Lease exemptions: test the full term and the asset's value when new
IFRS 16 lets a lessee skip the lease liability and right-of-use asset for two kinds of lease, but they are separate optional exemptions with different tests. Under UK-adopted full IFRS for a 2026 annual period, a short-term lease is judged on its full assessed term at commencement and a low-value lease on the underlying asset's value when new. Remaining months and small rent prove neither.
Two elections, made at different levels
A lessee may elect not to recognise a lease liability and right-of-use asset for short-term leases and for leases of low-value assets. Elected payments are expensed over the lease term on a straight-line basis, or another systematic basis that better represents the pattern of benefit. The short-term election is made by class of underlying asset; the low-value election can be made lease by lease. A modification or change in lease term means a new lease for the short-term exemption.
This covers lessees with contracts already assessed as leases, without early adoption of IFRS 18 or the 2027 IAS 21 presentation-currency amendment and without an IFRS 19 reduced-disclosure election. FRS 102, IFRS for SMEs, Ind AS, US GAAP and public-sector adaptations are outside scope.
The two tests
A short-term lease has a term of 12 months or less at commencement, and exactly 12 months can qualify. The term includes extension and termination option periods under the reasonable-certainty tests. Any purchase option prevents a lease from being short term, even if exercise is not reasonably certain. A lease that has only a few months left of a longer original term does not become short term by running down.
Low value is judged on the underlying asset's value when new, on an absolute basis, regardless of the lessee's size or materiality. The asset must work alone or with readily available resources and not be highly dependent on or interrelated with other assets. Cars typically fail; a head lease of an asset subleased, or expected to be, does not qualify; tablets, personal computers, small office furniture and telephones can qualify. These paragraphs set no GBP5,000 or other universal threshold, and several low-value leases can qualify even where their combined expense is material.
Sources and context, checked :
- IFRS 16 Leases (UK-adopted, at 1 January 2026), paragraphs 18-19
- IFRS 16 Leases (UK-adopted, at 1 January 2026), Appendix A, definition of short-term lease
- IFRS 16 Leases (UK-adopted, at 1 January 2026), paragraphs B3-B4, continuing on page 32
- IFRS 16 Leases (UK-adopted, at 1 January 2026), paragraphs B5-B8
Worked hypothetical: four contracts
The following leases and GBP amounts are hypothetical and independent, with no service components, incentives, variable payments or prepayments, even consumption of benefit, and supported elections and new-value evidence.
A high-value machine has a 10-month term with no options, and the lessee has elected short-term treatment for machinery. Rent of GBP2,000 a month in arrears, GBP20,000 in total, is expensed monthly with no lease liability or right-of-use asset, though unpaid rent is still a payable. A second machine has 10 months plus a 12-month extension the lessee is reasonably certain to exercise: 22 months, so both exemptions fail and normal IFRS 16 measurement applies, not automatic operating-lease treatment.
A standalone tablet, low value when new, is leased for 24 months at GBP25 a month with no expected sublease or dependence. Under a lease-specific election the expense is GBP25 a month, GBP600 in total, and the 12-month test is irrelevant. A three-year-old car now worth GBP3,000 is not low value because its current value or rent is small. These prices are not thresholds. For each elected lease, Dr lease expense, Cr cash or rent payable, with no depreciation or lease interest.
| Contract | Short-term result | Low-value result |
|---|---|---|
| 10-month machine, no options | Eligible if class election made | Not needed; asset high value |
| 10-month machine plus reasonably certain 12-month extension | Fails: 22-month assessed term | Fails: high value when new |
| 24-month standalone low-value tablet | Fails: 24 months | Eligible if lease election made and conditions met |
| Used car, small rent | Depends on full assessed term and any purchase option | No: low resale price does not prove low new value |
Sources and context, checked :
Disclosures and the lease register
Exemption does not remove disclosure. The lessee discloses its use of the exemptions and the short-term and low-value expense separately without double counting, and the short-term amount can omit leases of one month or less. Committed short-term leases at period end that differ from the portfolio behind the expense can require commitments disclosure.
Add exemption fields to the lease register: commencement, assessed full term, option evidence, purchase-option flag, asset class and election, supported value when new, interdependence and sublease flags, expense basis and disclosure totals. Recheck them whenever terms change.