IFRS 16 sets out principles for the recognition, measurement, presentation and disclosure of leases. IFRS 16 applies to all leases, except for items listed in paragraph IFRS 16.3. Specific recognition exemptions are provided for short-term leases and leases of low value assets (IFRS 16.5-8). IFRS 16 sets out substantially different accounting principles for lessees (customers) and lessors (suppliers).
Leases of intangible assets
Paragraph IFRS 16.3(e) excludes from the scope of IFRS 16 rights for intangible assets such as motion picture films, video recordings, plays, manuscripts, patents and copyrights. These rights should be accounted for under IAS 38. For leases of other intangible assets, entities (lessees only) may choose to apply IAS 38 or IFRS 16 (IFRS 16.4).
Entities may elect not to apply recognition requirements of IFRS 16 to short-term leases (IFRS 16.5(a)). A short-term lease is a lease that, at the commencement date, has a lease term of 12 months or less and does not contain a purchase option (IFRS 16.Appendix A). Note that a lease term is used within the meaning of IFRS 16 and it does not mean ‘maximum possible term’.
When this recognition exemption is applied, lease payments are recognised as an expense over the lease term on straight-line basis or another systematic basis (IFRS 16.6). The election for short-term leases should be made by class of underlying asset to which the right of use relates (IFRS 16.8).
Entities may elect not to apply recognition requirements of IFRS 16 to leases for which the underlying asset is of low value (IFRS 16.5(b)). The value of the underlying asset should be assessed by reference to a new asset regardless of the age of the asset being leased. Paragraph IFRS 16.B6 states that leases of cars do not qualify as leases of low-value assets because a new car would typically not be of low value. Examples of low-value assets given by IFRS 16 include tablets, PCs, small items of office furniture and telephones (IFRS 16.B8). Basis for Conclusions to IFRS 16 explain that, when developing the exemption for low-value assets, IASB had in mind leases of underlying assets with a value, when new, in the order of magnitude of US$5,000 or less (IFRS 16.BC100). Although this threshold is not included in the standard, it is often used as a valid guidance for determining whether an asset is of low value.
An assessment of whether an asset is of low value should also be made irrespective of the materiality levels for a given entity, so large and small entities are expected to reach the same conclusions about whether a particular underlying asset is of low value (IFRS 16.B4). Additionally, an asset can be of low value if it meets the following criteria (IFRS 16.B5):
- an entity can benefit from its use on its own or together with other resources that are readily available to the entity and
- the underlying asset is not highly dependent on, or highly interrelated with, other assets (e.g. is not a part of a bigger asset).
When the recognition exemption for low-value assets is applied, lease payments are recognised as an expense over the lease term on straight-line basis or another systematic basis (IFRS 16.6). The election for leases for which the underlying asset is of low value can be made on a lease-by-lease basis (IFRS 16.8). If a lessee subleases an asset, or expects to sublease an asset, the head lease does not qualify as a lease of a low-value asset (IFRS 16.B7).
See also Example 11 accompanying IFRS 16.
IFRS 16 allows portfolio application as a practical expedient for entities having a portfolio of leases with similar characteristics. An entity can use this expedient if it reasonably expects that the effects on the financial statements of applying IFRS 16 to the portfolio would not differ materially from applying IFRS 16 to the individual leases within that portfolio (IFRS 16.B1).
Leases can be grouped by type of the leased asset (e.g. cars for sales representatives) and time at which the contract leases where entered into (e.g. first half of a given year).
See also Example 11 accompanying IFRS 16.
Combination of contracts
Occasionally entities enter into a number of contracts that in substance are a single bigger arrangement. Therefore, two or more contracts entered into at or near the same time with the same counterparty (or related parties of the counterparty) should be combined for accounting purposes if at least on of the criteria set out in paragraph IFRS 16.B2 is met.
Paragraph IFRS 16.BC130 gives an example of a lessee that enters into four separate one-year lease contracts for similar assets, each starting after the previous one ends. Such contracts should be accounted for as a single four-year lease.
More about IFRS 16
See other pages relating to IFRS 16: