Adjusting and Non-adjusting events: IAS 10 explanation with examples and implications

When we are new to IFRS 16: Leases, there might be a common misconception that all rental agreements, or the agreements where we purchase something today and make payments in the future, fall under IFRS 16. And hence we treat every such transaction as a lease. However, this assumption does not hold true as IFRS -16 : leases has certain exceptions,  meaning that not every transaction of this nature is treated as a lease. And in today's article, we'll explore those exceptions briefly.

Table of Contents:

• Exceptions to IFRS-16
  
• Lease of Intangible Assets
  
• Lease Exemptions
  
• FAQs
  

What are the exceptions of IFRS-16?

Following are the transactions that apparently seem to be the lease, but they actually do not fall under the scope of IFRS 16 and hence these transactions are not treated as lease:

• Any land or other property acquired on lease to explore for or use minerals, oil, natural gas, and similar non-regenerative resources. Such transaction is treated under IFRS 6: Exploration for and Evaluation of Mineral Resources

• If the lessee has obtained biological assets on a lease, such transaction will also not fall under IFRS 16. Rather this will be treated under IAS 41: Agriculture; And
• Any transaction that falls under the scope of  IFRS 15 Revenue from Contracts with Customers. (i.e the transactions that are going to be recorded as sales rather than lease)

If we look at these exceptions of IFRS 16 closely, we may form a conclusion that almost only such leases will be treated under IFRS 16 that relate to Property, Plant and Equipment; and Intangible assets. All other leases are treated under their relevant standards. However; in the case of Intangible assets, IFRS 16 provides further guidance to us.

Lease of Intangible Assets under IFRS 16:

As per the guidance provided by IFRS-16 Leases in paragraph 3: Scope, a lessee may apply IFRS-16 to all intangible assets except for the lease under licensing agreements for motion picture films, video recordings, plays, manuscripts, patents, copyrights, and other such items.

Remember, IFRS 16 explicitly prohibits the application of this standard to the intangible assets mentioned above. However, for intangible assets other than the mentioned above, IFRS 16 gives an option to the lessee. He may or may not apply IFRS-16 to those assets. It's up to his choice. 

What are the exemptions of the lease allowed by IFRS-16?

There's an exception of IFRS-16 where a lessee may expense out the lease payments instead of recognizing them as Right-of-use assets. As per paragraph 5 of IFRS-16:Leases, a lessee may elect to charge the lease payments to Profit and Loss as an expense instead of recognizing them as the Right of use asset in the following cases:

• If the lease is a short-term lease (a lease that has a lease term of 12 months or less), or
• If the underlying asset is of low value 

And if the lessee opts to expense out lease payments, in that case, he will do so by adopting either a straight-line basis (over the lease term) or any other systematic basis if that basis is more representative of the matching concept.

FAQs (Exceptions & Exemptions to IFRS-16: Leases):

1: Does IFRS 16 apply to all leases?

Yes! IFRS-16 applies to all leases except for the assets mentioned in this paragraph.

2: What is Short term lease exemption under IFRS 16?

As per IFRS-16 Paragraph 5, if the lease term of a lease is 12 months or less, a lessee can charge the lease payments to Profit and Loss account as an expense rather than recognising it as Right of Use asset.

3: Can a lessee expense out lease payments instead of recognising them as Right of use (ROU) assets?

Yes! As mentioned in the previous paragraphs, there is an exception to IFRS 16 where a lessee can expense out lease payments instead of recognising them as ROU asset. This exemption applies when either the lease is of short-term, or the underlying asset is of low value.