FRS 102 short-term lease and low-value exemptions explained

Under FRS 102 Section 20, not every lease must go on the balance sheet. Two elective exemptions allow organisations to continue expensing lease payments directly through the profit and loss account: the short-term lease exemption, which applies to leases with a term of 12 months or less at commencement, and the low-value asset exemption, which applies to individual assets that qualify as low-value when new. Both are entirely optional, and both are commonly misapplied.

The FRS 102 changes effective for accounting periods beginning on or after 1 January 2026 affect an estimated 3.2 million UK and Republic of Ireland entities. For most organisations, the vast majority of their leases (property portfolios, vehicle fleets, major equipment) will require full on-balance-sheet recognition as right-of-use assets and lease liabilities. The exemptions discussed in this article cover the exceptions: the cases where a simpler treatment remains available. Understanding exactly where those boundaries sit, and where they do not, is essential for audit-ready reporting. For the full mechanics of ROU asset recognition under the international standard, see: What is a right-of-use asset? A plain-English IFRS 16 guide. For the FRS 102-specific treatment, see our companion guide: FRS 102 right-of-use assets: a plain-English guide.

Updated May 2026.

What the FRS 102 exemptions are

FRS 102 Section 20 provides two recognition exemptions for lessees. Both allow lease payments to be recognised as an expense on a straight-line basis (or another systematic basis if more representative of the pattern of benefit) rather than triggering the recognition of an ROU asset and corresponding lease liability on the balance sheet.

The two exemptions are:

• Short-term leases: leases with a term of 12 months or less at the commencement date of the lease.
• Leases of low-value assets: leases where the underlying asset, when new, is of low value. FRS 102 provides categorical guidance on what qualifies and what does not, without setting a specific monetary threshold.

Both exemptions are optional. An organisation is not required to apply either one. Some organisations may choose to apply one but not the other. Where an exemption is applied, it must be applied consistently by class of underlying asset for short-term leases (for example, applying the exemption to all short-term vehicle leases but not to short-term property leases). The low-value exemption is assessed lease-by-lease, on the individual asset.

Applying these exemptions can meaningfully reduce the data collection and calculation workload for organisations with certain asset types. But they do not eliminate the need for judgement, documentation, and consistent application: all of which auditors will expect to see.

The short-term lease exemption

A short-term lease is defined as a lease that, at the commencement date, has a term of 12 months or less, including any options to extend the lease where the lessee is reasonably certain to exercise them. If a lease has a non-cancellable period of 9 months but includes a 6-month extension option the lessee is reasonably certain to exercise, the effective term is 15 months and the short-term exemption does not apply.

A lease that contains a purchase option can never qualify as short-term, regardless of the stated lease term. This is an absolute rule with no exceptions. The presence of a purchase option signals that the arrangement is substantively more than a short-duration lease, and FRS 102 excludes it from the exemption entirely.

The exemption is applied by class of underlying asset, not lease-by-lease. An organisation that elects the short-term exemption for a class of asset (for example, short-term IT equipment leases) must apply it to all leases of that class that qualify. It cannot cherry-pick individual leases within a class.

Evergreen and rolling leases: a judgement call

Month-to-month or rolling leases require careful assessment before the short-term exemption is applied. The starting point is the non-cancellable period: if either party can terminate with 30 days' notice, the non-cancellable period is 30 days, and the lease may technically fall within the 12-month threshold.

However, the assessment of lease term also requires consideration of whether the lessee is reasonably certain to exercise any available extension options, and the wider economic substance of the arrangement. A rolling lease for a retail premises that has been in place for years, with no real intention of vacating, is unlikely to be genuinely short-term in substance even if either party could technically terminate it on short notice. The standard requires judgement, and auditors will scrutinise the rationale where the conclusion seems to understate the real commitment.

The practical guidance here: if an organisation genuinely expects to use the leased asset for more than 12 months, the short-term exemption almost certainly does not apply, regardless of the contractual rolling structure. If the duration is genuinely uncertain and short-term use is a real possibility, a well-documented judgement supporting the exemption will be defensible. If the rationale is primarily to avoid balance sheet recognition, expect the auditor to push back.

Under IFRS 16, rolling short-term leases that in practice ran for longer than 12 months became a significant audit focus in subsequent years after adoption. Auditors challenged organisations that had consistently re-designated leases as short-term while continuing to roll them forward with no genuine expectation of exit. FRS 102 preparers should expect the same scrutiny. The contractual rolling structure does not determine the conclusion; the honest assessment of expected use does.

The low-value asset exemption

FRS 102 does not set a specific monetary threshold for low-value assets. This is a deliberate departure from IFRS 16, which provides an indicative guideline of approximately USD $5,000 when new. Instead, FRS 102 takes a categorical approach, providing explicit lists of asset types that can and cannot qualify.

Assets that FRS 102 indicates will typically be low-value include:

• Tablets and personal computers
• Personal mobile phones
• Small items of office furniture (desks, chairs, filing cabinets)
• Small office equipment such as desktop printers

Assets that FRS 102 explicitly states are NOT low-value include:

• Vehicles of any kind (cars, vans, trucks, buses)
• Land and buildings (commercial and residential property)
• Construction and heavy machinery
• Farming and agricultural equipment
• Boats and ships

Two further rules govern how the assessment is made. First, the assessment is based on the value of the asset when new, not its current market value or its value at the date the lease is entered into. An organisation cannot claim low-value status for an asset simply because it is old, heavily used, or being leased at a nominal rate. Second, the assessment is made at the level of the individual asset, not the portfolio. A lease of 500 laptops must be assessed as a lease of individual laptops, each of which would be low-value when new, not as a portfolio arrangement with an aggregate value of tens of thousands of pounds.

Quick-reference: asset classification table

The table below summarises the likely classification for common asset types. Each assessment remains a matter of judgement and must be documented: this table provides a starting point, not a definitive answer.