Leases under FRS102 – what has changed?

Written on 22 October 2014

At WSM, we are becoming increasingly prepared for the changes that await UK GAAP next year. Many companies will be affected by the changes that will be occurring and so I thought I would write a little piece about leases and how the changes may affect your financial reporting.


Accounting under FRS102 can change the classification between an operating and a finance lease which may have an impact on your balance sheet and disclosures. FRS102, as with current UK GAAP, classifies an operating lease as not transferring the risks and rewards of ownership, whereas a finance lease does transfer the risks and rewards.

The change occurs because current UK GAAP includes the presumption that if the present value of the minimum lease payments is more than or equal to 90% of the fair value of the asset, it is considered a finance lease, whereas less than 90% is treated as an operating lease. Now that FRS102 does not include the ‘90% test’, classification of some leases may change.


With a finance lease for lessee and lessor accounting, FRS102 records the assets and liabilities at the lower of fair value of the leased item and the present value of the minimum lease payments, however, the definitions of gross investment, net investment and net cash investment differ.

Current UK GAAP offers no guidance for operating leases on the treatment of inflationary increases whereas FRS102 implies that these increases are expensed as they occur.

There will be no changes to the treatment of sale and leaseback transactions; however, FRS102 offers guidance for ways of deferring and recognising gains and losses.

Lease incentives (for example, 6 months of free rent at the beginning of a contract) under FRS102 needs to be recognised over the term of the lease whereas under UK GAAP, the incentive was spread over the period until the lease resets to market rate.

For more information on the FRS 102 changes, please contact the corporate team on 020 8545 7600.