BLM10010 - Lease accounting: accounting standards: introduction and relevant standards

This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 chapter.

Lease accounting is a complex subject. The accounting standards and the accompanying guidance are complex.  Lease accounting also commands much coverage in leasing text²ú´Ç´Ç°ì²õ. Ìý

The guidance that follows is not intended to give comprehensive coverage of all aspects of lease accounting.  The guidance aims to give an overview to allow an understanding of commonly found features in lessors’ and lessees’ accounts.  It doesÌýnot attemptÌýto repeat theÌýdetailÌýin accounting standardsÌýbutÌýis intended toÌýexplain enough to enable you to understand the way in which leasing transactions are presented in accounts. ÌýÌý

If the situation is unusual, particularly if it relies on accounting treatment to avoid tax, and you think the accounting treatment may be incorrect, you should seek the advice of anÌýAdvisory Accountant.Ìý

You should also initially refer any specific accounting issues not covered in the guidance to anÌýAdvisory Accountant.Ìý

Accounting frameworksÌýin use in the UKÌý

There are two acceptable accounting frameworksÌýin the UK: UK GAAP and International Financial Reporting Standards (IFRS).  For tax purposes, both these frameworksÌýform part of what is referred to as generally acceptedÌýaccounting practice (‘GAAP’ – as distinct from ‘UK GAAP’). Ìý

UK GAAPÌý

UK GAAP is the body of accounting standards and other guidance published by the UK’s Financial Reporting Council (FRC).  It consists of:Ìý

  • FRS 100 Application of Financial Reporting Requirements (sets out the overall framework for new UK GAAP);Ìý

  • FRS 101 Reduced Disclosure Framework (sets out the disclosure exemptions from IFRS for qualifying entities);Ìý

  • FRS 102 The Financial Reporting Standard applicable in the UK and the Republic of IrelandÌý(sets out in detail the requirements that entities adopting FRS 102 need to follow);Ìý

  • FRS 103 Insurance Contracts (applies to issuers of insurance contracts reporting under FRS 102);Ìý

  • FRS 104 Interim Financial Reporting; and Ìý

  • FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime.Ìý

ThisÌýframework replaced all previously issued Financial Reporting StandardsÌý(FRSs), Statements of Standard Accounting Practice (SSAPs) and the Abstracts issued by the Accounting Standards Board’sÌýÌýUrgentÌýIssues Task Force (UITFs)Ìýfrom 1 January 2015 (with the exception ofÌýFRS 105 which was effective from 1 January 2016).ÌýÌý

Prior to 1 January 2015,Ìýaccounting for leasing under UK GAAP wasÌýprimarilyÌýset out in SSAP 21, with further guidance availableÌýin FRS 5 Substance of Transactions (particularlyÌýApplication NoteÌýB)Ìýand UITF 28ÌýOperating LeaseÌýIncentives.ÌýDetail of these superseded standards and interpretations is not included in this manual. Please consult an Advisory Accountant for further information.Ìý

UK entities thatÌýqualify to prepare accounts under FRS 101Ìýapply the recognition, measurementÌýand disclosure requirements of IFRS, except for certain disclosure exemptions,Ìýare still classified asÌýUK GAAP accounts.Ìý

Entities preparing UK GAAP accounts under FRS 102 should account for leases in accordance withÌýFRS 102: Section 20 Leases.Ìý

Small entities or micro entities can choose to apply the requirements in FRS 102 section 1A or FRS 105 section 15Ìýrespectively.ÌýÌýÌý

The recognition and measurement principles for leases in FRS 105 Section 15 is based on the original version of FRS 102.ÌýÌý

IFRSÌý

IFRS 16 Leases was issued in January 2016. Companies in the UK canÌýchoose to apply IFRS. Ìý

IFRS 16 is effective for accounting periods beginning on or after 1 January 2019, with earlier application permitted. If an entity prepares accounts under IFRS or FRS 101 after this date, its leases will be in accordance withÌýGAAP if it accounts for its leases in accordance withÌýIFRS 16 Leases. Ìý

Prior to 1 JanuaryÌýthe relevant standard for IFRS or FRS 101 was International Accounting Standard (IAS) 17 Leases. Detail of IAS 17 is not included in this manual, although it is similar toÌýFRS 102 (pre 2024 amendments) Section 20.ÌýÌý

AdditionalÌýguidance was also available in IFRIC 4 Determining whether an arrangement containsÌýa lease, and SIC-27 Evaluating the substance of transactions involving the legal form of a lease.ÌýDetail of these superseded interpretations is not included in this manual. Please consult an Advisory Accountant for further informationÌýon IAS 17, IFRIC 4 or SIC-27.Ìý

IFRS 16 introduced significant changes for how lessees account for leases.Ìý

UK GAAP 2024 Periodic Review AmendmentsÌý

FRS 102 Section 20 was completely rewritten in 2024 to align with IFRS 16, with some simplifications – the ‘2024 ²¹³¾±ð²Ô»å³¾±ð²Ô³Ù²õ’. The 2024 amendments are mandatory for FRS 102 users with effect from 1 January 2026, with early adoption permitted. FRS 105 Section 15 was not amended as part of the 2024 amendments.Ìý

General requirementsÌý

The paragraphs that follow do not attemptÌýto repeat full details of the standards, merely to explain enough to enable you to understand the way in which leasing transactions are presented in accounts.  If the situation is unusual, particularly if it relies on accounting treatment to avoid tax, and you think the accounting treatment may be incorrect, you should seek the advice of yourÌýAdvisoryÌýAccountant.Ìý

Summary of key differences between frameworksÌý

Lessor accounting under FRS 102 (2024 amendments) and IFRS 16 is similar toÌýlessor accounting under FRS 102Ìý(pre-2024 amendments) and FRS 105. The lessor is required toÌýmake a judgement whether a lease is a finance leaseÌýor an operating lease.ÌýÌýIf, in substance,Ìýthe risks and rewards of ownershipÌýof the underlying assetÌýare transferred to the lessee,Ìýthe lease will be classified as a finance lease. If theÌýrisks and rewards of ownership are notÌýtransferred to the lessee, the leaseÌýis classifiedÌýas an operating lease. Once the lease classification has been determined, the lessor will account for the lease for all intents and purposes inÌýthe same way as a lessor using FRS 102Ìý(pre 2024 amendments). Ìý

In contrast, lessee accounting underÌýFRS 102 (2024 amendments) andÌýIFRS 16 is very different. These standardsÌýhaveÌýa single lessee accounting model that requiresÌýassets and liabilities arising from all but exempt lease agreements to be recognised on the balance sheet. The lessee will recognise an asset reflecting their right to use the leased asset for the lease term and a lease liability reflecting their obligation to make lease payments. Both the right-of-use (‘ROU’) asset and lease liability will be recognised at the commencement of the lease.Ìý

The ROU asset is depreciated, normally on a straight-Ìýline basis, over the lease term. The interest on the lease liability is recognisedÌýto maintainÌýa constant rate on the outstanding lease liability. Depreciation and interest on the lease liability are both recognised in the profit and loss account.Ìý

Guidance under each accounting frameworkÌý

Accounting for operating leases under FRS 102 Section 20 (pre 2024 amendments) (broadly for accounting periods commencingÌýon or before 1 January 2026) and FRS 105 isÌýdescribed at BLM12005Ìýonwards.Ìý

Finance lease accounting under these standards is covered atÌýBLM13010 onwards.Ìý

Lease accounting under IFRS 16 and FRS 102 Section 20 (2024 amendments) is covered fromÌýBLM17000onwards.Ìý

Service concessionÌýarrangements have some similarities with leasing transactions, butÌýshould be accounted for under either IFRIC 12 Service Concession arrangements, or FRS 102 Section 34.12 to 34.16C. See BLM20150.Ìý