Do you have a lease?
Is the lease a short term lease?
Is the leased asset considered to be low-value?
Is the asset subleased?
START
Hover over the '+' to read more.
Is the lease currently treated as a finance lease?
Is the lease currently treated as an operating lease?
You must apply the revised leasing rules. Seek advice.
Is the lease currently treated as a finance lease?
Transitional rules allow leases previously classified as finance leases — and that qualify for exemption — can choose to maintain their current accounting treatment or apply the new exemption provisions. Seek advice.
No changes in accounting treatment but more disclosures required. Seek advice.
No action required.
Yes
Yes
No
No
No
Yes
No
Yes
Yes
Yes
No
Yes
A lease term of 12 months or less is considered short term.
The lease term shall include:
any non-cancellable period
periods covered by lessee extension options if it is reasonably certain the extension will be taken
periods covered by lessee cancellation options if it is reasonably certain the termination will not be taken.
Existing leases with 12 months or less remaining as at transition date may be treated as short term regardless of the initial lease length.
The lease term for new leases should be based on conditions at the commencement date of the lease.
Whether an asset meets ‘low value’ exemption is dependent upon the nature of the asset rather than, despite its description, the value of the underlying asset. Certain assets, such as vehicles or production line equipment, cannot be considered low value. However, where the underlying asset has a value of £5,000 or less when ‘new’ it will often be treated as low value.
On the transition date, a lease liability must be recognised at the present value of future lease payments. A corresponding right-of-use asset (RoUA) must also be recognised. The lease liability is subsequently increased for interest and reduced by lease payments. The RoUA is subsequently depreciated.
This change increases both assets and liabilities — impacting key financial ratios such as gearing.
In the statement of cashflows, the principal portion of lease payments will be classified as financing activities, while the interest portion may remain under operating activities. When compared with the previous treatment for operating leases, this results in a higher operating cash inflow, with a higher financing cash outflow. The net cashflow does not change.
There may also be tax implications to consider.
A lease is an agreement in which one party (the lessee) pays to use an identified asset owned by another party (the lessor) for a specified period.
This will include all leases, both finance and operating leases, in place at the date of transition. All arrangements entered into after the date of transition must be assessed to determine if they contain a lease.
This information provides a simplified overview of the revised FRS 102 Section 20 and does not cover all aspects of the standard. The flow diagram offers a high-level summary of key considerations for entities with leased assets and does not include all technical details. We encourage you to consult the full standard to assess how the changes may apply to your specific circumstances. If you are unsure whether your lease arrangements are affected, please seek advice.
Yes
Yes
No
No
Yes
Hover over the '+' to read more.