FRS 102 Section 20 Overview
FRS 102 Section 20 fundamentally changes how UK companies account for leases. Previously, operating leases were simply expensed. Now, most leases must be recognised as assets and liabilities on the balance sheet.
What Changed?
Under the old rules, operating lease payments were simply charged to the P&L as rent expense. Under FRS 102 Section 20, lessees must now recognise:
FRS 102 Reference: FRS 102.20.9, 20.13
A Lease Liability
The present value of all future lease payments, discounted at the appropriate rate. This appears on your balance sheet as a liability.
A ROU Asset (Right-of-Use Asset)
Initially measured at the lease liability amount, adjusted for incentives, direct costs, and restoration obligations. This appears on your balance sheet as a non-current asset.
Impact on Financial Statements
The change affects multiple areas of your accounts:
| Area | Old Treatment | New Treatment |
|---|---|---|
| Balance Sheet | No asset or liability | ROU Asset + Lease Liability |
| P&L - Expenses | Rent expense (operating) | Depreciation + Interest expense |
| EBITDA | Lower (rent included) | Higher (rent excluded) |
| Gearing Ratios | Lower | Higher (more debt) |
| Cash Flow | Operating activities | Financing activities (principal) |
Exemptions
FRS 102 provides two optional exemptions that allow continued expense treatment:
FRS 102 Reference: FRS 102.20.9-20.12
Short-Term Leases
Leases with a term of 12 months or less (with no purchase option) may be expensed on a straight-line basis.
Low-Value Assets
Leases of low-value assets may be expensed. Note: FRS 102 does not specify a monetary threshold. Classification is based on asset type.