The default under revised FRS 102 Section 20 is straightforward: most leases go on the balance sheet. From 1 January 2026, lessees recognise a right-of-use asset and a corresponding lease liability at commencement for leases within scope. There is no classification for lessees reporting on leases, however there are still judgement calls to be made.
Section 20 does include two recognition exemptions: one for short-term leases and one for leases of low-value assets. These are not automatic. They are voluntary elections, and they come with specific conditions that must be met before a lease can legitimately stay off the balance sheet as ROU assets and lease liabilities.
Getting the eligibility assessment right matters. An exemption applied where it shouldn’t be creates a compliance risk. One missed where it could legitimately apply means unnecessary balance sheet complexity for the client.
In this guide, we will illustrate exactly how each exemption works, where the two differ in application, what disclosure obligations remain even when a lease is exempt, and what firms need to document to support the election at audit. (For a comprehensive overview of how Section 20 works, click here.)
A short-term lease is defined in Section 20 as a lease that, at commencement, has a lease term of 12 months or less and does not contain a purchase option. Both conditions must be met. A lease with a 10-month term that includes a purchase option is not a short-term lease. A lease with no purchase option but a 14-month term is not a short-term lease.
The lease term is not simply the contractual minimum period. It is the assessed term, which means it includes any extension periods the lessee is reasonably certain to exercise and excludes any termination periods the lessee is reasonably certain not to exercise. A rolling monthly contract that a client expects to hold for three years is not a short-term lease, even if the contractual period is technically month to month. The reasonably certain assessment requires judgement and should be documented at the commencement date. If the lease is cancellable with no enforceable longer period, it may be a short-term lease.
Factors relevant to that assessment include whether significant leasehold improvements have been made, the costs associated with termination, how important the underlying asset is to the client's operations, and the client's past practice with similar assets.
The short-term exemption is not applied lease by lease. It must be applied consistently across all leases within the same class of underlying asset. If a firm elects the short-term exemption for office equipment leases, that election applies to all short-term office equipment leases, not just selected ones. Choosing which individual leases within a class to exempt and which to bring on-balance sheet is not permitted.
When a short-term lease is modified, or when the lease term changes (for example, because the lessee exercises an option that was not previously included in the lease term determination), the lease is treated as a new lease from that point forward. If the new assessed term brings the total term to more than 12 months, or if the modification introduces a purchase option, the exemption no longer applies and the lease moves on balance sheet from the modification or change date.
Electing the short-term exemption means no right-of-use asset or lease liability goes on the balance sheet. The lease payments are recognised as an expense on a straight-line basis over the lease term, or on another systematic basis that better reflects the pattern of the lessee's benefit from using the underlying asset.
The low-value exemption works on a fundamentally different principle to the short-term exemption. Rather than assessing the lease term, you are assessing the value of the underlying asset itself in absolute basis, independent of the lessee's size or the value of the lease payments.
Section 20 does not set a specific monetary threshold. Instead, it lists nine categories of underlying asset that would not be considered low value:
This list is not exhaustive, however. If a leased asset is of similar value to the types of assets on this list, it does not qualify as low value. The intent is to ensure that significant assets are captured on the balance sheet while giving preparers room to exercise judgement on lower-value items.
The Basis for Conclusions to FRS 102 notes that tablet computers, small items of office furniture, and telephones would be acceptable candidates for the exemption. These too are offered as helpful context and not intended to represent a comprehensive list of qualifying assets.
Two further conditions apply regardless of asset value. The lessee must be able to benefit from the asset on its own, or together with other readily available resources. The asset must also not be highly dependent on or highly interrelated with other assets. This prevents a leased item that only functions as part of a larger system from being treated as low value simply because its individual unit value is modest.
There is one further condition to watch: the low-value exemption cannot be applied to a lease where the lessee subleases the asset or expects to sublease it. In that situation, the head lease must go on-balance sheet regardless of asset value.
Unlike the short-term exemption, the low-value exemption can be made on a lease-by-lease basis. There is no requirement to apply it consistently across a class of assets. A firm can elect the exemption for one laptop lease and not another if there is a reason to do so, and it will not create a compliance issue.
This gives firms more flexibility in practice. It also means the eligibility assessment and the election decision need to be recorded at the individual lease level.
As with the short-term exemption, when the low-value exemption is elected, no right-of-use asset or lease liability is recognised. Lease payments are recognised as an expense on a straight-line basis over the lease term, or on another systematic basis that better reflects the pattern of the lessee's benefit.
The distinction that matters most in day-to-day application is how the elections are structured. The short-term exemption is a class-level election, applying all or nothing across a given class of underlying asset. The low-value exemption is a lease-level election that can be taken or declined for individual leases regardless of what applies to others in the same class.
For firms managing large client portfolios, this affects how the exemption assessment needs to be organised and documented. Short-term elections can be recorded at the policy level for a given class. Low-value elections need to be traceable to individual leases.
Both exemptions remove the requirement to recognise the lease on the balance sheet in the form of ROU assets and lease liabilities. They do not, however, remove the disclosure obligations under Section 20. This point is easy to overlook, particularly for smaller clients where balance sheet simplicity is the goal.
Where a lessee has applied either exemption, Section 20 requires all of the following:
That maturity analysis requirement is particularly worth flagging. It applies to leases that are off the balance sheet, which means the data still needs to be captured, tracked, and reported even though no recognition has taken place. For clients with a large number of small, rolling, or short-duration leases, this adds up.
Both the short-term and low value exemptions are voluntary. That means each election is a decision that needs to be made, recorded, and retained. An undocumented exemption election is not a defensible position if the treatment is challenged at audit.
For the short-term exemption, the documentation for each lease needs to show the assessed lease term at the commencement date (including the reasonably certain analysis for any extension or termination options) and the class-level election decision.
For the low-value exemption, the documentation for each lease needs to show the asset value assessment at the individual lease level including consideration of the asset type, the interrelationship with other assets, and whether subleasing is expected.
In both cases, the assessment is made at the commencement date. If circumstances change later (e.g., a short-term lease is extended or a low-value asset becomes part of a subleasing arrangement), the exemption qualifier needs to be revisited and the documentation updated.
For firms managing exemption elections across a multi-client portfolio, keeping this documentation consistent, traceable, and audit ready is one of the more operationally demanding parts of Section 20 compliance.
For firms whose client base spans both FRS 102 and IFRS-reporting entities, the difference in how the two standards handle the low-value threshold is worth acknowledging.
IFRS 16 does not include a monetary threshold in the standard itself, but its Basis for Conclusions indicates a benchmark of approximately USD $5,000 for what would typically be considered low value. FRS 102 references the same illustrative examples (tablet computers, small office furniture items, and telephones) as acceptable candidates for the exemption.
Where the two standards diverge is in how they frame the threshold. IFRS 16 anchors on a monetary benchmark. FRS 102 takes a different approach, identifying asset categories that are definitively not low value and leaving preparers to make the determination for everything else.
The FRC's stated intent is that this flexibility should result in fewer leases ending up on the balance sheet under FRS 102 than would be the case under IFRS 16. For asset-light clients with a large number of small equipment leases, this can make a meaningful difference to the balance sheet impact of transition.
The short-term exemption works consistently across both standards.
Managing exemption elections across a multi-client portfolio requires tracking lease term assessments, asset value determinations, class-level elections, and lease-level elections alongside the ongoing maturity analysis disclosures for every exempt lease. That’s a lot of moving parts to manage reliably in a spreadsheet, particularly when lease terms change, modifications occur, or new leases are added mid-year.
Fortunately, Crunchafi has accounted for that. Our FRS 102 Section 20 lease accounting functionality is coming soon.
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Can a lessee choose to bring a short-term or low-value lease on-balance sheet even if it qualifies for an exemption?
Yes. Both exemptions are voluntary. A lessee that prefers to recognise all its leases on-balance sheet can do so, even where a lease would otherwise qualify for the short-term or low-value exemption. Some entities may prefer consistency across their lease portfolio over the administrative simplicity the exemptions offer.
What happens if a lease initially treated as short-term is extended beyond 12 months?
If the lease term changes (e.g., the lessee exercises an extension option that was not previously included in the lease term assessment), the lease is treated as a new lease from that point. The short-term exemption no longer applies, and the lessee must recognise a right-of-use asset and lease liability from the date of that change.
Does the short-term exemption apply to a lease that renews automatically each year?
Not necessarily. The exemption applies to the assessed lease term, not just the contractual minimum. If a lessee is reasonably certain to continue renewing, the assessed term may well exceed 12 months even if each individual renewal period does not. The reasonably certain analysis needs to be applied honestly at the commencement date, with reference to the lessee's intentions and past practice with similar assets.
If a client has a mix of short-term and longer leases within the same asset class, can the short-term exemption still be applied?
The short-term lease exemption is elected by class of underlying asset and must be applied consistently to all short-term leases. It cannot be applied selectively to some eligible leases and not to others in the same class. Leases in that class that do not meet the short-term definition must be accounted for on balance sheet as ROU assets and lease liabilities.
