Putting every lease on the balance sheet would mean capitalising the office printer and the twelve-month car hire. Ind AS 116 provides two optional exemptions to avoid that — but they are narrower than most people assume, and the elections work differently from each other in a way that catches preparers out.
The Two Exemptions
Ind AS 116 gives lessees two optional recognition exemptions. Where one applies and is elected, no right-of-use asset and no lease liability are recognised. Lease payments are simply expensed over the lease term, on a straight-line or other systematic basis.
| Short-term lease | Low-value asset | |
|---|---|---|
| Condition | Lease term of 12 months or less at commencement | Underlying asset is of low value when new |
| Purchase option | Must not contain one | No such condition |
| Election made | By class of underlying asset | Lease by lease |
| Monetary threshold in the standard | Not applicable | None defined |
That third row is the distinction most often missed, and it has real consequences — covered below.
The Short-Term Lease Exemption
A short-term lease has a lease term of 12 months or less at the commencement date and contains no purchase option. A single purchase option disqualifies the lease entirely, regardless of how short it is.
Two traps here:
Lease term includes reasonably certain renewals. An eleven-month agreement that both parties routinely renew, and where renewal is reasonably certain, has a lease term exceeding twelve months. It is not short-term. This matters in India, where eleven-month rental agreements are standard practice precisely because they sit below certain regulatory thresholds — the accounting term is assessed on economic substance, not the stated period.
The election is by class of underlying asset. You cannot apply it to some vehicle leases and not others. If you elect the exemption for the class “motor vehicles”, it applies to all qualifying short-term vehicle leases.
The Low-Value Asset Exemption
This applies where the underlying asset is of low value when new.
Three points define how it works:
- Assessed on absolute value, not materiality to the lessee. The test is the value of the asset itself, not whether the amount is significant relative to the company’s size. A large corporation cannot treat a leased vehicle fleet as low-value simply because it is immaterial to group results.
- Based on the asset when new, regardless of its age at lease commencement. A five-year-old machine that cost a substantial amount when new does not qualify.
- Based on the underlying asset’s value, not the lease rentals. Low rentals on a high-value asset do not qualify.
Ind AS 116 does not specify a monetary threshold. The standard indicates the concept relates to items such as personal computers, small items of office furniture, telephones and similar equipment. The IFRS 16 Basis for Conclusions referenced an order of magnitude, but that guidance is not itself part of the standard, and entities apply judgement consistently rather than a bright line.
A Further Restriction
The low-value exemption is not available where the asset is subleased or expected to be subleased. If you lease equipment and sublet it onwards, you are acting as an intermediate lessor and the exemption does not apply.
It also does not apply where the asset is highly dependent on, or highly interrelated with, other assets — an individually inexpensive component that only functions as part of a larger leased system is assessed with that system.
Worked Comparison
| Arrangement | Exemption available? | Reason |
|---|---|---|
| 9-month equipment hire, no purchase option | Yes — short-term | Term under 12 months |
| 11-month office lease, renewal reasonably certain | No | Lease term exceeds 12 months in substance |
| 10-month vehicle lease with purchase option | No | Purchase option disqualifies it |
| Leased laptops for staff | Yes — low value | Typical low-value item |
| Leased delivery van, 3 years | No | Underlying asset is not low value |
| Leased laptops, subleased to a contractor | No | Sublease bars the low-value exemption |
| Second-hand machine, low current value, high value when new | No | Test applies to value when new |
Accounting Where an Exemption Applies
The treatment reverts to something close to the old operating lease model:
- Payments recognised as an expense over the lease term, straight-line or another systematic basis if more representative
- No ROU asset, no lease liability on the balance sheet
- Expense sits in operating costs — it does not improve EBITDA the way capitalised leases do
- Cash outflow stays entirely in operating activities
Disclosure is still required — the expense relating to short-term leases and to low-value asset leases must be disclosed separately, along with short-term lease commitments where the portfolio has changed.
Why This Affects Comparability
Because both exemptions are optional, two companies with identical lease portfolios can report differently. One elects both exemptions and keeps them off balance sheet; another applies full recognition to everything.
For most companies the amounts involved are small and the difference is immaterial. But in businesses with large fleets of individually modest assets — IT equipment across a large workforce, for instance — the aggregate can matter. Checking the accounting policy note tells you which approach a company has taken.
Key Takeaways
- Two optional exemptions: short-term leases and low-value assets
- Short-term = 12 months or less at commencement, with no purchase option
- Lease term includes reasonably certain renewals — an 11-month lease routinely renewed is not short-term
- Short-term election is by class of asset; low-value election is lease by lease
- Low value is judged on the asset when new, in absolute terms, not on lease rentals or materiality
- No monetary threshold is defined in Ind AS 116
- The low-value exemption is unavailable where the asset is subleased
- Exempt leases are expensed, disclosed separately, and do not lift EBITDA
Frequently Asked Questions (FAQ)
Q: What are the exemptions under Ind AS 116?
Two optional recognition exemptions for lessees — short-term leases of 12 months or less with no purchase option, and leases of low-value assets. Where elected, no right-of-use asset or lease liability is recognised and payments are expensed over the lease term.
Q: What is the monetary threshold for a low-value asset?
Ind AS 116 does not define one. The standard indicates the concept relates to items such as personal computers, small office furniture and telephones. Entities apply judgement and should do so consistently, disclosing their policy.
Q: Does an 11-month rent agreement qualify as a short-term lease?
Not automatically. The lease term includes renewal periods where extension is reasonably certain. Eleven-month agreements that both parties routinely renew have a lease term exceeding twelve months in substance, so the exemption does not apply.
Q: Can I apply the short-term exemption to only some leases?
The short-term election is made by class of underlying asset, so it applies to all qualifying short-term leases within that class. The low-value exemption, by contrast, is applied lease by lease.
Q: Is the low-value test based on the lease rentals or the asset value?
The value of the underlying asset when new, not the lease rentals. Low rentals on a high-value asset do not qualify, and a second-hand asset is assessed on what it was worth new rather than its current value.
Q: Can a large company treat vehicle leases as low value because they are immaterial?
No. The assessment is on the absolute value of the underlying asset, not on materiality relative to the lessee’s size. A vehicle is not a low-value asset regardless of how large the leasing company is.
Q: Do exempt leases still need disclosure?
Yes. The expense relating to short-term leases and to low-value asset leases must be disclosed separately, along with commitments for short-term leases where the current portfolio differs from the one the expense relates to.
Q: Does a purchase option affect the short-term exemption?
Yes, decisively. A lease containing a purchase option cannot be treated as short-term regardless of its length, because the definition of a short-term lease specifically excludes leases with a purchase option.
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