IFRS 16 requires lessees to capitalize all leases, with two exceptions:
(1) short-term leases (lease term of 12 months or less)
(2) leases of low-value assets (fair market value of the leased asset is $5,000 or less at the beginning of the lease)
If the lease meets either of these two exceptions, the lessee can choose not to capitalize the lease.
It might seem like a company could avoid capitalizing a lease by simply entering into a one-year lease (to qualify for the short-term lease exception) and then renewing the lease each year. Such a company would still be required to capitalize the lease, however. This is because leases with a term of 12 months or less must be capitalized if (a) they have a renewal option and (b) it’s reasonably certain the lessee will exercise the renewal option.
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