IFRS 16 – a closer look at ‘low value’

From now until mandatory implementation from 1 January 2019, we are going to delve into a different part of IFRS 16 Leases on a regular basis. We start with a look at what ‘low-value’ means.

Why do I need to know what low-value means?

A lessee can elect not to apply the initial and subsequent recognition and measurement requirements of IFRS 16 to leases for which the underlying asset is of ‘low-value’. Where applicable, these recognition exemptions will generally make for less work and a simpler transition for the leases in question. The exemption can be applied on a lease by lease basis.

What does IFRS 16 tell me about low-value?

The standard itself does not provide much guidance to assist in assessing what ‘low-value’ means: it is not a defined term. However, when making the assessment of what is low-value, the standard requires the lessee to assess the value starting from the value of the underlying asset when it was new, regardless of the age of the asset at inception of the lease.

The Basis for Conclusions of IFRS 16 provides some insight into the type of leases to which the exemption is intended to apply:

“The IASB intended the exemption to apply to leases for which the underlying asset, when new, is of low-value (such as leases of table and personal computers, small items of office furniture and telephones). At the time of reaching decisions about the exemption in 2015, 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”.

The IASB goes on to say “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 – ie 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”.

This may lead to some seemingly odd conclusions. Following the IASB’s intentions, that different lessees should reach the same conclusion relating to underlying assets, regardless of their size nature or circumstances, means a large multinational blue chip company would have the same criteria for identifying low-value assets as would a small corner shop.

IFRS 16 does not permit a lessee to break an asset down into many underlying assets of low-value unless:

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
The underlying asset is not highly dependent on, or highly interrelated with, other assets.

In additional, if a lessee sub-leases an asset, or expects to sub-lease an asset, the head lease cannot qualify as a lease of a low-value asset.

What about materiality?

Some entities may argue that ‘low-value’ is significantly higher than the order of magnitude referred to in the Basis for Conclusions of IFRS 16 by applying the concept of materiality in the Conceptual Framework and IAS 1. This potential approach was identified by the IASB when the standard was drafted. However, if an entity uses the concept of materiality to avoid application of the recognition and measurement requirements of IFRS 16, then the onus is on that entity to demonstrate that its approach does not lead to material error in aggregate. This rule contrasts with the recognition exemption in IFRS 16, whereby a large volume of ‘true’ low-value assets can be material in aggregate but this would not constitute a material misstatement because the approach complies with the standard.

When might an entity decide not to take the exemption?

Where EBITDA is a key performance metric, some entities may choose not to apply the recognition exemption to some or all low-value leases. This is because the recognition of a right of use asset and corresponding lease liability on the balance sheet will lead to improved EBITDA.

For help and advice on IFRS16 please get in touch with your usual BDO contact.