FRS 102 CHANGES TO LEASE ACCOUNTING

New requirements for FRS 102 adopters take effect this year which may have a significant impact on how some lessees recognise and report their leases.

The changes, which have been implemented by the Financial Reporting Council (FRC), align FRS 102 with its IFRS counterpart (IFRS 16).  Not only does it change the way some lessees recognise leases in their financial statements, it also removes the previous distinction between finance and operating leases.

The changes are mandatory for accounting periods beginning on or after 1 January 2026 (with early adoption permissible).

To briefly summarise the changes, let’s start with a quick recap on what had been the established treatment.

Current treatment (prior to 2026)

A lessee will have categorised their leases as either a ‘finance’ or an ‘operating’ arrangement and will have applied the associated treatment:

Finance leases: the lessee will have recognised an asset and a liability (at the lower of the fair value of the leased asset and the present value of minimum payments). Interest on the lease and depreciation of the asset will have been recognised through their profit & loss account.

Operating leases: the lessee won’t have recognised a lease liability or the asset on their balance sheet, with lease payments having been recognised as an expense through their profit & loss account on a straight-line basis over the lease term.

New treatment from 2026

The new treatment removes the distinction between finance and operating arrangements; they are all now treated in the same way with lessees recognising a right-of-use asset and a corresponding lease liability.

Lease interest and depreciation of the asset is now recognised as an expense through the profit & loss account for all leases.

There are exemptions to the new requirements, including for short term leases (12 months or less) and low value assets.  FRS 102 provides examples of assets that would not be considered low value, included most vehicles and land & buildings.  Beyond these examples, users are required to make their own assessment of what they consider low value assets – as assessment that is likely to vary between organisations based on their own circumstances.

Transitional arrangements

As mentioned, early adoption of the new requirement is allowed.  However, when first adopting these rules there is no need to restate comparatives.

Pre-existing operating leases should be brought into the new framework by recognising a lease liability and a right-of-use asset based on the remaining lease term.

FRS 102 makes it clear that prior period adjustments must not be recognised.

Key take away

The change mostly impacts organisations holding leases previously classified s operating, who will now recognise an increased level of assets and liabilities, and instead of recognising a rental expense will now recognise interest and depreciation charges.

 

RSM Channel Islands offer a variety of accounting services to businesses who may be affected by this change.  Please contact Emma da Silva if you would like to discuss how we can help you.

This information is provided for general guidance only.  It is not intended to form advice and should not be relied upon as such.  The application of FRS 102 can be complex, and professional advice should be sought.