Under the revised FRS 102 Section 20, a lessee can choose not to put two kinds of lease on the balance sheet: short term leases of 12 months or less with no purchase option, and leases of low value assets such as laptops or small office furniture. The payments are then expensed on a straight line basis, as rent was before. The short term election is made for a whole class of asset; the low value election can be made lease by lease.
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Which leases can a lessee keep off the balance sheet?
For accounting periods beginning on or after 1 January 2026, lessees under FRS 102 recognise a right of use asset and a lease liability for most leases. Paragraph 20.5 lets a lessee choose not to apply the recognition and measurement rules in paragraphs 20.45 to 20.73 to:
- short term leases; and
- leases for which the underlying asset is of low value, as set out in paragraphs 20.9 to 20.12.
These are elections, not requirements. A lessee can put a short term or low value lease on the balance sheet if it prefers. Paragraph 20.7 sets the level of each choice: the short term election is made by class of underlying asset, so a company cannot expense one short vehicle hire and capitalise another; the low value election can be made lease by lease. The wider changes are explained in FRS 102 changes from January 2026. Micro entities using FRS 105 keep the old operating and finance lease model, so they do not need these exemptions.
What counts as a short term lease?
The glossary defines a short term lease as one that, at the commencement date, has a lease term of 12 months or less. A lease that contains a purchase option is never short term, however brief.
The key word is lease term, not contract length. Paragraph 20.38 defines it as the non cancellable period plus periods covered by an extension option the lessee is reasonably certain to exercise, and periods covered by a termination option it is reasonably certain not to exercise. Paragraph 20.39 says a lease stops being enforceable once both parties can terminate without the other’s permission and with no more than an insignificant penalty. Paragraph 20.41 lists factors for judging reasonable certainty, including rents compared with market rates, significant leasehold improvements, termination costs and how important the asset is to the business. So a nine month contract with an option to extend for two years that the lessee is reasonably certain to use is not short term.
Paragraph 20.8 adds that a short term lease is treated as a new lease if it is modified or the lease term changes, for example when the lessee exercises an option not previously included. A lessee that keeps renewing a 12 month hire must reassess each time.
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How do rolling and informal leases fit?
Many small companies rent premises from a director or a connected company with no written lease, or on a month to month basis. ACCA’s technical factsheet on the changes notes that evergreen leases on a day to day, week to week or month to month basis can potentially be short term leases. It also cautions that where both parties expect the arrangement to continue for a long time, often because the rent is below market, the lessee must determine the lease term and it may be long, potentially based on the useful life of the building. The informal nature of the arrangement does not decide the answer; the expected period of use and the economic incentives do. Related party disclosures may also apply; see notes to the accounts under FRS 102.
What counts as a low value asset?
FRS 102 does not set a monetary limit. Instead it gives three rules:
- Absolute assessment. Paragraph 20.9 says the value of the asset is assessed on an absolute basis, regardless of whether the leases are material to the lessee, and the value of the lease payments has no bearing on the assessment. A large group and a small company should reach the same answer for the same asset.
- Independent use. Paragraph 20.10 says an asset can be low value only if the lessee can benefit from it on its own or with other readily available resources, and it is not highly dependent on, or highly interrelated with, other assets.
- No subletting. Paragraph 20.12 excludes a head lease where the lessee subleases, or expects to sublease, the asset.
Paragraph 20.11 lists assets that would not be low value: cars, vans, buses, coaches, trams, trucks and lorries; cranes, excavators, loaders and bulldozers; telehandlers and forklifts; tractors, harvesters and attachments; boats and ships; railway rolling stock; aircraft and aero engines; property; and production line equipment. ACCA gives laptop and desktop computers, tablets and small items of office furniture as examples that would be low value.
How are exempt leases accounted for?
Paragraph 20.6 requires the lease payments to be recognised as an expense on a straight line basis over the lease term, or on another systematic basis that better represents the pattern of the lessee’s benefit. Rent free periods are part of the lease term under paragraph 20.37, so a six month lease with the first month free is expensed evenly over six months, not as cash is paid. No asset or liability is recognised except accruals or prepayments for timing differences; see accruals and prepayments. Paragraph 20.13 also allows a portfolio approach for leases with similar characteristics, which can reduce the work for large numbers of similar items.
How does this work for a typical small company?
Illustration only. A company has these leases at the start of its year:
| Lease | Treatment | Reason |
|---|---|---|
| Eight laptops, three year term | Expense straight line | Low value asset, election taken lease by lease |
| Van, three year contract hire | Right of use asset and liability | Vans are listed in paragraph 20.11 as not low value, and the term exceeds 12 months |
| Storage unit, 12 month fixed term, no options | Expense straight line | Short term, if the company has elected for that class of asset |
| Excavator hired for 10 months with an option to buy | Right of use asset and liability | The purchase option prevents short term treatment and excavators are not low value |
| Office rented from a director, no written lease | Judgement | Lease term depends on the expected period of occupation and incentives to stay |
How do the exemptions apply on transition and on acquisitions?
On first applying the revised Section 20, paragraph 1.52(a) means no transition adjustment is needed for leases of low value assets that will use the exemption. Paragraph 1.53(c) allows a lessee to treat leases ending within 12 months of the date of initial application as if they were short term, and to include their cost in the short term lease expense disclosure for that first period. When a business is acquired, paragraph 19.19A does not require the acquirer to recognise right of use assets and lease liabilities for the acquiree’s leases that end within 12 months of the acquisition date or that are of low value assets.
What must be disclosed?
Paragraph 20.80(b) requires disclosure of the expense relating to short term leases accounted for under paragraph 20.6, which need not include leases of one month or less. Paragraph 20.80(c) requires the expense for low value leases, excluding short term leases of low value assets already in 20.80(b). Small companies using Section 1A must give the same short term, low value and variable payment disclosures under paragraph 1AC.32A, and paragraph 1AC.31 names leases for which a recognition exemption has been taken as an example of an off balance sheet arrangement. See FRS 102 Section 1A.
What are the common mistakes?
- Treating any lease with a 12 month contract as short term without checking extension options and whether the lessee is reasonably certain to use them.
- Applying the short term exemption to some assets in a class but not others.
- Judging low value by the size of the rent or by materiality, which paragraph 20.9 rules out.
- Treating vehicles as low value because the monthly payment is small.
- Forgetting that a renewal or modification resets the short term assessment under paragraph 20.8.
- Omitting the expense disclosures, which apply to small companies too.
For how the other side of the contract is accounted for, see lessor accounting under FRS 102.
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Related Accountapedia entries
- IFRS 16 vs the new FRS 102 lease rules
- How break clauses and options affect the lease term
- Renting premises from a director: lease accounting
- How micro entities account for leases
- Leases in charity accounts from 2026
Sources
- Financial Reporting Council: FRS 102 September 2024 tmKYWO6
- ACCA: Tf lease accounting under frs102 1024
- ICAEW: New revenue recognition model for frs 102 and 105
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.