FRS 102

What is FRS 102?

FRS 102 is the financial reporting standard applicable in the UK and Republic of Ireland (UK GAAP). It is a single standard that applies to the financial statements of entities that are not applying adopted IFRS, FRS 101 or FRS 105. FRS 102 is designed to apply to the general purpose financial statements and financial reporting of entities including those that are not constituted as companies and those that are not profit-oriented.

The requirements in FRS 102 are based on the IASB’s IFRS for SMEs Accounting Standard, with some significant amendments made for application in the UK and Republic of Ireland.

FRS 102 is subject to a periodic review at least every five years. The second periodic review, with a principal effective date of 1 January 2026, makes changes to FRS 102 which apply to leases, revenue recognition, and a number of smaller changes. Only the changes to lease accounting are covered in this article.

What is Lease Accounting?

Lease accounting is the process by which a company records the financial impacts of its leasing activities. Leases that meet specific classification requirements must now be recorded on a company's financial statements. Under the new standard, all leases will be recorded on the entity’s balance sheet, with exceptions for low value and short-term leases.

What is IFRS 16?

IFRS 16 is the current international financial reporting standard for lease accounting that requires all leases longer than 12 months to be recorded as assets and liabilities on balance sheets. The International Accounting Standards Board, or IASB, established this new standard in 2016 to foster more transparency between investors and companies.

What is the difference between FRS 102 vs. IFRS 16?

FRS 102 section 20 will be changed to align with the IFRS 16 standard. There are some minor differences, but the most important thing is that the differences are in rules and inputs.  The mathematics of FRS 102 lease accounting are the same as for IFRS 16.  The major differences include:

• FRS 102 uses an Obtainable Borrowing Rate as an alternative to the incremental borrowing rate.  The OBR is easier for entities to calculate. 
• The definition of Low Value Lease is different.  While IFRS 16 uses a dollar threshold as guidance, FRS 102 uses a classification test which expressly states that the value of the consideration is not a factor.
• The rules for determining the discount rate to use in a remeasurement (historical versus current) are different. 
• Recognizing gains and losses for sale/leaseback is simplified. 

What is an Operating Lease?

An operating lease is a contract that allows for the use of an asset but does not convey ownership rights of the asset.  These leases do not appear on the entity balance sheet. The FRS 102 revisions eliminate the operating lease type.

What is a Finance Lease?

A finance lease is a contract that allows for the use of an asset and has at least one of five criteria making it like the purchase or conveyance of ownership at the end of the lease term. All leases will now become finance leases, except for leases which meet low value or short-term exception requirements.

What is a Capital Lease?

A capital lease is the old FRS 102 name for a contract that allows for the use of an asset and has at least one of five criteria making it like the purchase or conveyance of ownership at the end of the lease term. The new FRS 102 standard replaces this classification with finance leases.

What is an Embedded Lease?

An embedded lease relates to an asset that is included as part of a service contract or agreement. Such assets must now be recognized on the balance sheet.

What is a Right of Use Asset or ROU Asset?

The right of use asset is what a company recognizes on the balance sheet for finance leases under FRS 102, representing the right to use the leased asset. The ROU Asset is not the value of the underlying asset, it is the value of the right to use the asset for the lease term.

What is Sale Leaseback Accounting?

A sale and leaseback accounting transaction occurs when the seller transfers an asset to the buyer, and then leases the asset from the buyer. This arrangement most commonly occurs when the seller needs the funds associated with the asset being sold, despite still needing to occupy the space.

What is a Leasehold Improvement?

A leasehold improvement is a modification or enhancement made to a leased building space that has the right to use during the term of the lease. Leasehold improvements revert to the lessor at the expiration of the lease.

How does FRS 102 account for Dilapidations or other End of Lease Obligations?

On initial measurement, a lessee is required to recognize dismantling, removal and restoration costs as part of the right-of-use asset. A reserve for that cost is recorded as an offsetting credit.

The liability associated with dismantling, removal and restoration costs is recognized and measured in accordance with FRS 102 section 21.

What is Deferred Rent?

Deferred rent occurs in lease accounting when the cash rent payments are different than its recognized financial statements and often occurs when a lessee is given free rent in one or more periods. Under the old FRS 102 standard, the deferred rent appeared as a balance sheet item. Under the revised standard, it is absorbed into the difference between the ROU Asset and Lease Liability.

What is the FRS 102 Effective Date?

The FRS 102 effective date is on or after 1 January 2026, with early adoption permitted.

Who must comply with FRS 102?

FRS 102 applies to the financial statements of entities that are not applying adopted IFRS, FRS 101 or FRS 105. The requirements in FRS 102 are based on the IASB’s IFRS for SMEs Accounting Standard.

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