HKFRS 16 paragraphs 5-8 contain recognition exemptions for lessees, which allow a lessee to elect not to apply the requirements in HKFRS 16 paragraphs 22-49 to “short-term leases” and “leases for which the underlying asset is of low value”.
The following simplified example explains how these recognition exemptions may be applied.
Fact pattern:
A lessee enters into a lease arrangement to rent a car from 1 July 20X0 to 31 December 20X2, with no termination/renewal and purchase options. The monthly rental is HK$10,000. The lessee’s financial year-end is June. The lessee is currently preparing its financial statements for the year ended 30 June 20X2.
Questions:
i. The remaining lease term is less than 12 months (i.e. 1 July 20X2 to 31 December 20X2). Does the recognition exemption for short-term leases apply?
ii. The monthly rental is only HK$10,000, which the lessee considers is of low-value. Does the recognition exemption for low-value assets apply?
View:
Paragraph 5 of HKFRS 16 states that a lessee may elect not to apply the requirements in paragraphs 22-49 to:
(a) short-term leases (as defined in Appendix A of HKFRS 16 as a lease that, at the commencement date, has a lease term of 12 months or less. A lease that contains a purchase option is not a short-term lease); and
(b) leases for which the underlying asset is of low value (as described in paragraphs B3-B8 of HKFRS 16).
i. Short-term leases
Paragraphs BC87-BC97 of the Basis for Conclusions accompanying HKFRS 16 explain the considerations and decisions of the International Accounting Standards Board (IASB) during the development of IFRS 16 in relation to short-term leases. Particularly, paragraph BC93 states that the IASB decided to expand the short-term lease exemption by making the determination of duration of short-term leases consistent with the determination of lease term, thus considering the likelihood of extension options being exercised or termination options not being exercised.
In determining whether a lease is a short-term lease, with reference to the definition of a short-term lease, a lessee should perform an assessment at the commencement date of the lease to consider whether the lease has a lease term of 12 months or less. The assessment is not dependent on the remaining lease term.
Example 5 of the accompanying illustrative examples of HKFRS 16 is related to short-term leases.
Based on the fact pattern as described, although the remaining lease term is less than 12 months (i.e. 1 July 20X2 to 31 December 20X2), the commence date of the lease was 1 July 20X0 with a lease term of 30 months in total (i.e. 1 July 20X0 to 31 December 20X2), which is more than 12 months. Hence, the recognition exemption for short-term leases does not apply.
ii. Leases of low-value assets
Paragraphs B3-B8 of HKFRS 16 contain guidance on assessing leases for which the underlying asset is of low value. Paragraph B3 states a lessee shall assess the value of an underlying asset based on the value of the asset when it is new, regardless of the age of the asset being leased. Paragraph B4 states the assessment of whether an underlying asset of low value is performed on an absolute basis, and the assessment is not affected by the size, nature or circumstances of the lessee. Paragraph B6 states that a lease of an underlying asset does not qualify as a lease of a low-value asset if the nature of the asset is such that, when new, the asset is typically not of low value. For example, leases of cars would not qualify as leases of low-value assets because a new car would typically not be of low value. Paragraph B8 notes examples of low-value underlying assets can include tablet and personal computers, small items of office furniture and telephones.
Paragraphs BC98-BC104 of HKFRS 16 explain the IASB’s considerations during the development of IFRS 16 around leases of low-value assets. In particular, paragraph BC100 states that the IASB intended the exemption to apply to leases for which the underlying asset, when new, is of low value (such as leases of tablet and personal computers, small items of office furniture and telephones). The IASB had in mind leases of underlying assets with a value, when new, in the order of magnitude of US$5,000 or less. A lease will not qualify for the exemption if the nature of the underlying asset is such that, when new, its value is typically not low. The IASB also decided the outcome of the assessment of whether an underlying asset is of low value should not be affected by the size, nature, or circumstances of the lessee-i.e. the exemption is based on the value, when new, of the asset being leased; it is not based on the size or nature of the entity that leases the asset.
Example 11 of the accompanying illustrative examples of HKFRS 16 provides an example of the application of paragraphs B3-B8 of HKFRS 16 to leases of low-value assets.
Based on the fact pattern as described, the monthly lease payment is only HK$10,000. However, the recognition exemption for low-value assets is assessed based on the value of the underlying asset when it is new, and a lease of a car does not qualify as a lease of a low-value asset because a new car would normally not be of low-value. Hence, the recognition exemption for low-value assets does not apply.
Please refer to HKFRS 16, the accompanying Basis for Conclusions and illustrative examples for details of the requirements and illustrations (see link).
