Key Points
- The exemption applies only to leases with a term of 12 months or fewer at commencement, including any extension options the lessee is reasonably certain to exercise.
- Election is made on a class-of-underlying-asset basis, not lease by lease.
- Applying the exemption keeps the lease off the balance sheet entirely, with no right-of-use asset or lease liability recognised.
- A lease that contains a purchase option cannot qualify, regardless of how short the contractual period is.
What is the short-term lease exemption?
Every audit season, you'll find a client with 40 or 50 short-duration contracts (van leases, seasonal equipment, pop-up retail space, temporary offices) that someone decided to just roll it forward from last year without checking whether the terms still qualify. We've seen this on about half the engagements that have any fleet or equipment leasing. The usual failure isn't misapplying the exemption. It's not reassessing whether a repeatedly renewed 11-month lease has effectively become a multi-year commitment.
IFRS 16.5 (a) permits the lessee to elect not to apply the recognition requirements of IFRS 16.22 –49 to short-term leases. A short-term lease is one that, at the commencement date, has a lease term of 12 months or less. The assessment includes extension options: if the lessee is reasonably certain to exercise a renewal that pushes the total term beyond 12 months, the exemption is unavailable. IFRS 16 .B34 reinforces that the lease term is the non-cancellable period plus any periods covered by options the lessee is reasonably certain to exercise.
The election must be made by class of underlying asset ( IFRS 16.8 ). A company leasing both office equipment and motor vehicles can elect the exemption for equipment while capitalising all vehicle leases, but it can't cherry-pick individual equipment leases within the same class. Once elected, the lessee recognises lease payments as an expense on a straight-line basis over the lease term, or on another systematic basis if that better represents the pattern of the lessee's benefit ( IFRS 16.6 ).
The exemption doesn't eliminate disclosure obligations. IFRS 16.55 requires the lessee to disclose the expense recognised for short-term leases, giving auditors and users a view of the off-balance-sheet commitment.
Worked example: Van der Berg Logistics B.V.
Van der Berg is a Dutch transport and logistics company with FY2025 revenue of EUR 19M. It reports under Dutch GAAP (RJ) but also prepares IFRS consolidated accounts for its parent. The company leases a fleet of 14 delivery vans under rolling contracts. Each contract has a non-cancellable period of 11 months with a one-month renewal option that automatically extends unless either party gives 30 days' notice.
Step 1 — Assess the lease term at commencement
For each van, the non-cancellable period is 11 months. The one-month renewal is automatic, but Van der Berg has no economic penalty for non-renewal (alternative vans are available on comparable terms within two weeks). Management concludes it is not reasonably certain to exercise the renewal. The lease term is 11 months.
Step 2 — Confirm eligibility for the short-term exemption
The lease term of 11 months is within the 12-month threshold. None of the contracts contain a purchase option. The fleet qualifies under IFRS 16.5 (a).
Step 3 — Elect the exemption by class
Van der Berg elects the short-term lease exemption for the class "motor vehicles." The election covers all 14 van leases. Monthly payments are EUR 1,850 per van, totalling EUR 25,900 per month for the fleet. The annual expense recognised on a straight-line basis is EUR 25,900 multiplied by 11 months, giving EUR 284,900.
Step 4 — Disclosure
Van der Berg discloses EUR 284,900 as short-term lease expense for FY2025 under IFRS 16.55 . The disclosure appears in the lease note alongside the on-balance-sheet lease amounts for the entity's warehouse leases (which exceed 12 months and are capitalised).
The short-term exemption for the van fleet is defensible here. Each lease term is 11 months with no reasonably certain renewal, no purchase option exists, the election was made consistently at the class level, and the IFRS 16.55 disclosure is present in the lease note.
Why it matters in practice
Teams often assess the lease term at the contract signing date rather than the commencement date. IFRS 16.5 (a) anchors the 12-month test to the commencement date, and IFRS 16 Appendix A defines commencement as the date the lessor makes the underlying asset available. For leases signed months before the asset is delivered, the term at commencement may differ from the term at signing. Nobody enjoys going back through a lease schedule to re-date every contract, but skipping it is how files get flagged.
The class-level election requirement is also overlooked more often than you'd expect. At firms like ours, we've seen practitioners apply the exemption to selected individual leases within a single asset class while capitalising others in the same class. IFRS 16.8 doesn't allow this. An auditor finding inconsistent treatment within a class has grounds to challenge the entire exemption for that class, and the adjustment required to capitalise all leases retroactively can be material (particularly for vehicle fleets where individual lease values are modest but aggregate quickly).
Short-term lease exemption vs. low-value asset exemption
| Dimension | Short-term lease exemption ( IFRS 16.5 (a)) | Low-value asset exemption ( IFRS 16.5 (b)) |
|---|---|---|
| Qualifying criterion | Lease term of 12 months or less at commencement | Underlying asset has a low value when new (IASB indicated approximately USD 5,000) |
| Election level | By class of underlying asset | Lease by lease |
| Purchase option | Disqualifies the lease from the exemption | Does not disqualify, provided the asset value is low |
| Typical assets | Seasonal equipment, short-duration vehicle leases, temporary office space, event venue rentals | Laptops, tablets, small items of office furniture, individual phones |
| Disclosure | Separate line for short-term lease expense ( IFRS 16.55 ) | Separate line for low-value lease expense ( IFRS 16.55 ) |
The distinction matters when a lease is both short-term and low-value. The entity may use either exemption, but the class-level constraint on short-term leases versus the lease-by-lease flexibility of the low-value exemption can drive different outcomes when only some leases within a class qualify.
Related terms
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Frequently asked questions
Can I apply the short-term lease exemption to a lease that renews every six months?
It depends on whether the lessee is reasonably certain to renew beyond 12 months in total. IFRS 16.B34 requires the entity to consider all relevant factors when assessing extension options. If the entity has renewed the same lease repeatedly for several years and has no realistic alternative, the cumulative expected term may exceed 12 months, disqualifying the exemption.
Do I still need to disclose short-term leases if I apply the exemption?
Yes. IFRS 16.55 requires the lessee to disclose the expense recognised for short-term leases during the reporting period. This disclosure sits alongside the capitalised lease information and gives users visibility into off-balance-sheet lease commitments. Omitting it is a presentation error under IAS 1.31.