Under IFRS 16, which leases are expensed as incurred rather than capitalized?

Under IFRS 16, which leases are expensed as incurred rather than capitalized?

• A. All leases are capitalized with no exceptions
• B. Short-term leases of one year or less and low-value leases
• C. Only leases with a BPO
• D. Leases with variable payments

Answer: (B)

Under IFRS 16, the default is to capitalize most leases, recognizing a right‑of‑use asset and a lease liability from the start of the lease. There are exemptions, though: if a lease is short-term (12 months or less) or if the underlying asset is of low value, the lessee may elect not to capitalize and instead expense the lease payments as they’re incurred, usually on a straight‑line basis over the lease term. This is exactly why short-term and low-value leases are expensed rather than capitalized. The other situations don’t fit this specific exemption: a purchase option at the end of the lease doesn’t by itself cause expensing, and variable payments are treated based on whether they’re fixed/variable components included in the lease liability or expensed when the event occurs.

Under IFRS 16, the default is to capitalize most leases, recognizing a right‑of‑use asset and a lease liability from the start of the lease. There are exemptions, though: if a lease is short-term (12 months or less) or if the underlying asset is of low value, the lessee may elect not to capitalize and instead expense the lease payments as they’re incurred, usually on a straight‑line basis over the lease term. This is exactly why short-term and low-value leases are expensed rather than capitalized. The other situations don’t fit this specific exemption: a purchase option at the end of the lease doesn’t by itself cause expensing, and variable payments are treated based on whether they’re fixed/variable components included in the lease liability or expensed when the event occurs.