FRS 116 Leases – Recognition Exemptions

As a business owner, you may have heard of Financial Reporting Standards (FRS) before. The FRS is one of the standards that set out rules on the correct ways the companies should use to give financial information regarding the business activities they have carried out. However, you may be too busy to study all of them in detail to ensure that your company follows them. In this case, an excellent way of solving this problem is by hiring an accounting service in Singapore as the experts will be able to lend you a helping hand on this matter.

Now, let us have a look at the recognition exemptions mentioned in FRS 116 Leases.

For short-term leases and leases that the underlying asset (an asset which is the subject of a lease) is of low value, a lessee may choose not to follow the requirements listed in paragraphs 22-49 of FRS 116. According to paragraph 6 of FRS 116, if the lessee decides to do so, he should recognise the related lease (Also see FRS 116 Leases – Recognising and Measuring Finance Leases) payments as an expense on a straight-line basis throughout the lease term or by using another systematic basis. If there is a systematic basis that can represent the pattern of his benefits better, then he should apply that basis.

If a lessee deals with short-term leases by using the methods mentioned above, he should consider the lease to be a new one under two conditions. These two situations are when a lease modification has taken place, or if there is an alteration in the lease term.

For leases that the underlying assets have low value, the lessee may account for them by using a straight-line basis or another systematic basis. The only exception is if the lessee subleases or predicts itself to sublease a certain asset, where under such a condition, the head lease should not be considered as a lease of an asset (Also see FRS 116 Leases – Recognition and Initial Measurement of Right-of-use Asset and Lease Liability by the Lessee) of low value.

The lessee should examine the value of a particular underlying asset according to its value when it is still new, and he does not need to consider the age of the asset. To identify whether the asset is of low value, the lessee should conduct the assessment on an absolute basis. No matter whether the lease is material to the lessee, the leases of underlying assets of low value are qualified for the accounting (Also see The Importance of Accounting Procedures) treatment mentioned above (using straight-line basis or another systematic basis when recognising the expenses on lease payments). The circumstances, nature, or size of the lessee should not bring any impact on the assessment. Hence, although the lessees are different, they should reach the same conclusions on whether an underlying asset is a low-value asset.

One can only determine an underlying asset to be a low-value asset if the lessee can get advantage from using it on its own, or using it with other readily available resources that the lessee has in hand. If that particular underlying asset does not rely on other assets very much or does not have close connections to other assets, then it should be a low-value asset too.

A lease of an underlying asset should not be treated as a lease of an asset of low value if the asset’s value is typically high when it is new. As an instance, the lease of cars would not be a lease of assets of low value as a new car will generally have a high value. Some of the examples of underlying assets with low value include personal computers, tablets, telephones and some other small items.