How to Transition to FRS 102 For Lease Accounting

Brendan Doyle | 2025-04-03

Background

For the United Kingdom and Ireland the effective date of the FRS 102 lease amendments is 1 January 2026, with early adoption permitted. Like IFRS 16, the new rules have a significant impact on lessee accounting. The lease amendment change of FRS 102, like IFRS 16 removes the lessee lease classification model of operating and finance leases. As a result, lessees will now recognise the majority of their leases on the balance sheet akin to a finance lease under the previous model. There are some exemptions to this, which we will discuss below. 

The new balance sheet model will be done using the same principles derived from IFRS 16, which you may be familiar with. Now for the vast majority of the company’s leases, a lessee is required to calculate the present value of the known future lease payment for the lease, that calculated amount is known as the lease liability and will be recognized on the balance sheet as a credit. The debit side of the journal will create an asset balance, known as the right of use asset. During the course of the lease, these balances will be unwound to zero by expiry. 

As you may have gathered, this new model impacts those companies with operating leases as they now have to apply to the balance sheet model. In this article we will cover how to transition your current operating leases from the previous approach expense mode. 

If you have finance leases, it is essentially business as usual under the new requirements of FRS 102.

How to Transition to FRS 102

Unlike the adoption of IFRS 16 that set out 3 transition methods when moving for the requirements of IAS 17 to IFRS 16. FRS 102 is far more straightforward, the update prescribes the following as the only adoption method:

• A company will apply the balance sheet model prospectively. There is no option where the lessee will be required to adjust comparative periods nor disclose any impact on prior periods.
• At transition, the right of use asset is equal to the lease liability balance adjusted for any prepayments or accrued payments at transition date.
• If there is a balancing amount on adoption, that difference will go to the opening balance of retained earnings.

Practical Expedients On Adoption

Also at adoption, FRS 102 has a number of practical expedient when applying the new rule changes:

1. The update allows a company to use the carrying amounts that have been previously calculated for group reporting under IFRS 16 as opening balances. This concession ensures upon adoption you’re not required to maintain two sets of lease accounting balances to be in compliance with IFRS 16 and FRS 102. So if you have already calculated the lease liability and right of use balances, your upcoming transition will be straightforward. 
2. Under the revised FRS 102 requirements for lease accounting, the definition of a lease changes. The standard setters have a practical expedient that ensures a company does not have to reassess all previously classified leases under the new lease definition. In other words, all previous classified leases are grandfathered under the new lease definition. Although the definition of what constitutes a lease is very similar to the previous definition so most leases will still be a lease, this saves a huge amount of time.

Exemptions To Operating Lease on Adoption

So on 1 January 2026, you will want to identify your lease population, specifically your operating leases to apply the new FRS 102 lease accounting model. However, before you start calculating all of the right of use assets and lease liabilities you have some more exemption to consider, to save you time. They are:

• Low value exemption: Just like IFRS 16, if the company is leasing a low value item, e.g. phone the new balance sheet model does not have to be applied. 
• Imminent expiry of lease: If the lease is expiring within 12 months of application e.g. 31 January 2026 it can be excluded from the balance sheet model. 
• Investment property: If you have accounted for the lease as investment property using the fair value, no adjustment is required

These exemptions should reduce your lease population, with the goal to reduce your workload. Also, when you start applying the new FRS 102 model you can

• Apply Portfolio discount rate: a lessee can use one discount rate for a portfolio of leases with similar characteristics: essentially that would be the lease term and what you’re leasing is similar. This isn’t much of a practical expedient as you would likely use the same discount rate anyway
• Lessee may rely on its assumption regarding onerous leases under IAS 37 to assess impairment of an ROU Asset

Subleases

If you have entered into any subleases, in which the company is the intermediate lessor, and the classification of that lease is an operating lease, the intermediate lessor is required to reassess that classification. The only change will occur if that operating lease is now deemed a finance lease. For more information on this refer to an upcoming article. 

Practical Examples

So by now you should have identified your lease population that the new FRS 102 lease accounting model needs to be applied to. Let’s go through some examples in getting to this point. 

Example 1

Obree Bicycles is a bicycle manufacturer with stores all over the UK. The company’s financial year end is 31 December and will not be early adopting, so the transition date will be  1 January 2026.

Leading up to 1 January 2026, Obree compiles a complete list of its leases. Historically, these have been treated as either finance or operating lease which are followings

Leases identified:

Operating:

• 5 Warehouse lease (all expire after 31 December 2026)
• 15 shopfront leases (all expire but two leases expire after 31 December 2026)
• 14 equipment lease (All have at least 1.5 years remaining as at January 1, 2026)
• 14 Photocopier lease (each leases has 6 months remaining)
• 5 Mobile phone rentals (all expire after 31 December 20216)

Finance:

• 9 motor vehicles

Question

How many leases does Obree have to apply the new lease accounting model under FRS 102 to? 

Answer

The leases in scope that Obree must apply the new lease accounting balance sheet model to are:

• 5 warehouse leases
• 13 shopfront leases
• 14 equipment leases

In total, Obree will have to calculate the lease liability and right of use asset for 32 leases. Obree has quite a lot of work ahead of him.

Example 2

You are now at the final step! To calculate the lease liability and right of use asset for each lease. This article will have a basic example, however refer XXXXX for a in depth article on a step by step process on how to calculate the lease liability and right of use asset under FRS 102. 

Obree has decided to start with his first warehouse lease to apply the new model to. The lease details are as follows:

• Lease commencement date: 15 June 2021
• Lease end date: 31 December 2029
• Discount rate: 4%
• Prepaid amount as at 1 January 2026,  £15,000
• Payment Amount: £10,000
• Payment terms: Annual, In Advance at the start of the year

What is the value of the lease liability and right of use asset, at transition date? 

Lease liability:  £37,749.96

Workings

XNPV workings present value workings

Conclusion

You should now be in a good position to adopt the new lease accounting requirements. As all companies that have adopted IFRS 16 can attest, one of the hardest tasks is identifying all of a company’s operating leases. Once that is done, check if any of them qualify for exemptions to reduce your workload. Afterward, the real work begins—the calculations in Excel.

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