Exemptions to IFRS 16: Leases

IFRS 16 is set to bring about significant changes in accounting for leases. This is the third article in a four-part series, which examines the new standard and its impact on business. Readers should not act on the contents of the articles in isolation, but should read all four articles together.

While the accounting of lessees will be significantly impacted by the new IFRS 16 standard, as described in the first two articles in this series, there are some instances where the rules will not apply.  ‘Of particular relevance to our industry is the optional accounting simplification which will be allowed for short-term leases,’ says Sybrandt Fouché, Chief Financial Officer of RentWorks. ‘In these instances, accounting will be similar to current operating lease accounting under IAS 17.’

Short-term leases

A lease will be classified as ‘short-term’ if it covers a period of 12 months or less at its commencement date.  ‘If an accounting policy choice is made to exercise the exemption in respect of short-term leases, then it must be made consistently for all short-terms leases of underlying assets of the same class,’ says Fouché. ‘Companies will need to decide whether they will apply the general IFRS 16: Leases model, bringing these leases onto their balance sheets, or whether they’ll apply similar accounting to operating leases under IAS 17.’

Importantly, a lease cannot qualify as short-term if it contains a purchase option, or if it includes any optional extension periods, unless it is reasonably certain that the lessee will not exercise an option to extend the lease, resulting in the lease period being longer than 12 months.

Low asset-value leases

‘Another area of exemption to IFRS 16, which will impact lessees, is that of optional accounting simplifications for lower-value assets. This would be available as an accounting policy choice on a lease-by-lease basis,’ says Fouché.

In these cases, the value will be assessed according to the value of the underlying stand-alone asset as if it was new, irrespective of the asset’s actual age. The exemption may be applied whether or not the leases in question are material to the reporting entity. The IASB has stated that it considers low-value assets to be those with a value of around US$ 5 000 or less, when new. Leases of assets such as office furniture, laptops and servers would typically qualify for this exemption, but vehicle leases would not.

‘In cases where there are, for example, ten assets under one lease, it will be important to determine whether each asset is a separate lease component (stand-alone asset) and if the asset underlying each component has a low value when new,’ says Fouché. ‘If so, if the lease as a whole is of a high value, the lessee could still choose to apply the low-value asset exemption to each of the low value lease components. The low value assets would be accounted for similar to operating leases under IAS 17.’

Other types of leases which will be exempt from the application of IFRS 16 are:

• Leases by companies reporting under IFRS for SMEs, which will still apply similar policies as in IAS 17;
• Leases of non-regenerative resources, for example for the use of minerals, oil and natural gas;
• Leases of biological assets, where IAS 41: Agriculture will apply;
• Service concession arrangements;
• Licences of intellectual property granted by a lessor; and
• Rights held by a lessee under certain licensing agreements, for example films, plays, manuscripts, patents and copyrights.

The next article in this series will consider whether there is still a benefit in leasing assets, when considering the changes imposed by IFRS 16.

Articles in this series will examine:

1. Changes in off balance sheet lease reporting;
2. The impact IFRS 16 will have on businesses, from an accounting and operational perspective;
3. The exceptions to the application of IFRS 16; and
4. Whether, in light of IFRS 16, there is still benefit in leasing, as opposed to buying assets.