BLM11030 - Lease accounting: lease classification: inception and commencement

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.

Accounting standards distinguishÌý²ú±ð³Ù·É±ð±ð²Ô inceptionÌýand commencementÌýof a lease:Ìý

  • the inceptionÌýof the lease is the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provisions of the lease.Ìý

  • the commencement of the lease term is the date from which the lessee is entitled to exercise its right to use the leased asset. It is the date of initialÌýrecognition of the lease (ieÌýthe recognition of the assets, liabilities, incomeÌýor expenses resulting from the lease, as appropriate).Ìý(FRS 102Ìý(pre and post 2024) Glossary, IFRS 16 Defined Terms)Ìý

FRS 102 (pre 2024 amendments) & FRS 105Ìý

FRSÌý102Ìý(pre 2024 amendments)ÌýSection 20.8Ìýand FRS 105 Section 15.9ÌýprovideÌýthat, for both lessees and lessors,Ìýat inception of a lease it is classified as either an operating or a finance lease and that lease classification is not changed during the lease term unless the lessee and lessor agree to change the provisions of the lease, in which case the lease classification is re-evaluated.ÌýÌý

FRS 102 (pre 2024 amendments) Section 20.9 and FRS 105 Section 15.10 also confirm in the case of a finance lease, that the amounts to be recognised at the commencement of the lease term are determinedÌýat the inceptionÌýof the lease. However,Ìýthe assets, liabilities, incomeÌýor expenses resulting from the lease, as appropriate, are not recognisedÌýin the accountsÌýuntil commencement of the lease term.Ìý

FRS 102 (2024 amendments) and IFRS 16Ìý

For lessors only, FRS 102 (2024 amendments)Ìý20.91Ìýand IFRS 16.66Ìýalso require the lease classification to be determinedÌýat the inceptionÌýof the lease.Ìý

For finance lessors only, FRS 102 (2024 amendments) 20.93 and IFRS 16.67 stateÌýthat the assets held under a finance lease should be recognised at the commencement date.Ìý

The need to distinguish between inceptionÌýand commencement is usually only significant where the leased asset takes a long time to constructÌýand the lease is entered into before the asset is complete. ThisÌýis quite common, particularly in ship leasing, where the lease may be entered into (‘inception’) several years before the ship is available to the lessee (‘commencement’). Where provision is made in a lease agreement to adjust for changes in the construction or acquisition costs of the leased asset or changes in some other measure of cost or value between inceptionÌýand commencement, such changes are deemedÌýto have taken place at inception.Ìý

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