Part 2: FRS102 On-Balance-Sheet Leases

Subsequent measurement and disclosure requirements under the revised lease accounting model

The revised lease accounting requirements in FRS 102 extend beyond initial recognition. Following commencement of a lease, lessees are required to apply ongoing measurement, reassessment and disclosure requirements throughout the lease term. These requirements are set out in Section 20 of FRS 102 and apply to leases recognised under the revised lessee accounting model.

Measurement of the right-of-use asset

After initial recognition, a right-of-use asset is generally measured using the cost model.

Under this approach, the carrying amount of the asset is reduced by accumulated depreciation and impairment losses and adjusted for certain remeasurements of the lease liability.

The depreciation period depends on the circumstances of the lease. Where ownership of the underlying asset transfers to the lessee, or where a purchase option is expected to be exercised, depreciation is generally recognised over the estimated useful life of the underlying asset. In other cases, depreciation is recognised over the shorter of the lease term and the useful life of the right-of-use asset.

Entities are also required to consider impairment in accordance with Section 27 of FRS 102.

Measurement of the lease liability

Following initial recognition, the carrying amount of the lease liability is adjusted to reflect:

• interest on the liability;

• lease payments made; and

• remeasurements arising from reassessments or lease modifications.

Interest is recognised using the discount rate applied in measuring the lease liability. FRS 102 gives guidance on this: where it can be determined, the interest rate implicit in the lease should be used.

Variable lease payments that are not included in the initial measurement of the lease liability are recognised in the period in which the relevant event or condition occurs.

Reassessments and lease modifications

The standard requires reassessment in specified circumstances.

Examples include:

• changes in the lease term;

• changes in the assessment of purchase options;

• changes in amounts expected to be payable under residual value guarantees; and

• changes in lease payments arising from changes in an index or rate.

FRS 102 also contains detailed requirements for lease modifications. Certain modifications are accounted for as separate leases, while others require the existing lease liability and right-of-use asset to be remeasured.

Presentation requirements

Entities are required either to present or disclose right-of-use assets separately from other assets and lease liabilities separately from other liabilities.

Where separate presentation is not adopted, the relevant line items containing those balances must be disclosed.

Special presentation requirements apply to right-of-use assets that meet the definition of investment property.

Disclosure requirements

FRS 102 requires lessees to provide a general description of significant leasing arrangements.

Additional disclosures may be required where necessary to enable users of the financial statements to understand those arrangements.

Depending on relevance, disclosures may include information relating to:

• future cash outflows not reflected in lease liabilities;

• restrictions and covenants imposed by leases;

• discount rates used in measuring lease liabilities;

• sale and leaseback transactions;

• lease expenses;

• cash outflows relating to leases; and

• movements in right-of-use assets.

Additional disclosure requirements apply where entities utilise recognition exemptions for short-term leases or leases of low-value assets.

FRS 102 Part 2 - Conclusion

The revised lease accounting model introduces ongoing requirements extending beyond the initial recognition of a right-of-use asset and lease liability. Lessees must consider measurement, reassessment, presentation and disclosure requirements throughout the lease term in accordance with Section 20 of FRS 102.

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Sources

FRS 102 (September 2024), Section 20 – Leases, paragraphs 20.1–20.54.

Disclaimer

This article provides a general overview of the relevant FRS102 requirements and should be read alongside the full standard and any applicable guidance. The application of the requirements will depend on an entity's specific facts and circumstances.

Author

This article was reviewed by David Fletcher FCA, Associate Director at Just Audit. David is also an IPC ICAEW Practice Committee Member.