BLM17005 - Lease accounting under IFRS 16 and FRS 102 (2024 amendments): introduction and rationale for the on-balance sheet model
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.
IFRS 16 Leases is mandatory for entities reporting under IFRS and FRS 101 for accounting periods beginning on or after 1 January 2019.
FRS 102 (2024 amendments) Section 20 is mandatory for FRS 102 reporters for accounting periods beginning on or after 1 January 2026, with earlier application permitted.
Previously, accounting standards under both UK GAAP and IFRS classified leases as either ‘finance leases’ or ‘operating leases’.
The different treatment for leases meant that economically similar transactions could be accounted for differently, and therefore reduced comparability for users of the accounts. It also provided opportunities to structure leasing arrangements to obtain a preferred accounting treatment.
IFRS 16 and FRS 102 (2024 amendments) 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 asset and lease liability will be recognised at the commencement of the lease.
The right-of-use 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.