Many of you are starting to consider the impact the new accounting standard on leases when it becomes effective from 1 January 2019. Here are our responses to commonly asked questions about these standards.
How do I account for different components of a property lease?
Rental contracts typically include other payments in addition to rent. The treatment of these additional costs will depend on the circumstances and the tenant will need to assess if the payment results in a transfer of a good or service.
When the payment is for a good or service, it is not part of the lease and should be accounted for separately. Tenants would use observable stand-alone prices (i.e., prices at which a customer would purchase a component of a contract separately) when available. If observable stand-alone prices are not readily available, tenants would estimate stand-alone prices, maximising the use of observable information. For example, water charges, waste removal, security, cleaning or maintenance are non-lease components because they provide the tenant with a good or service and therefore should be accounted for separately and in accordance with other standards. However, the standard offers tenants the choice of accounting for non-lease components as part of the lease.
Payments that do not result in a transfer of goods or service to the tenant are considered to be part of the lease. General rates, property taxes or insurance that protects the landlord’s investment do not provide the tenant with any additional goods or services and would not be a separate component of the lease.
What is the International Financial Reporting Standards (IFRS) 16 exemption for low value assets?
IFRS 16 provides an optional relief for low-value asset leases where the accounting is similar to operating lease accounting under the current leasing standard. A low-value asset is not specifically defined in the standard and this will be a policy decision for management. Management should consider all relevant factors before settling on the appropriate limit, remembering that a limit which is set too low could lead to a great deal of work. On the other hand, a limit that is too high will defeat the intent of the new standards to ensure that lease liabilities (and assets) are not hidden from the users of the financial statements. You may consider using your existing capitalisation threshold as the starting point in defining a low value asset. We would expect laptops and personal computers, telephones, office equipment and furniture to qualify for the exemption.
Things to remember:
- The low-value asset relief is optional and is an accounting policy choice that can be made on a lease-by-lease basis.
- The low value test is applied to individual assets and not collectively. For example, if you lease all your laptops and each laptop is below the low-value asset limit, the lease would be exempt from the standard.
- The value refers to the value of the underlying asset when new, regardless of its age the start of the lease.
- Entities in the public sector need to consider any instructions issued by their lead agencies.
- Document your judgement in setting the low value asset threshold.
Will licences to use an asset come under IFRS 16?
Identifying a lease will now require careful consideration of the elements of the definition of a lease, even though the scope of IFRS 16 is generally similar to the existing standard on leases. IFRS 16 is not restricted to contracts, or portions of contracts, that are specifically described or labelled as leases and one must remember the principle that transactions need to be accounted for and presented in accordance with their substance and economic reality and not merely their legal form. One important distinction is between a lease and a service contract. A situation where the supplier controls the use of an asset to deliver the service or the supplier has the substantive right to substitute alternative assets may result in the arrangement not containing a lease and therefore be accounted for as a service contract.
For additional information, read the following article; AASB 16 – Leases: Are you prepared for the secondary implications?
If you’re interested in receiving additional information regarding the new accounting standards, please contact your financial adviser to discuss further.