract could not keep their heavy plant exempt just because it had a break clause after 11 months. It is clear they will need the plant for longer than this, so it cannot be exempt.

EXEMPTION FOR LOW VALUE ASSETS

A lease will qualify for the low value asset exemption if it meets the following criteria:

• The underlying asset is not dependent on, or highly interrelated with, other leased assets.
• The lessee can benefit from using the underlying asset on its own or with other readily available resources.
• Within the suggested threshold of roughly $5,000 as the value of the underlying asset when new.
• The lease is not the head lease in a sublease arrangement.
• The nature of the underlying asset, when new, is typically low value.

it means that the exemption is only likely to impact underlying assets such as office furniture and other operational and technological equipment that is typically low value. It is expected that the majority of low value asset leases would already likely be exempted through materiality concessions and, therefore, this exemption is unlikely to have a detrimental impact of the information available to users of financial statements, but will provide great relief to smaller companies, who will not need to prove the immateriality of exemption-qualifying leases under IFRS 16

Leases that qualify for the low-value asset exemption, or one of the other exemptions, may continue to be treated as off balance sheet; entities should keep this in mind when accounting for leases