A company leases a set of desktop computers valued at roughly $800 each when new, under a three-year lease, and separately leases an office building for six months with no purchase option and no expectation of renewal. Under IFRS 16's recognition exemptions for lessees, how should the company treat each lease?
- Neither lease qualifies for an exemption, because IFRS 16 requires the value and the duration of a lease to both independently fall below the relevant thresholds before any single exemption can apply
- The computers may qualify for the low-value asset exemption, which is assessed on an absolute basis regardless of lease term (the IASB's basis for conclusions describes low-value assets, such as small IT equipment, as around USD 5,000 or less when new); the building lease may separately qualify for the short-term lease exemption because its term is 12 months or less and it contains no purchase option
- Only the building lease can ever qualify for an exemption, because IFRS 16's low-value asset exemption is restricted to intangible assets and cannot apply to any physical equipment
- Both leases must be capitalized regardless of value or term, because IFRS 16 abolished every lessee recognition exemption that had existed under the previous leases standard
Why B? And why not the others?
Correct answer: B. The computers may qualify for the low-value asset exemption, which is assessed on an absolute basis regardless of lease term (the IASB's basis for conclusions describes low-value assets, such as small IT equipment, as around USD 5,000 or less when new); the building lease may separately qualify for the short-term lease exemption because its term is 12 months or less and it contains no purchase option
IFRS 16 paragraphs 5-8 provide two independent, optional recognition exemptions for lessees: short-term leases (a lease term of 12 months or less at commencement, with no purchase option) and leases of low-value assets. The low-value asset exemption is assessed on an absolute basis by reference to the value of the underlying asset when new, regardless of the lease term or the size of the lessee; the IASB's basis for conclusions describes the Board having in mind assets of around USD 5,000 or less when new, citing examples such as small IT equipment, tablets, personal computers and small items of office furniture. Because these are two separate exemptions, the computers can qualify under the low-value test on their own, and the building lease can independently qualify under the short-term test. The option requiring both conditions to hold at once is wrong because it treats two independent exemptions as if they were a single combined test. The option restricting the low-value exemption to intangible assets is wrong because the Board's own examples are physical items such as computers and furniture. The option claiming IFRS 16 abolished all lessee exemptions is wrong because these two practical expedients were retained specifically to reduce the burden of capitalizing immaterial or short-lived leases.
Source: IFRS 16 Leases, paragraphs 5-8 (recognition exemptions) and Basis for Conclusions paragraph BC100 (low-value assets)