At the commencement date of a lease, a lessee recognises a right-of-use asset and a lease liability under IFRS 16: the lease liability is measured at the present value of unpaid lease payments, and the right-of-use asset is measured at cost, with an optional exemption from these requirements available for certain short-term or low-value leases.
Initial Recognition and Measurement of the Lease Liability
At the commencement date, a lessee measures the lease liability at the present value of the lease payments that are not paid at that date, discounted using the interest rate implicit in the lease if that rate can be readily determined, or otherwise the lessee's incremental borrowing rate. The lease payments included in this measurement comprise fixed payments, variable payments linked to an index or rate, amounts expected to be payable under residual value guarantees, the exercise price of a purchase option if the lessee is reasonably certain to exercise it, and termination penalties if the lease term reflects exercise of a termination option.
Initial Recognition and Measurement of the Right-of-Use Asset
A lessee measures the right-of-use asset at cost at the commencement date. That cost comprises the amount of the initial measurement of the lease liability, any lease payments made at or before the commencement date less any lease incentives received, any initial direct costs incurred by the lessee, and an estimate of costs of dismantling and removing the asset or restoring the site, where such an obligation exists.
Exemption for Short-Term Leases and Low-Value Assets
A lessee may elect not to apply the usual recognition and measurement requirements to short-term leases and to leases for which the underlying asset is of low value. A short-term lease is defined as a lease that, at the commencement date, has a lease term of 12 months or less and does not contain a purchase option. If a lessee elects this exemption, it recognises the lease payments as an expense on a straight-line basis over the lease term, or on another systematic basis if that basis is more representative of the pattern of the lessee's benefit.
Why This Distinction Matters
This exemption simplifies the accounting for a large number of small or short-duration leases, so that a lessee does not need to recognise an asset and a liability for every piece of short-term or minor equipment leased, while other leases remain subject to full recognition of a right-of-use asset and a lease liability.
Legal References
- IFRS 16 — Leases, paragraph 22 (lessee recognition of a right-of-use asset and lease liability).
- IFRS 16, paragraph 24 (components of the cost of the right-of-use asset).
- IFRS 16, paragraph 26 (measuring the lease liability at its discounted present value).
- IFRS 16, paragraph 5 (exemption for short-term and low-value leases).
- IFRS 16, paragraph 6 (accounting when the exemption is elected).
- IFRS Glossary of Terms (definition of a short-term lease — IFRS 16.A).
For questions about your specific situation, you can ask the Accounting Helper (private sector) on Helpers, or consult a licensed chartered accountant.