Short-term and low-value lease exemptions
Which of a client's leases qualify for IFRS 16's short-term or low-value exemptions, how each election is made, and how to record it in the policy.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
When IFRS 16 arrived, many small clients assumed every rental agreement would now need a right-of-use asset, a lease liability and a discounting calculation: the printer, the water cooler, the card machine, the site container hired for a few months. Most of those never needed the full treatment. IFRS 16 contains two exemptions that keep minor leases out of the statement of financial position, and used properly they save a great deal of effort without misleading anyone.
Used carelessly, they hide real obligations. A "short-term" lease renewed every year for a decade, or a "low-value" fleet of company cars, does not qualify. This article covers the two tests, how each election is made, how to record the choice, and what should still be tracked.
Twelve months or less, no purchase option
IFRS 16 introduced a single lessee accounting model that requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. The short-term exemption is the first half of that sentence.
ACCA explains the test: a short-term lease under IFRS 16 has a term of 12 months or less at commencement and cannot contain a purchase option. Both conditions must be met. A nine-month hire of a generator with an option to buy at the end is not short-term, however brief.
Typical short-term leases among small clients include site equipment hired for a single contract, temporary storage during a move, and a furnished office taken for a project. Be careful with agreements that are renewed again and again. The lease term for IFRS 16 purposes is not simply the period printed on the current agreement; if the client is in substance committed to a longer period, the test may not be met. Read IFRS 16's guidance on the lease term before relying on the exemption for any rolling arrangement.
Low value judged on the asset, not the lessee
The second exemption is about the asset, not the term. ACCA explains that the IFRS 16 low-value election is assessed on an absolute basis, regardless of the lessee's size. A large company and a small one apply the same test to the same asset.
ACCA gives examples on both sides. A car lease does not qualify. Tablets, personal computers, small office furniture and telephones can. The point of the absolute test is that the exemption is about assets that are inherently of low value when new, not about leases that happen to be immaterial to a particular client. A small client's single delivery vehicle may be modest in rand, naira or shilling terms, but it is not a low-value asset under this test.
By class of asset or lease by lease
The two elections are made differently, and the difference matters when recording them.
| Exemption | How the election is made |
|---|---|
| Short-term | By class of underlying asset, according to ACCA. Once chosen for a class, such as site equipment, it applies to all short-term leases in that class. |
| Low-value | Lease by lease, according to ACCA. Each qualifying lease can be treated on its own merits. |
For short-term leases, ACCA explains, the election lets the lessee expense the lease rentals over the lease term instead of recognising a right-of-use asset and liability. That means the rental expense for the year reflects the period of use, not simply the invoices paid. Read the standard for the equivalent treatment of leases under the low-value election.
Recording the elections in the policy
The elections are accounting policy choices and should be visible in the policies. Achekam's Studio includes standard accounting policy wording based on IFRS for SMEs, labelled for review before issue, and staff can write the client's own. For a full IFRS client applying IFRS 16, write the lease policy to state:
- that the company applies the short-term exemption, and to which classes of asset;
- that the company applies the low-value exemption, and the kind of assets it covers, such as office equipment and telephones;
- that payments on such leases are recognised as an expense over the lease term.
If the client does not use an exemption, delete the wording rather than leave a generic paragraph describing a choice it never made. For a client on IFRS for SMEs, check the lease wording against the requirements of the edition it applies, since the standard wording is based on IFRS for SMEs and the exemptions above are described here in IFRS 16 terms.
What still goes into the lease register
Achekam lets staff keep a client's lease register under IFRS 16 or IFRS for SMEs Section 20. The register can read a lease from the contract and produce an AI draft of its terms; the draft is not used until a person confirms it, and every number the AI reads must appear in the contract text.
Whether exempt leases are entered in the register is the firm's choice, but some record of them is worth keeping:
- List every lease the client has, including those treated as exempt.
- For each exempt lease, note which exemption applies and why: the term and absence of a purchase option, or the nature of the asset.
- At each year end, recheck rolling short-term agreements and any lease where the asset or terms have changed.
- Move any lease that no longer qualifies into the register, with its terms confirmed against the contract.
A list like this also answers the reviewer's first question about leases: how do we know nothing was missed? Deciding whether an agreement is a lease at all, such as a supply contract with dedicated equipment, comes before any of this and is covered in does a contract contain a lease. The register itself is covered in the IFRS 16 lease register.
The IFRS Foundation's IFRS 16 page summarises the single lessee model and the exemption for leases of 12 months or less and low-value assets. Walk the client's office and site with the lease list in hand once a year; agreements nobody remembered signing tend to surface that way.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
