FRS 102 Practical Expedients and How to Manage Them in Lease Accounting
What Is a Practical Expedient?
A practical expedient is an optional simplification within an accounting standard that allows organizations to reduce the complexity of applying certain rules while remaining compliant.
In lease accounting, practical expedients allow companies to avoid costly data collection or detailed calculations when the impact on financial reporting would be minimal.
Lease accounting standard adoption requires a great deal of detail, preparation and the right selection of tools and procedures to make sure your organization stays compliant and avoids costly mistakes.
In other words, it's kind of a big deal. That's why accountants need help in transitioning from one lease standard to another lease standard.
That's where practical expedients come in.
Accounting frameworks including FRS 102, ASC 842, and IFRS 16 include practical expedients to help organizations transition to new lease accounting standards and manage ongoing compliance more efficiently.
Why Practical Expedients Exist in Lease Accounting
The Financial Reporting Council (FRC) amended the new FRS leases standard to provide lease accounting practical expedients in response to the major challenges reported associated with lease accounting compliance.
The concerns reported by stakeholders were about two main issues:
- There can be difficulty when defining standalone selling prices for lease and non-lease components that are not sold separately.
- The significance of data regarding the separate components to users of the financial statements.
In practice, these requirements often require significant lease data collection and analysis. Practical expedients allow organizations to simplify these steps without materially impacting financial reporting.
Practical Expedients Available Under FRS 102
FRS 102 calls for lessees to separate lease components from non-lease components, using only the lease components in calculating the lease liability and right of use asset. This is easy in the case of net leases, where non-lease components are invoiced separately.
In the case of gross leases and modified gross leases, where some or all of the non-lease components are included in rent, separation of components is still required, although it may be difficult. Lessees may apply a practical expedient to not separate the components.
This practical expedient allows companies to treat lease and non-lease components as a single lease payment when calculating lease liabilities and right-of-use assets.
This election is made by the class of underlying assets and must then be applied to all leases in the class. The expedient makes the management of leases easier, but it does result in higher liability and asset balances. Entities should therefore consider the impacts carefully before taking the expedient.
Other Practical Expedients Under FRS 102
FRS 102 includes several additional practical expedients that simplify lease accounting calculations and reporting.
Portfolio Approach
An additional practical expedient allows lessees to apply the standard “to a portfolio of leases with similar characteristics if the entity reasonably expects that the effects on the financial statements … to the portfolio would not differ materially from … the individual leases within that portfolio”. This is similar to the permitted portfolio approach under ASC 842, except that FRS 102 specifically refers to this as a practical expedient.
Transition Practical Expedients
There are also a series of practical expedients to be selected at initial adoption.
Most notable are elections to not reassess whether an agreement contains a lease. This can significantly reduce the amount of historical contract analysis required when organizations adopt a new lease accounting standard.
Short-Term Lease Practical Expedient
If the lessee elects the practical expedient to exclude balance sheet impact of short-term leases, it shall apply short-term classification to leases with less than 12 months remaining as of the adoption date.
This exemption can simplify accounting for leases with minimal financial impact.
Important Considerations Before Electing a Practical Expedient
Electing this practical expedient is a commitment. Any lessee that chooses the practical expedient for an asset class is required to apply it consistently to all eligible non-lease components in that class.
Organizations should carefully evaluate:
- Impact on lease liabilities and right-of-use assets
- Consistency requirements across asset classes
- Audit documentation requirements
- Long-term implications for lease reporting
Because these elections must be applied consistently, companies should document their methodology and ensure the approach aligns with internal accounting policies.
Managing Practical Expedients Efficiently
Even though practical expedients simplify certain accounting steps, managing lease data and compliance across hundreds or thousands of leases can still be complex.
Whether a business opts in or out of the practical expedient available for lease accounting compliance, choosing a proven lease accounting solution allows you to manage leases in the manner that best suits company practices and processes.
Simplify Lease Accounting and Practical Expedient Management
Modern lease accounting software helps organizations apply practical expedients consistently, automate calculations, and maintain audit-ready documentation across multiple accounting standards.
CoStar Real Estate Manager provides enterprise-grade lease accounting automation for FRS 102, ASC 842, and IFRS 16, helping teams:
- Centralize lease data
- Apply accounting elections consistently
- Automate liability and ROU calculations
- Maintain audit-ready reporting
See how CoStar REM simplifies lease accounting compliance.
