With the release in January 2016 of International Financial Reporting Standard (IFRS) 16 Leases, the International Accounting Standards Board (IASB) introduced a 'shortcut' method of accounting for assets with low value.
An exemption is granted, called a practical expedient, for assets with an initial investment value of US$ 5,000. In the accompanying information to IFRS 16, it was noted that the amount indicated will be allowed subject to indexing.
Well, it’s one year since the introduction of IFRS 16 - so time to pin down a common index percentage for the year to come.
The small investment amount for assets with low value does not warrant large and lengthy discussion - which index percentage to select is the only necessary one.
Any percentage in the bandwidth between 0.5% and 3.5% would fit an economy with low inflation expectations. To avoid annual switches, perhaps one should restrain oneself to an average percentage of, say, 2.0%, which happens to be also the long-term inflation goal of reputable central banks.
Administrators will be happy to have certainty early in the year. Analysts should be happy too, as comparability between companies is at stake when comparable businesses in various countries apply different index percentages.
Finally, the IASB should embrace this simple solution or, alternatively, create timely yearly guidance. Guidance for which the IASB may be hesitant as guidance for indexing is not the IASB's core business.
I, therefore, suggest applying a fixed 2.0% index percentage for the years through 2019.
The financial effects?
With US$ 5,000 for 2016, a 2.0% increase results in US$ 5,100 for 2017, US$ 5,202 for 2018 and US$ 5,306 in the year the IFRS 16 Leases standard will be introduced by most IFRS reporting entities.
Too early to decide?
No, new two-years+ leases already will run into 2019 and then may become exempt.
Henk Uunk held the position of manager financial accounting and reporting at ING Lease Holding from 2004 to 2014. He is chairman of the accounting committee of the Dutch Leasing Association (NVL) and a member of Leaseurope’s accounting and taxation committee since 1992. Uunk is a contributor to the Dutch Accounting Standards Board working group on leases and acts as a consultant to the Dutch Car Leasing Association (VNA).