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ACCA Strategic Professional · Strategic Business Reporting (International) · Leases

Pelham Co leases an office floor for 10 years and an included parking space under one contract. Payments are $50,000 a year. Pelham's finance director proposes expensing all payments straight-line as rent, arguing the lease is not material to the group's results, although it is significant to reported gearing. Which statement is correct under IFRS 16 and professional ethics?

The proposal is not acceptable. IFRS 16 requires a lessee to recognise a right-of-use asset and lease liability for a 10-year property lease, as only short-term and low-value exemptions exist. Keeping it off the statement of financial position to improve gearing would breach the ethical duty of integrity.

  1. AThe proposal is acceptable because lessees may choose operating lease treatment for property
  2. BThe proposal is acceptable if the group discloses the commitment in the notes
  3. CThe proposal is not acceptable, as a right-of-use asset and lease liability should be recognised, and avoiding them to improve gearing would breach integrityCorrect
  4. DThe proposal is acceptable because the lease exceeds 12 months only by the parking element

Explanation

IFRS 16 has a single lessee model; exemptions apply only to short-term (12 months or less) and low-value asset leases. A 10-year office lease qualifies for neither, so recognition is required. Omitting it to flatter gearing would compromise integrity and objectivity.

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