IFRS 16 and Short-term Leases

IFRS 16 provides an optional exemption from the full requirements of the standard for short-term leases (leases with a lease term of 12 months or less).

If the entity elects to take the exemption, lease payments are recognized as an expense on a straight-line basis over the lease term or another systematic basis.

The short-term lease exemption must be applied consistently to all underlying assets in the same class.

Example 1

Company A owns real estate and leases a building to Company B. No formal lease agreement is in place (i.e. the lease is “month to month”) and the lease simply rolls over from one month to the next. Either party is able to terminate the lease without notice.

Solution 1

In determining the lease term, only the contractual terms of the arrangement are considered, not past or expected future behavior. The lease term is based on the period of time that the contract is enforceable by either party.

Therefore, such a ‘month to month’ lease would meet the definition of a short-term lease.

Example 2

ABC Ltd manufactures and sells calendars. In order to sell its calendars directly, it enters into an agreement to lease a storefront in a mall for the months of November and December each year for 4 years. The agreement specifies the storefront, and the mall owner cannot substitute another storefront.

Solution 2

In order to determine whether the term is more than 12 months, ABC Ltd considers that “period of use” is defined in IFRS 16 as: “the total period of time that an asset is used to fulfill a contract with a customer (including the sum of any non-consecutive periods of time).”

The total aggregate term of the lease is 8 months (2 months per year for 4 years), and therefore ABC Ltd can elect to apply the practical expedient for short-term leases.