Piotr STASZKIEWICZ
Audit Partner at RSM Poland

In the previous article devoted to leasing, several sample questions were asked by members of management boards and accountants regarding the recognition, valuation and presentation of leasing under the new IFRS 16 standard. Below please find the answers to the inquiries received.

Who is affected by IFRS 16?

Essentially, any entity adopting IFRS and to which the right to control the use of a given asset is transferred for a specified period of time in exchange for a fee (IFRS 16, paragraph 9). For the purpose of further consideration, a lessor shall be any entity that receives the right to use an asset (or a principal part thereof) for a certain period of time in exchange for a fee.

This does not mean, however, that the standard does not provide for ANY exemptions or derogations. In general, IFRS 16 does not apply to issues related to: biological assets (IAS 40), exploration and the evaluation of mineral resources (IFRS 6), concession services referred to in IFRIC 12 (including the management of public roads, bridges, etc.), licenses for intellectual assets based on IFRS 15 or rights based on license agreements in the field of, among others, films or patents (IAS 38). The lessor may, but is not obliged to, apply the principles of IFRS 16 to any intangible assets other than any rights under license agreements such as: cinema productions (films), patents, copyrights, etc.[1] In view of the above, having concluded contracts for the use of cars, aircrafts, land, buildings or smaller equipment, such as computer sets, any user thereof becomes a lessee and should apply the principles regarding lessees in the scope of disclosure, valuation and presentation of leasing, unless they seek to benefit from an exemption.

Exemptions

IFRS 16 provides for two possible exemptions, i.e. a lessee may not apply IFRS 16 to:

  • short-term contracts, i.e. concluded for 12 months or less;
  • contracts, the subject of which are the rights to benefit from low-value assets, analyzed according to the price of this new asset; separately, each asset resulting from the contract is subject to an analysis, their cumulative significant value is irrelevant; if the value of the new asset, the right to which the entity is exercising is low-value (i.e. it does not exceed the contractual amount and the amount of USD 5,000 implicit in the comments), the company may not convert the right to use low-value assets according to IFRS 16.

The above mentioned exemptions and the examples thereof shall be discussed in a separate entry.

Commencement of a lease

IFRS 16 provides two key concepts related to leasing. The first one is the inception date, i.e. the day the entity/lessee determines that the contract has been concluded and that it includes leasing. It is the date of the contract and the date of the commitment by the parties thereto to principal provisions thereof, whichever is earlier. From the point of view of financial and accounting services, the more important date seems to be the latter, the so-called commencement date, i.e. the moment the lessor makes a certain asset available to the lessee. As at this day, the lessor then recognizes the right to use the assets in the books and values them, and the liabilities on the other side of the balance sheet.

What value should be recognized and presented in the balance sheet?

This and other issues related to leasing in a new form shall be discussed in our blog very soon.

[1] In accordance with point BC 71 of IFRS 16, part B, the International Accounting Standards Board (IASB) did not want to prevent lessees from applying IFRS 16 to leases of intangible assets for which there are no specific requirements in other standards. Thus, the Board concluded that there are no grounds to exclude the leases of intangible assets as such from IFRS, other than those indicated above to which IAS 38 applies.