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 textbooks.  

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 does not attempt to repeat the detail in accounting standards but is intended 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 an Advisory Accountant. 

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

Accounting frameworks in use in the UK 

There are two acceptable accounting frameworks in the UK: UK GAAP and International Financial Reporting Standards (IFRS).  For tax purposes, both these frameworks 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).  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. 

This framework replaced all previously issued Financial Reporting Standards (FRSs), Statements of Standard Accounting Practice (SSAPs) and the Abstracts issued by the Accounting Standards Board’s  Urgent Issues Task Force (UITFs) from 1 January 2015 (with the exception of FRS 105 which was effective from 1 January 2016).  

Prior to 1 January 2015, accounting for leasing under UK GAAP was primarily set out in SSAP 21, with further guidance available in FRS 5 Substance of Transactions (particularly Application Note B) and UITF 28 Operating Lease Incentives. Detail of these superseded standards and interpretations is not included in this manual. Please consult an Advisory Accountant for further information. 

UK entities that qualify to prepare accounts under FRS 101 apply the recognition, measurement and disclosure requirements of IFRS, except for certain disclosure exemptions, are still classified as UK GAAP accounts. 

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

Small entities or micro entities 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 FRS 105 Section 15 is based on the original version of FRS 102.  

IFRS 

IFRS 16 Leases was issued in January 2016. Companies in the UK can choose to apply IFRS.  

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 with GAAP if it accounts for its leases in accordance with IFRS 16 Leases.  

Prior to 1 January the 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 to FRS 102 (pre 2024 amendments) Section 20.  

Additional guidance was also available in IFRIC 4 Determining whether an arrangement contains a lease, and SIC-27 Evaluating the substance of transactions involving the legal form of a lease. Detail of these superseded interpretations is not included in this manual. Please consult an Advisory Accountant for further information on IAS 17, IFRIC 4 or SIC-27. 

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

UK GAAP 2024 Periodic Review Amendments 

FRS 102 Section 20 was completely rewritten in 2024 to align with IFRS 16, with some simplifications – the ‘2024 amendments’. 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. 

General requirements 

The paragraphs that follow do not attempt to 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 your Advisory Accountant. 

Summary of key differences between frameworks 

Lessor accounting under FRS 102 (2024 amendments) and IFRS 16 is similar to lessor accounting under FRS 102 (pre-2024 amendments) and FRS 105. The lessor is required to make a judgement whether a lease is a finance lease or an operating lease.  If, in substance, the risks and rewards of ownership of the underlying asset are transferred to the lessee, the lease will be classified as a finance lease. If the risks and rewards of ownership are not transferred to the lessee, the lease is classified as an operating lease. Once the lease classification has been determined, the lessor will account for the lease for all intents and purposes in the same way as a lessor using FRS 102 (pre 2024 amendments).  

In contrast, lessee accounting under FRS 102 (2024 amendments) and IFRS 16 is very different. These standards have a single lessee accounting model that requires assets 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. 

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

Guidance under each accounting framework 

Accounting for operating leases under FRS 102 Section 20 (pre 2024 amendments) (broadly for accounting periods commencing on or before 1 January 2026) and FRS 105 is described at BLM12005 onwards. 

Finance lease accounting under these standards is covered at BLM13010 onwards. 

Lease accounting under IFRS 16 and FRS 102 Section 20 (2024 amendments) is covered from BLM17000onwards. 

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