Financial Reporting · Leasing

IFRS 16 Short-Term, Low-Value Leases and Lessee Disclosure

Updated 11 October 2026 · Fact-checked

A lessee may choose not to recognise a right-of-use asset and lease liability for short-term leases (12 months or less, no purchase option) and low-value asset leases. Instead it expenses the payments, normally straight line over the lease term. All other leases are on the statement of financial position, with note disclosures.

Understand Lessee Short-Term, Low-Value Leases and Disclosure

IFRS 16 normally puts every lease on the lessee's statement of financial position as a right-of-use asset and a lease liability. Doing this for tiny or very short leases costs more effort than it is worth. So the standard gives two optional exemptions.

A short-term lease has a lease term of 12 months or less at the commencement date and contains no purchase option. A low-value asset lease is a lease of an asset that is of low value when new, such as tablets, small items of office furniture or phones. The test looks at the value of the asset when new, not its age and not the size of your business. The IASB's Basis for Conclusions mentions about US$5,000 when new as an indication of low value. It is not a rule in the standard, so only use a figure if the question gives it.

The exemptions are a choice. For short-term leases the choice is made by class of underlying asset. For low-value leases it is made lease by lease. If the lessee takes the exemption, it recognises the payments as an expense, either on a straight-line basis over the lease term or on another systematic basis if that better represents the pattern of benefit. Any accrual or prepayment arises when cash paid differs from the expense.

A lease is not low value if the asset is highly dependent on or interrelated with other assets. If the lessee subleases the asset, or expects to sublease it, the head lease does not qualify as a low-value lease, so watch the wording. A modification or change in the lease term of a short-term lease is treated as a new lease whose term runs from the effective date of the modification, and the 12-month test is reapplied to it.

For leases that are not exempt, presentation matters. Right-of-use assets are shown separately in the statement of financial position, or disclosed in the notes if included within other line items. The lease liability is split between current and non-current. In profit or loss, depreciation of the right-of-use asset and interest on the lease liability are shown separately. Interest is a finance cost. Principal repayments of lease liabilities are financing cash flows, interest follows the entity's IAS 7 policy, and payments for exempt leases are normally operating cash flows.

Key rules to remember

Short-term lease test: Lease term ≤ 12 months at commencement AND no purchase option; Both conditions must be met. Elected by class of underlying asset.
Low-value test: Value of the asset when new is low, judged in absolute terms; Elected lease by lease. Independent of the lessee's size. Use a threshold only if the question gives one.
Expense for exempt leases: Total payments ÷ lease term in months × months in the period = expense for the period (straight line); Applies if payments are uneven, for example rent-free periods or stepped rents. Use the monthly rate when the term is not a whole number of years. Another systematic basis is allowed if it is more representative.
Accrual or prepayment: Cash paid − expense = prepayment (if positive) or accrual (if negative); Carry the balance in current assets or current liabilities.
Non-exempt lease expense in profit or loss: Depreciation of right-of-use asset + interest on lease liability; Do not also charge the rental payments to profit or loss.
Lease liability split: Current = principal repaid within 12 months; Non-current = remainder; Current portion is the next year's liability reduction, not the next payment.

How to solve Lessee Short-Term, Low-Value Leases and Disclosure questions

Use this order for any question on exempt leases or lease presentation.

1Identify each lease and the asset. Note the term, any purchase option and the value of the asset when new.
2Decide if it is a short-term lease (12 months or less, no purchase option) or a low-value lease. If neither, treat it as a normal IFRS 16 lease.
3Check that the entity elects the exemption. If the question says it does, or says nothing against it, apply it.
4For exempt leases, add up all payments over the lease term and spread them straight line. Allocate the expense to the correct accounting period.
5Compare cash paid with the expense for the year to find a prepayment or accrual.
6For non-exempt leases, calculate depreciation and interest, then split the liability into current and non-current.
7Present each item in the correct place: expense in profit or loss, assets and liabilities in the statement of financial position, and note disclosures.
8Add the disclosure points the question asks for, such as the expense for exempt leases and total cash outflow.

Quickest way: Three-question screen then straight-line

When to use it: Use in objective questions and short written parts where you must pick the treatment fast.

Ask: is the term 12 months or less with no purchase option? If yes, it is short-term.
If not, ask: is the asset cheap when new, like a laptop or phone? If yes, it is low value.
If either is yes, expense the total payments ÷ term per year. Otherwise build a right-of-use asset and liability.
Check the prepayment or accrual: cash paid minus expense.
For a profit or loss line, remember depreciation plus interest for normal leases, but only rent expense for exempt ones.

Common mistakes in Lessee Short-Term, Low-Value Leases and Disclosure

Treating a lease as short-term because only part of it falls in the current year.
Students look at the year-end date instead of the lease term.
Fix: Measure the lease term from commencement. A 24-month lease is not short-term even if only 6 months fall in this period.
Judging low value by the age or current value of the asset.
It feels natural to use today's value of a second-hand item.
Fix: Use the value of the asset when new. A used asset that was costly new is not low value.
Charging the cash paid as the expense when rent is uneven.
Students follow the payment schedule.
Fix: Total all payments, divide by the term, and charge that amount each year. The difference is a prepayment or accrual.
Using the low-value exemption because the lessee is a small business.
Confusing the exemption with a size concession.
Fix: The test is about the asset, not the entity. A large group can use it and a small company cannot use it for a costly asset.
Applying the short-term exemption to a 12-month lease with a purchase option.
Students stop reading once they see 12 months.
Fix: Any purchase option in the lease removes the short-term exemption, however short the term.
Showing the whole lease liability as non-current, or charging rent as well as depreciation and interest.
Mixing the old operating lease expense with the IFRS 16 model.
Fix: Split the liability into current and non-current. For non-exempt leases charge depreciation and interest only.

Worked examples

Example 1

On 1 January 20X1 Zeta leases a machine for 9 months with no purchase option. Payments are ₹90,000 per month for the first 3 months and ₹1,20,000 per month for the next 6 months. Zeta has a 31 March year end and elects the short-term exemption. Calculate the expense for the year to 31 March 20X1 and any accrual or prepayment.

Show the solution

The term is 9 months with no purchase option, so it is a short-term lease and the exemption can be used.
Total payments = (3 × ₹90,000) + (6 × ₹1,20,000) = ₹2,70,000 + ₹7,20,000 = ₹9,90,000.
Straight-line cost per month = ₹9,90,000 ÷ 9 = ₹1,10,000.
Months in the year to 31 March 20X1 = 3 (January to March), so expense = 3 × ₹1,10,000 = ₹3,30,000.
Cash paid in the period = 3 × ₹90,000 = ₹2,70,000.
Expense exceeds cash paid by ₹3,30,000 − ₹2,70,000 = ₹60,000, which is an accrual.

Answer: Lease expense ₹3,30,000 in profit or loss; accrued expense of ₹60,000 in current liabilities. No right-of-use asset or lease liability is recognised.

Example 2

Delta has a 31 December 20X2 year end and three leases. (1) On 1 January 20X2 it leased 6 laptops for 3 years. Each laptop is worth ₹40,000 when new, and the total rental is ₹36,000 a year in equal payments. (2) On 1 July 20X2 it leased a delivery van for 10 months, with no purchase option, at ₹15,000 per month. (3) On 1 January 20X2 it leased a building for 5 years. The building was worth ₹50,00,000 when new. For this question only, the stated (hypothetical) rule is that an asset is low value if it costs less than ₹4,00,000 when new. Which leases can use an exemption, and what is the expense for the year to 31 December 20X2?

Show the solution

Laptops: the low-value test applies to each individual laptop, not to the laptops in total. Each laptop is ₹40,000 when new, which is below the ₹4,00,000 threshold given, so each is low value and the low-value exemption can be used, even though the term is 3 years.
Van: the term is 10 months with no purchase option, so the short-term exemption can be used. A van is not a low-value asset, so only the short-term route applies.
Building: the term is 5 years, so it is not short-term. It was worth ₹50,00,000 when new, which is above the ₹4,00,000 threshold, so it is not low value. Neither exemption applies. Recognise a right-of-use asset and lease liability.
Laptop expense = ₹36,000 for the year, straight line, because the payments are equal and the lease ran for the whole year.
Van expense = 6 × ₹15,000 = ₹90,000, for the months July to December 20X2 that fall in the year. Total payments over the term are 10 × ₹15,000 = ₹1,50,000, and payments are equal, so the cash paid is also ₹90,000 and there is no accrual or prepayment.
Disclose the exempt lease expenses in the notes. Show the building's right-of-use asset and the current and non-current lease liability in the statement of financial position, with depreciation and interest in profit or loss.

Answer: Laptops and van are exempt (expenses ₹36,000 and ₹90,000 respectively, total ₹1,26,000). The building is recognised on the statement of financial position with depreciation and interest charged.

Exam tips

Read for the two traps first: a purchase option and the lease term at commencement. They decide short-term questions.
In objective questions, a low-value lease is about the asset when new, so ignore the lessee's size and the asset's current condition.
In Section C, show the straight-line workings: total payments, term, annual expense, then accrual or prepayment. Marks are given for each step.
When asked for disclosure, name the items: depreciation by class, interest expense, expense for short-term and low-value leases, total cash outflow, and right-of-use assets.
Keep presentation tidy: lease liability current and non-current, depreciation and interest as separate lines, and no rental charge for non-exempt leases.

Practice questions from Leasing

Lessee Short-Term, Low-Value Leases and Disclosure: frequently asked questions

What is the difference between a short-term lease and a low-value lease under IFRS 16?

A short-term lease is defined by its term: 12 months or less at commencement with no purchase option. A low-value lease is defined by the asset: it is of low value when new. A low-value lease can run for several years.

How do you expense a low-value lease in profit or loss?

Add up the total payments over the lease term and charge them straight line over that term, unless another systematic basis is more representative. If cash paid differs from the charge, record a prepayment or accrual.

Is the exemption compulsory?

No, it is a choice. A lessee can still capitalise a short-term or low-value lease under the normal IFRS 16 model. The short-term choice is made by class of asset and the low-value choice lease by lease.

What must a lessee disclose about leases?

A lessee discloses items such as depreciation of right-of-use assets by class, interest on lease liabilities, the expense for short-term and low-value leases, total cash outflow for leases, and additions to right-of-use assets. It also gives a maturity analysis of lease liabilities.