FRS 102 Preparing for Change

What does the new lease accounting model mean for lessees under FRS 102 in Ireland? 

The Financial Reporting Council’s Periodic Review 2024 amendments to FRS 102 will move most lessee accounting under Irish GAAP to an on-balance-sheet model. The revised approach is based on IFRS 16 principles and is broadly similar to existing finance lease accounting. In practice, most material leases that were previously treated as operating leases will now be recognised on the balance sheet, and the operating versus finance lease distinction will no longer drive lessee accounting treatment.

For many Irish entities, this will increase the assets and liabilities recognised on the balance sheet and change how lease costs are presented in the income statement. Only short-term leases and leases of low-value assets are expected to remain off balance sheet.

The revisions are effective for accounting periods beginning on or after 1 January 2026. Businesses should use the time before adoption to quantify the effect on their financial statements, review lease populations and assess any implications for contracts, banking arrangements and KPIs that rely on reported financial information. 

How will the new lease accounting model affect a lessee’s financial information?

Using an existing property operating lease as an example, at a high level, you should expect impacts in several areas

On the balance sheet 

The lessee will recognise a new asset within fixed assets, which represents the ‘right of use’ of the property, and a corresponding lease liability, split between current and non-current liabilities, at the present value of the future lease payments, with adjustments made for the incremental costs of obtaining the lease. Each rental payment will reduce the lease liability. 

In the income statement 

The current operating lease expense (rent) will be replaced with depreciation (and any impairment) of the right of use asset, and a finance cost for the unwinding of the lease liability.

Over the length of the lease, the amount charged to the income statement will still be the total cost of the lease, it’s just that the timing will change, due to a higher finance cost in earlier years of the lease as the lease liability is unwound. 

On key figures and KPIs, such as:  

• EBITDA increasing by the value of the operating lease expense that is removed; 
• finance and depreciation costs being higher, which may impact lending covenants; 
• gross assets used for the company size thresholds*, which may be breached by the inclusion of right of use assets; 
• net current assets being decreased by the current element of the lease liability; and 
• gearing ratios increasing, depending on the definitions of debt. 

The impact on any finance leases will be far less, as they are already shown 'on balance sheet'. However, you will need to assess whether the amounts already recognised as assets and liabilities meet the new requirements.

*The government has announced that it will bring forward legislation in the summer of 2024 to increase the turnover and gross asset thresholds by approximately 50% which may alleviate some of these concerns. 

What should finance teams do first?

Even if your first financial statements under the new lease accounting model are still some distance away, now is the right time to identify all leases, including those embedded in wider service or supply arrangements, and to understand the key commercial terms in each agreement. A practical starting point is to review lease commitments currently disclosed, together with existing finance leases, to assess the volume of contracts that may need to be remeasured under the revised FRS 102 requirements. 

Consideration of practical expedients available

FRS 102 has provided reporters with a number of practical expedients to make the transition more straight-forward. The below practical expedients are available on initial application:

• Arrangement already classified as a service contract - there is a practical expedient not to re-check if there is a lease embedded in contract.
• Portfolio approach - you can account for a portfolio of leases with similar characteristics as if it were one lease. Similar characteristics include type of asset, lease duration, discount rate etc.
• Low-value leases - you can continue to account for low-value leases as operating leases. Low-value has not been defined and will require management judgement. Some assets such as property has been excluded from being identified as low-value.
• Short-term leases - If a lease is less than 12 months in duration or has less than 12 months remaining on its term as at 1 January 2026 (or date of transition), expedient available to treat these lease as short-term and continue to recognise as an operating lease.
• Hindsight - A lessee may use hindsight such as in determining the lease term if the contract contains options to extend or terminate the lease.
• IFRS parent - Subsidiaries of IFRS parent company can utilise the carrying values of the right-of-use assets and lease liabilities recognised under IFRS for the subsidiary's leases.

How could the FRS 102 changes affect management information and reporting systems? 

From a practical perspective, businesses may need to revisit how lease data is captured, calculated and reported across finance systems. This can include deciding when the revised standard should be reflected in management accounts, setting up appropriate nominal accounts for right-of-use assets, lease liabilities, depreciation and finance costs, and ensuring these map correctly through internal reporting and statutory reporting processes. Businesses should also assess whether lease calculations are best managed through dedicated lease accounting software or controlled internal models such as spreadsheets.

It may also be necessary to expand fixed asset registers and supporting schedules so that each right-of-use asset, along with related depreciation and any impairment, can be tracked accurately over the lease term. 

What are the wider considerations for implementing the new lease accounting model? 

It is crucial to identify and assess any contractual arrangements, such as covenants, earn-out agreements, and performance related pay that refer to KPIs, such as EBITDA, to fully understand how they will be impacted.

Comparatives cannot be restated on initial application of the periodic review 2024, which means adjustments are taken to reserves at the start of the current year. While this may have some practical advantages, it creates a lack of comparability between the current and comparative periods.

Clear stakeholder communication will be important. Because comparative figures are not restated on transition, businesses may need to explain why current-period metrics are not directly comparable with prior periods and how the changes affect KPIs, assets, liabilities and profit trends. Planning that message early can help avoid confusion when budgets, targets and performance measures are reviewed.

If you are preparing for the lease accounting changes under FRS 102, it is worth assessing the effect early so you can address data, systems, covenants and stakeholder communications ahead of implementation.