Accounting for Short-Term and Low-Value Leases (IFRS) – Practical Expedients under IFRS 16

Under IFRS 16, lessees are generally required to recognize all leases on the balance sheet. However, the standard allows two optional exemptions for short-term leases and low-value asset leases, providing relief for arrangements where capitalization may be unnecessarily burdensome.

This article explains the scope, conditions, and accounting treatment of short-term and low-value leases under IFRS 16, including recognition exemptions, practical examples, and required disclosures.

1. Overview of IFRS 16 Lease Exemptions

IFRS 16 allows lessees to elect not to apply lease capitalization to:

✦ Short-term leases – 12 months or less, with no purchase option

✦ Low-value leases – where the underlying asset is of low value when new

When these exemptions are applied, the lease is treated off-balance-sheet, and lease payments are recognized as straight-line expenses over the lease term.

2. Short-Term Lease Exemption

A short-term lease is defined as:

✦ Lease term of 12 months or less

✦ No purchase option

✦ Election can be made lease-by-lease

If the lease is extended or modified beyond 12 months, it no longer qualifies, and the exemption must cease from the date of change.

Example: Office space leased for 9 months with no option to renew → qualifies for exemption

Journal entry (monthly): Dr. Lease Expense – $2,000 / Cr. Cash – $2,000.

3. Low-Value Lease Exemption

Low-value leases apply to assets that:

✦ Are of low individual value when new

✦ Typically cost $5,000 USD or less (as per IASB guidance)

✦ Are not dependent on other leased assets

✦ Are not highly specialized

Examples:

✦ Tablets, personal computers

✦ Small office furniture

✦ Telephones, portable printers

Assessment is based on individual asset value, not lease payments or portfolio value.

Example: A company leases a printer worth $2,500 new for 3 years → qualifies

Journal entry (monthly): Dr. Lease Expense – $120 / Cr. Accounts Payable – $120.

4. Election and Policy Application

Lessees must disclose their election to apply these exemptions. Elections can be made:

✦ Separately for short-term and low-value leases

✦ Differently for different classes of assets (e.g., elect for IT equipment but not for office space)

These leases are excluded from right-of-use assets and lease liabilities, and expense is recognized straight-line over the lease term.

5. Financial Statement Disclosure

IFRS 16 requires lessees using these exemptions to disclose:

✦ Expense recognized for short-term leases

✦ Expense recognized for low-value asset leases

✦ Accounting policy choice for applying the exemptions

✦ Explanation of any material lease commitments not capitalized

Disclosure example: “The Company elected not to recognize right-of-use assets and lease liabilities for short-term and low-value leases. Related lease expenses totaled $75,000 and $12,000, respectively, during the year ended December 31.”