IFRS 16 Short-Term & Low-Value Leases: Recognition Exemptions Explained with Examples

What are the two IFRS 16 recognition exemptions?

IFRS 16 forces almost every lease onto the balance sheet, but IFRS 16.5 permits a lessee to elect not to recognise a right-of-use asset and lease liability for two categories: leases that are short-term, and leases for which the underlying asset is of low value. For any lease that takes an exemption, the lessee instead recognises the payments as an expense on a straight-line basis over the lease term, or on another systematic basis if that is more representative of the pattern of the lessee's benefit (IFRS 16.6). This reproduces the old IAS 17 operating-lease outcome for a deliberately narrow slice of the portfolio.

The two elections operate differently. The short-term election is made by class of underlying asset — choose it for, say, all short-term IT hardware and you apply it to every short-term lease in that class (IFRS 16.8). The low-value election is made lease-by-lease, so within the same class you can capitalise one item and expense the next (IFRS 16.8). Both are optional accounting-policy choices; an entity that prefers a single balance-sheet-complete model can decline both, as Vodafone does, recognising every lease in full. Where the exemptions are used, IFRS 16.53(c)-(d) requires the short-term and low-value expense to be disclosed as separate note line items, with the related cash outflow under IFRS 16.53(g).

The one-line summary. Short-term is about the term (≤12 months, no purchase option). Low-value is about the asset when new (an absolute size test, roughly USD 5,000). They are independent gates — a lease needs to pass only one to stay off balance sheet (IFRS 16.5).

When does a lease qualify as short-term?

A short-term lease is defined in IFRS 16 Appendix A as a lease that, at the commencement date, has a lease term of 12 months or less and contains no purchase option. Both conditions are hard-edged. A 13-month lease fails even if the lessee genuinely intends to exit at month 12; a 12-month lease that carries any option to purchase the asset fails outright, regardless of the option price. The term test uses the IFRS 16 lease term, so it already folds in extension and termination options that the lessee is reasonably certain to exercise (IFRS 16.18-19) — a nominal 9-month lease with a renewal the lessee is reasonably certain to take is not short-term, because its lease term exceeds 12 months.

The election is made and disclosed by class of underlying asset (IFRS 16.8), which stops entities cherry-picking individual short-term leases within the same class. Critically, the assessment is fixed at commencement. If a short-term lease is later modified, or the lease term changes (for example the lessee becomes reasonably certain to exercise a renewal it had earlier excluded), IFRS 16.7 requires the lessee to treat it as a new lease at that date and re-test eligibility — which frequently pushes it onto the balance sheet. The examples below show how the two conditions bite.

How do you decide if an asset is "low-value"?

The low-value assessment is set out in IFRS 16.B3-B8 and rests on the value of the underlying asset when it is new, measured on an absolute basis — not relative to the lessee's size, not the discounted lease payments, and not the depreciated second-hand value (IFRS 16.B3-B5). The Board deliberately declined to specify a figure in the standard, but the Basis for Conclusions explains it had in mind assets with a value, when new, in the order of USD 5,000 or less (IFRS 16.BC100). Because the test is absolute, the conclusion is the same for a corner shop and a multinational, and it never changes over the life of the lease as the asset depreciates.

IFRS 16.B5 adds two gating conditions that must both hold. First, the lessee must be able to benefit from the asset on its own or with other readily available resources. Second — and this is the condition most often missed — the asset must not be highly dependent on, or highly interrelated with, other assets (IFRS 16.B5(b)). A telephone handset or a laptop stands alone; a bespoke sensor that only functions as part of a larger production line does not, and cannot be low-value even if the sensor's standalone price is tiny. The Basis for Conclusions offers indicative qualifying examples — tablets and personal computers, small items of office furniture, and telephones (IFRS 16.BC100) — and one hard exclusion.

The class trap (IFRS 16.B3, BC100). Low value is judged on the type of asset, not the size of the individual payment. The Board specifically states a car does not qualify, because a car when new is not of low value, even where an individual monthly rental is small. Leasing one vehicle out of a fleet at £300 a month is a full ROU asset and liability, not a low-value expense.

Two further points settle common arguments. Aggregation is a red herring: the low-value test is applied to each underlying asset individually (IFRS 16.B3), so a contract for 200 laptops is 200 low-value assessments, not one £120,000 "high-value" contract. And a lessee cannot claim the exemption for an asset it subleases or intends to sublease — IFRS 16.B7 treats such a head lease as not low value.

How do you account for exempted leases?

For any exempted lease the mechanics are simple: no ROU asset, no lease liability, no depreciation and no interest. The lessee recognises the lease payments as an expense on a straight-line basis over the lease term, unless another systematic basis better represents the pattern of benefit (IFRS 16.6). The subtlety is that straight-line is measured against the total contractual payments, so an uneven or rent-free payment profile produces a smoothing accrual or prepayment even though nothing sits in non-current assets. The two worked examples below show a short-term lease with uneven cash, and the decisive contrast between a qualifying low-value fleet of laptops and a non-qualifying fleet car.

Worked example 1: short-term straight-line schedule (IFRS 16.5-6)

Monthly journal in months 1-6 (expense exceeds cash, so an accrual builds):

In months 7-12 the accrual reverses (Dr Lease expense 1,000, Dr Accrued lease liability 200, Cr Cash 1,200). The accrual is an ordinary payables item, not a lease liability, and no interest is imputed. Total P&L charge is a flat £1,000 a month, satisfying IFRS 16.6.

Worked example 2: low-value laptops vs a fleet car (IFRS 16.B3-B5)

Lease A is expensed lease-by-lease under IFRS 16.5-6, even though the aggregate contract is £120,000 over three years — because each £900 laptop is assessed individually (IFRS 16.B3):

Lease B fails the class test in IFRS 16.B3 / BC100, so at commencement the entity recognises a lease liability at the present value of the £300 monthly payments and an equal ROU asset (initial-measurement journal below), then depreciates the asset and unwinds interest on the liability in the normal way:

ROU/liability figure illustrative: PV of 36 × £300 at ~7% IBR ≈ £9,650. See the IBR guide for the discounting.

What do auditors challenge on exemption claims?

Exemption claims are a favourite audit target because they are policy-driven, high-volume, and easy to over-apply. Three challenges recur, each tied to a specific ISA.

Red flag 1 — splitting a long lease into consecutive short-term leases (ISA 240 / ISA 315)

The classic abuse is signing a genuine multi-year arrangement as a rolling series of 12-month contracts to keep it off balance sheet. Under ISA 315 (Revised) the auditor identifies this at the risk-assessment stage by understanding the business rationale of related contracts, and ISA 240 frames it as a possible management bias / structuring risk. The standard's own defence is the lease-term definition: where the lessee is reasonably certain to keep renewing the same asset, the substantive lease term exceeds 12 months and the short-term exemption is unavailable (IFRS 16.18-19, and the re-test on term changes in IFRS 16.7). A five-times-renewed "annual" office lease is the textbook trigger.

Red flag 2 — low-value claims that ignore the class and dependency tests (ISA 500)

ISA 500 requires sufficient appropriate evidence for the amounts expensed. Auditors ask for the value-when-new support behind each asset class and probe two failure modes: an asset that is cheap per unit but belongs to an excluded class (a single fleet car at £300/month — disqualified by IFRS 16.B3 / BC100), and an asset that is inexpensive standalone but highly interrelated with other assets (IFRS 16.B5(b)). A schedule that lists diverse asset types under one "low-value" policy line, with no per-class replacement-cost evidence, is an ISA 500 evidence gap.

Red flag 3 — the smoothing accrual and disclosure completeness (ISA 540)

Even off-balance-sheet leases involve an estimate: the straight-line accrual on uneven payment profiles (IFRS 16.6) and the completeness of the disclosed short-term and low-value expense (IFRS 16.53(c)-(d)). ISA 540 (Revised) governs the auditor's testing of that accrual and the underlying data. A common finding is that the general ledger expense reconciles, but the note disclosure omits leases expensed directly by operating units, understating the IFRS 16.53 line items.

Case study: Diageo plc FY2024 disclosure

The disclosure illustrates IFRS 16.53(c)-(d) and 53(g) in practice: the exemption expense is quantified separately from the on-balance-sheet lease charge, and it is material enough ($70m) to be a genuine analytical item rather than a rounding footnote. Note that these amounts are the exempted expense only — the vast majority of Diageo's lease commitment (warehouses, offices, plant, distribution vehicles) is recognised as ROU assets and liabilities, because those classes fail both exemption gates.

Usman Qureshi (ACCA)

In audits, exemption decisions are often the first things challenged. Entities call items low-value without documenting the value-when-new and the dependency test in IFRS 16.B5, or run consecutive short-term leases that are really one long lease. This guide gives the evidence trail auditors expect under ISA 500 and ISA 315.

Frequently asked questions