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ACCA Applied Skills · Financial Reporting · Leasing

Delta Co leases a machine from Rho Co for 12 months with no purchase option. The machine has a new value of $4,000, and Delta elects the IFRS 16 exemptions where permitted. Which statement is correct?

Delta may elect the exemption and expense the payments on a straight-line basis. The lease is 12 months with no purchase option, so it qualifies as short-term. The exemption is a lessee choice, independent of lessor classification, and removes both the liability and the right-of-use asset.

  1. ADelta may treat it as a short-term lease and recognise payments as an expense, usually straight-lineCorrect
  2. BDelta cannot use any exemption because the term is 12 months
  3. CDelta must recognise the lease liability but may omit the right-of-use asset
  4. DDelta may only use the exemption if Rho also treats it as an operating lease

Explanation

A short-term lease has a term of 12 months or less with no purchase option, and the lessee may elect to expense payments straight-line. The low-value exemption is also available for a $4,000 new asset. Both exemptions are lessee elections independent of the lessor's classification, and neither permits recognising the liability alone.

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