BLM00020 - Introduction: Leasing: Introduction to accounting standards

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. You should initially refer any specific accounting issues not covered in the guidance to your advisory accountant.

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

UK GAAP

UK GAAP is the body of accounting standards and other guidance published by the UK’s Financial Reporting Council (FRC). A new financial accounting framework became effective in the UK from 1 January 2015. It consists of:

  • FRS 100 Application of Financial Reporting Requirements (sets out the overall framework for new UK GAAP);
  • FRS 101 Reduced Disclosure Framework (sets out the disclosure exemptions from IFRS for qualifying entities);
  • FRS 102 The Financial Reporting Standard applicable in the UK and the Republic of Ireland (sets out in detail the requirements that entities adopting FRS 102 need to follow);
  • FRS 103 Insurance Contracts (applies to issuers of insurance contracts reporting under FRS 102);
  • FRS 104 Interim Financial Reporting; and
  • FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime (effective from 1 January 2016).

The new framework has replaced all previously issued Financial Reporting Standards or FRSs, Statements of Standard Accounting Practice (SSAPs) and the Abstracts issued by the Accounting Standards Board’s (ASB) Urgent Issues Task Force (UITFs).

In any accounting period beginning after 1 January 2015, if an entity prepares UK GAAP accounts in accordance with FRS 102, then its leases will be in accordance with Section 20 of FRS 102 Leases. FRS 102 Section 20 is not supplemented by any other guidance.

FRS 102 Section 20 replaced previous accounting for leases under SSAP 21 and its associated guidance.

Entities qualifying as small or micro can choose to apply the requirements in FRS 102 Section 1A or FRS 105 Section 15 respectively. The recognition and measurement principles for leases in each of these is based on FRS 102, the main differences are in relation to the required disclosures. These sections are therefore not discussed in detail in this manual.

Qualifying entities in the UK that prepare accounts in accordance with FRS 101 are still UK GAAP accounts. With the exception of the disclosure exemptions set out in FRS 101, an entity preparing accounts in accordance with FRS 101 applies the recognition, measurement and disclosure requirements of IFRS. Therefore for the rest of this manual references to UK GAAP are to application of FRS 102 only.

Companies in the UK can also choose to apply IFRS.

IFRS

IFRS 16 Leases was issued in January 2016. IFRS 16 is effective for accounting periods beginning on or after 1 January 2019, with earlier application permitted. Therefore if an entity prepares accounts under IFRS or FRS 101 after this date, then its leases will be in accordance with GAAP if it accounts for its leases in accordance with IFRS 16 Leases.

Prior to that the relevant standard for IFRS or FRS 101 was International Accounting Standard (IAS) 17 Leases.

For accounting periods beginning before 1 January 2018:

  • the derecognition principles of IAS 39 Financial instruments: Recognition and measurement (or IFRS9 Financial Instruments for those adopting that standard instead of IAS 39) apply to lease receivables and payables
  • and the impairment provisions of IAS 39 apply to lease receivables.

For accounting periods beginning on or after 1 January 2018, only IFRS 9 will be relevant to derecognition of lease receivables and payables, and impairment of lease receivables.

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

Lease accounting is introduced at BLM00200 onwards and covered in detail at BLM10000 onwards. The manual focusses on FRS 102 and IFRS 16. As IAS 17 is similar to FRS 102 differences between FRS 102 and IAS 17 are highlighted at BLM10020.