What are lease liabilities IFRS 16

When should a lease be a liability and not an expense?

For a lessee, IFRS 16 removes the prior classification of leases as either operating leases or finance leases, effectively treating all leases as finance leases. 

IFRS 16 states that a contract is, or contains, a lease if:

• there is an identified asset, and

• the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. 

‘Control’ is conveyed where the customer has both the right to direct the identified asset’s use and the right to obtain substantially all the economic benefits from that use.

A lease always has a lessee (customer) and a lessor (supplier). A lessee obtains and a lessor provides the right to control the use of the asset for the lease period in exchange for consideration.

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Exemptions

For leases involving intangible assets other than those described, the lessee is allowed to ignore AASB 16/IFRS 16 if it so chooses. 

Also, a lessee is granted exemptions from applying the requirements of AASB 16/IFRS 16 for leases with a duration of 12 months or less and leases for low‐value assets. 

For those leases, the lessee can recognise the payments as expenses and the only assets and liabilities that may be recognised are for the payments due but not yet made at the end of the period (a liability) and payments made in advance (an asset). 

These exemptions were introduced in response to the feedback received from various parties complaining about the complexities in applying the requirements of AASB 16/IFRS 16.

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What is low value

The choice for leases of low-value assets can be made on a lease-by-lease basis. According to paragraph B5 of Appendix B of AASB 16/IFRS 16:

An underlying asset is considered to be of low-value if:

1. The lessee can benefit from use of the underlying asset on its own or together with other resources that are readily available to the lessee; and
2. The underlying asset is not highly dependent on, or highly interrelated with, other assets.

The assessment of whether an asset is of low value is not affected by the size, nature or circumstances of the lessee but is based on whether the value of the asset when new can be considered low value. 

When deciding about the low-value asset exemption in 2015, the IASB intended it to apply to leases for underlying assets with a value, when new, of US$5000 or less. 

Paragraph B8 of AASB 16/IFRS 16 gives tablet and personal computers, small items of office furniture and telephones as examples of low-value assets.

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How to identify if a lease exists

1. The right to control the use of the asset
   1. Does the contract convey the right to control the use of an identified asset by assessing whether the supplier has a substantive right to substitute the identified asset throughout the period of use?
   2. The assessment whether a substitution right is substantive depends on the facts and circumstances at the start of the contract and does not take into account circumstances that are not considered likely to occur.  
2. The right to obtain the economic benefits
   1. Does the customer have the right to obtain substantially all economic benefits from the use of an identified asset by reviewing the defined scope of the customer’s right to use an asset and protective rights of the supplier?
   2. An entity should consider the decision-making rights that are most relevant to how they affect the economic benefits to be derived from the use of the asset.
3. The right to direct the use of the asset
   1. Does the customer have the right to direct the use of an identified asset? What are the different decision-making rights of the customer and how do these affect identifications of a lease contract?
   2. The new concept of ‘predetermined’ should be assessed carefully and the Board expects that, for most leases, the assessment will be based on identifying the party that decides how and for what purpose an asset is used in the design or the operation of the asset.

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