Module I· Lease Accounting (IFRS 16 vs. HGB)Intermediate
Question
What are short-term leases and low-value-asset leases under IFRS 16?
Answer
Mechanics
IFRS 16 allows two exemptions from the RoU asset / lease liability model:
- Short-term leases: remaining lease term <= 12 months. The lessee can choose not to capitalize them; lease payments continue as rent expense. This simplifies administration for short contracts.
- Low-value-asset leases: new asset value around $5,000 or similarly immaterial. The lessee can choose not to capitalize them; typical examples are printers, laptops, and office equipment.
Practice:
- Large companies often do not use the short-term exemption broadly because consistency and compliance are easier.
- The low-value exemption is commonly used because it is a materiality threshold.
Deep diveShow more details
Consequence
IFRS 16 largely eliminates off-balance-sheet leasing, but small residual amounts remain. These off-balance lease expenses must be disclosed in the notes and are usually less than 5% of total lease expense.
Pitch tip
In DD for lease-heavy targets, check the lease note disclosure. If short-term or low-value exemptions are >10% of lease expense, it may indicate structuring to optimize the balance sheet; adjust valuation by calculating a capitalized-lease equivalent.