FRS 102 is conceptually similar to existing UK GAAP. However, there are some important differences in the detail that adopters will need to be aware of even though it does not yet make any radical changes to lease accounting like those currently proposed for full IFRS (see our analysis of the IASB Exposure Draft).
Identification of leases
Section 20 of FRS 102 sets out the accounting treatment of leases which, when adopted, will supersede SSAP 21 Accounting for leases and hire purchase contract and UITF Abstract 28 Operating lease incentives.
SSAP 21 includes within its scope only arrangements where there is a contract between a lessor and a lessee for the hire of a specific asset. Other contracts which are similar to leases but do not meet the definition are accounted for under FRS 5 Reporting the substance of transactions.
Section 20 will capture many of these similar arrangements that previously fell outside SSAP 21 where:
- fulfilment of the arrangement is dependent on the use of an implicitly or explicitly specified asset or assets, and
- the arrangement conveys the right to use the asset.
Paragraph 20.3 gives some examples: outsourcing arrangements, telecommunication contracts that provide rights to capacity and take-or-pay contracts.
Entities will need to review the contracts they have in place with suppliers to determine which arrangements will now need to be accounted for as a lease under FRS 102.
Helpfully, the transitional provisions in Section 35 of FRS 102 permit a first-time adopter to elect to determine whether an arrangement existing at the date of transition contains a lease on the basis of facts and circumstances at that date, rather than when the arrangement was entered into.
Classification of leases as operating or finance
Whilst both frameworks take a risks and rewards based approach to classification of leases, there is no bright line '90% test' in FRS 102 like there is in SSAP 21. Instead, FRS 102 sets out examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease; these are the same as those set out in IAS 17 Leases.
In practice, this may lead to different lease classifications once FRS 102 is adopted. We recommend entities undertake an impact assessment in this area early as the recognition of additional finance leases will lead to the recognition of new assets and liabilities and potentially a higher expense in the profit and loss account. This could effect, for example, bank covenants and taxation charges.
Disclosure of operating leases by a lessee
SSAP 21 requires a lessee to disclose the payments committed to be made during the next year, analysed between those in which the commitment expires:
- within that year
- in the second to fifth years inclusive
- over five years from the balance sheet date.
FRS 102 however, requires disclosure of the total minimum lease payment due over the lease term, with the payments aged by the bandings above but based on when payments are due rather than when the commitment expires.
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