Short-term and low-value lease exemptions

Learning objectives

• Identify the lessee's two optional exemptions: short-term leases (12 months or less, with no purchase option), elected by class of underlying asset, and leases of low-value assets, elected on a lease-by-lease basis.L1, L2
• Determine whether an asset is of low value by reference to its value when new, regardless of materiality and of the lessee's circumstances, and exclude an asset that is subleased.L2, L3
• Calculate the annual expense of an exempt lease recognised on a straight-line basis (or on another systematic basis that is more representative).L1, L2

Normative references

• IFRS 16 §5A lessee may elect not to apply paragraphs 22 to 49 to short-term leases and to leases for which the underlying asset is of low value (guidance in paras. B3 to B8).
• IFRS 16 §6Where the exemption is applied, the lessee recognises the associated lease payments as an expense on a straight-line basis over the lease term or on another systematic basis. That other basis is applied if it is more representative of the pattern of the lessee's benefit.
• IFRS 16 §7If a lessee accounts for a short-term lease under paragraph 6, it considers the lease to be a new lease if there is a lease modification or any change in the lease term (for example, the exercise of an option not previously included).
• IFRS 16 §8The election for short-term leases is made by class of underlying asset (assets of a similar nature and use in the entity's operations). The election for leases of low-value assets can be made on a lease-by-lease basis.
• IFRS 16 §B3The lessee may apply the exemption in paragraph 6 to leases for which the underlying asset is of low value. The value is assessed on the basis of the value of the asset when it is new, regardless of the age of the asset being leased.
• IFRS 16 §B4The assessment of whether an underlying asset is of low value is performed on an absolute basis: it is not affected by the size, nature or circumstances of the lessee, and the exemption is available whether or not the leases are material to it. Different lessees should therefore reach the same conclusions about a particular underlying asset.
• IFRS 16 §B5An underlying asset can be of low value only if the lessee can benefit from its use on its own or together with other resources that are readily available to it, and the asset is not highly dependent on, or highly interrelated with, other assets.
• IFRS 16 §B6An asset whose nature is such that, when new, it is typically not of low value cannot qualify for the exemption; the standard gives the example of cars.
• IFRS 16 §B7If the lessee subleases an asset, or expects to sublease it, the head lease does not qualify as a lease of a low-value asset.
• IFRS 16 §B8The standard gives tablet and personal computers, small items of office furniture and telephones as possible examples of low-value assets.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

23 questions

• For a short-term lease, a lessee may elect to recognise neither a right-of-use asset nor a lease liability.L1
• The election to apply the short-term lease exemption is made lease by lease, on a case-by-case basis.L1
• Fixalis leases a machine for a period of 12 months; the contract gives it an option to purchase the machine at the end. This lease can be treated as a short-term lease.L2
• How does a lessee that applies the exemption to a short-term lease account for the related lease payments?L1
• On what basis does a lessee assess whether the underlying asset of a lease is of low value?L2
• Transalis wants to apply the two optional lessee exemptions. At what level is each election made?L2
• To conclude that an underlying asset is of low value, which factors must a lessee take into account? (several answers)L2
• Which of the following assets, taken when new, does the standard cite as possible examples of low-value assets? (several answers)L1
• Chantiers Orbel leases a site hut for a lease term of {lease_term_months} months from 1 April 20X1, with no purchase option. It applies the short-term lease exemption to this class of assets. The lessor grants a rent-free period for the first {free_months} months; afterwards, Orbel pays {monthly_payment} at the end of each month until the end of the lease. Compute the lease expense for the year ended 31 December 20X1, recognised on a straight-line basis.L1
• The events organiser Festivia leases a marquee structure for {lease_term_months} months from 1 September 20X1, with no purchase option; it applies the short-term lease exemption to this class of assets. The first month is rent-free ({free_months} month), then Festivia pays {monthly_payment} in arrears, at the end of each following month. The reporting period ends on 31 December 20X1. Determine the lease expense for 20X1 and the accrued expense in the statement of financial position at that date.L2
• The design studio Graphix leases 25 tablets for {lease_term_months} months from 1 March 20X1. After analysis, each tablet is a low-value asset (case datum) and Graphix elects the exemption for this lease. The total payment, payable in advance at the beginning of each month, is {payment_year1} per month in the first year and then {payment_year2} per month in the second year. No other systematic basis is more representative than the straight-line basis. Compute the lease expense for the year ended 31 December 20X1 and the accrued expense at that date.L2
• The firm Bureaulis leases office chairs for {lease_term_months} months from 1 July 20X1. Each chair is a small item of furniture whose value when new is low (case datum); Bureaulis applies the low-value exemption to this lease. Payments are made in advance on 1 July each year: {payment_y1} in the first year, {payment_y2} in the second and {payment_y3} in the third. No other systematic basis is more representative. Determine the lease expense for 20X1 (year ended 31 December) and the prepaid expense at that date.L2
• Stockalia leases a storage container for {lease_term_months} months from 1 November 20X1, with no purchase option, and applies the short-term lease exemption to this class of assets. It pays {quarterly_payment} in advance at the beginning of each quarter, that is on 1 November 20X1 and 1 February 20X2. Compute the lease expense for the year ended 31 December 20X1.L1
• The GrandPort group, with several thousand employees, and the young company Pixelia, with 3 employees, each lease a new laptop of the same model for three years. GrandPort treats its lease as relating to a low-value asset, and this analysis of the asset is considered correct. Pixelia's finance director considers that, for such a small entity, the lease payment is material and that the laptop therefore cannot be a low-value asset for Pixelia. Which conclusion should be adopted?L3
• Rivéo leases, for two years, a nine-year-old car whose current value is estimated at 2,500. An equivalent model is worth 28,000 when new. The contract contains no purchase option. The accountant proposes applying the low-value exemption. Which analysis is correct?L3
• Cowelia, which operates a coworking space, leases 40 laptops for three years; each laptop, when new, would meet the criteria of a low-value asset. Cowelia plans to sublease these laptops to the members of its space. It wishes to apply the low-value exemption to the head lease. Which analysis should be adopted?L3
• The accountant of Plieuse & Co analyses the lease of an industrial folding machine: (1) the lease term, at the commencement date, is 11 months; (2) the production machinery class is covered by the short-term lease election; (3) the contract contains an option to purchase the machine at the end, but a term of 11 months is enough to qualify it as a short-term lease; (4) the payments are therefore recognised as an expense on a straight-line basis. Which step contains the error?L2
• Optiflux leases 120 sensors for four years, each with a modest price when new. These sensors work only once integrated into a measurement line that Optiflux also leases; they are highly interrelated with each other and with that line. Analysis by the management controller: (1) each sensor, taken individually, has a modest price when new; (2) the low-value election may be made lease by lease; (3) it does not matter that the sensors can only work when integrated into the line: the exemption applies; (4) the payments for the sensors are recognised as an expense on a straight-line basis. Which step contains the error?L3
• Fitralis leases a forklift for 9 months, with no purchase option, and applies the short-term lease exemption to this class of assets. After 7 months, it agrees with the lessor to extend the lease by 4 months. Accountant's analysis: (1) the original lease was indeed a short-term lease; (2) the extension changes the lease term; (3) since the total term reaches 13 months, the original lease must be restated from its commencement date, with a right-of-use asset and a lease liability recognised at that date; (4) the payments already expensed are reversed. Which step contains the fundamental error?L2
• Which of the following statements on recognition by the lessee at the commencement date are correct? (several answers)L2
• Valcrose leases 40 tablets for its sales staff. The lease is of low-value assets and Valcrose has elected the corresponding exemption. What does it recognise at the commencement date?L2
• Brelin leases an exhibition stand for 9 months and applies to this short-term lease the exemption allowing it to recognise the lease payments as an expense. Throughout this period, it subleases the stand to a young brand. How does Brelin classify the sublease?L3
• Nautéa leases a cold-storage warehouse for 10 months. For the class of warehouse assets, it has not elected the short-term lease exemption and therefore recognises a right-of-use asset and a lease liability. It subleases the warehouse to a fish wholesaler for the 10 months. How should Nautéa approach the classification of the sublease?L4