Subleases Under FRS 102: The Intermediate Lessor
A sublease arises when you lease an asset in (the head lease) and grant a third party the right to use it while your head lease stays in force. You become an intermediate lessor: a lessee on the head lease and a lessor on the sublease at the same time. FRS 102.20.31-20.32 sets out how the two sides interact.
Classify against the right-of-use asset, not the property
The intermediate lessor classifies the sublease as a finance lease or an operating lease by reference to the right-of-use (ROU) asset arising from the head lease, not the underlying property itself. A sublease that covers most of your remaining head-lease term transfers substantially all of your right of use, so it is a finance sublease even though the building plainly outlives it.
FRS 102 Reference: FRS 102.20.31
| Scenario | Likely classification |
|---|---|
| Head lease 10 years; sublease 9 of the 10 years | Finance sublease (major part of the ROU asset's life) |
| Head lease 10 years; sublease 3 years | Operating sublease |
If the sublease is an operating lease
You keep the head-lease ROU asset on your balance sheet, keep depreciating it, and recognise sublease income on a straight-line basis over the sublease term. Nothing about the head-lease accounting changes: interest keeps accruing on the head-lease liability and the ROU asset keeps depreciating as before.
If the sublease is a finance lease
You derecognise the ROU asset from the head lease, recognise a net investment in the sublease (a receivable for the present value of the sublease payments), and take any difference between the two straight to profit or loss. The head-lease liability stays exactly where it was: you still owe your landlord regardless of what your subtenant owes you.
Journal - Sublease Classified as Finance
The head lease is never affected
In both cases you continue to account for the head-lease liability as a lessee under the normal Section 20 model. Subletting does not reduce, transfer or extinguish your obligation to the head landlord, and it is not a lease modification of the head lease.
In Lease102
Disclosures
Income from subleasing right-of-use assets is one of the quantitative amounts a lessee discloses under FRS 102.20.37-20.39, alongside depreciation, interest and the maturity analysis. If the sublease is a finance sublease, the lessor disclosure requirements (FRS 102.20.42-20.43) apply to the net investment.
FRS 102 Reference: FRS 102.20.37-20.39
Model the head lease correctly first
Sublease accounting starts from an accurate head-lease ROU asset and liability. Lease102 calculates both, with full amortisation schedules and journals.