Plain-English guide
FRS 102 Section 20: lease accounting, explained
FRS 102 Section 20 is the lease accounting section of UK and Irish GAAP. For accounting periods beginning on or after 1 January 2026, it puts almost every lease on the lessee's balance sheet as a right-of-use asset and a lease liability, with two narrow recognition exemptions. This guide covers recognition, measurement, discount rates and disclosures, with the paragraph references auditors ask for.
The recognition principle
At the commencement date of a lease, the lessee recognises a right-of-use (ROU) asset and a lease liability (FRS 102.20.45). This on-balance-sheet model replaces the previous split between operating leases (kept off balance sheet) and finance leases: for lessees, that distinction no longer exists under the amended Section 20.
Lessor accounting is different: lessors continue to classify each lease as a finance lease or an operating lease (FRS 102.20.86 onwards), so a company that both leases in premises and sublets space applies two different models at once.
Exemptions and peppercorn leases
A lessee may elect to keep two categories of lease off the balance sheet and expense the payments straight-line. Peppercorn arrangements are a separate question, not a third election.
Short-term leases
FRS 102.20.5(a)
Lease term of 12 months or less at commencement, with no purchase option. The term includes extension options the lessee is reasonably certain to exercise.
Election: By class of underlying asset
Treatment: Payments expensed straight-line over the term
Low-value assets
FRS 102.20.5(b)
The underlying asset is of low value when new, judged by the nature and type of asset (laptops, tablets, small office furniture), never by its cost to the lessee. Vehicles and property are never low-value.
Election: Lease by lease
Treatment: Payments expensed straight-line over the term
Peppercorn leases
FRS 102.20.35
Total consideration is a nominal (peppercorn) amount, common for charity premises and government grants of property. Strictly not an exemption election: consideration this low may mean the arrangement does not meet the definition of a lease at all.
Election: Assessed per arrangement
Treatment: Where it is a lease below market rent, the incoming resource (grant or, for PBEs, the donated element per PBE34.64-PBE34.74) is recognised as part of the right-of-use asset
Measuring the liability and the asset
The lease liability is the present value of the lease payments not yet paid at commencement, discounted at the rate for the lease (FRS 102.20.49). Payments include fixed rents less incentives receivable, in-substance fixed payments, index-linked amounts measured at the commencement-date rate, expected residual value guarantees, a purchase option price the lessee is reasonably certain to exercise, and termination penalties where the lease term reflects early termination. Turnover rents and other usage- or performance-based payments are excluded and expensed as incurred.
The right-of-use asset starts at cost (FRS 102.20.46-20.47): the initial liability, plus payments made at or before commencement, plus initial direct costs (legal fees, broker commissions), plus the estimated cost of restoring the asset at the end of the lease (dilapidations), minus lease incentives received.
The most common error we see
Netting a rent-free period or landlord fit-out contribution against the lease liability. Under FRS 102.20.47(b), incentives received at or before commencement reduce the right-of-use asset, not the liability. The liability is simply the present value of the remaining payments.
Choosing the discount rate
Section 20 asks for the rate implicit in the lease where it can be readily determined. Where it cannot, the lessee chooses, lease by lease, between two alternatives the standard does not rank.
First: rate implicit in the lease
Use it when it can be readily determined, which in practice is mainly hire-purchase deals and vehicle leases where the cash price and payments are known (FRS 102.20.49).
Then either: incremental borrowing rate (IBR)
The rate the lessee would pay to borrow, over a similar term with similar security, the funds needed for an asset of similar value. More judgemental to evidence (FRS 102.20.49).
Or: obtainable borrowing rate (OBR)
The rate the entity would pay to borrow the total lease payments, and the simpler of the two alternatives to evidence. Most UK SMEs use this, often evidenced from a bank facility rate or a reference-rate base plus a credit spread (FRS 102.20.49).
Whichever rate is used, auditors expect the basis to be documented at each lease's commencement date. Lease102 records the rate type and evidence per lease, with live SONIA and €STR reference rates for OBR derivation.
What lessees disclose
FRS 102.20.76-20.85 requires a general description of significant leasing arrangements, the further qualitative information needed to understand them (including the types of discount rate used), and quantitative disclosures: carrying amounts of right-of-use assets by class of underlying asset, additions and depreciation charged, interest expense on lease liabilities, the expense recognised for short-term and low-value leases, sublease income, and the total cash outflow for leases. A lessee also discloses its commitments for the short-term and low-value leases it has kept off balance sheet. FRS 102 asks no maturity analysis of a lessee: within Section 20 that requirement falls on lessors.
For worked numbers, journals and the note text itself, see the docs: a full worked example, disclosure note generation and discount rate selection.
FRS 102 Section 20: frequently asked questions
What is FRS 102 Section 20?
FRS 102 Section 20 is the part of the UK and Ireland accounting standard (FRS 102) that sets out how companies account for leases. Following the periodic review amendments effective 1 January 2026, it requires lessees to recognise a right-of-use asset and a lease liability on the balance sheet for almost all leases, replacing the old operating versus finance lease distinction for lessees.
Which leases stay off balance sheet under FRS 102 Section 20?
Two recognition exemptions are available to lessees (FRS 102.20.5): short-term leases (12 months or less with no purchase option, elected by class of asset) and leases of low-value assets such as laptops and small office equipment (elected lease by lease). Exempt leases are expensed straight-line; everything else goes on the balance sheet. Peppercorn (nominal consideration) arrangements are treated differently: they may not meet the definition of a lease at all (FRS 102.20.35).
How is the lease liability measured under FRS 102?
At commencement the lease liability is the present value of the remaining lease payments, discounted at the rate implicit in the lease if readily determinable, otherwise a lease-by-lease choice between the incremental borrowing rate and the obtainable borrowing rate (OBR), which the standard does not rank. Payments include fixed rents less incentives receivable, in-substance fixed payments, index-linked amounts at the commencement rate, expected residual value guarantees, a purchase option price if reasonably certain, and termination penalties reflected in the lease term.
How is the right-of-use asset measured?
The right-of-use asset starts at cost: the initial lease liability, plus payments made at or before commencement, plus initial direct costs such as legal fees and broker commissions, plus estimated restoration (dilapidations) costs, minus lease incentives received. A common error is netting Day-1 incentives against the liability; under FRS 102.20.47(b) incentives received at or before commencement reduce the asset (incentives receivable later reduce the lease payments in the liability per 20.51(a)).
What discount rate should a UK SME use for FRS 102 leases?
Most UK SMEs use the obtainable borrowing rate (OBR), one of the two alternatives FRS 102.20.49 allows where the rate implicit in the lease cannot be readily determined. It is the rate the entity would pay to borrow the total payments under the lease, commonly evidenced from an existing bank facility rate, a recent loan offer, or a reference-rate base such as SONIA plus an appropriate credit spread, documented at each lease's commencement date.
How does FRS 102 differ from IFRS 16?
FRS 102 Section 20 is closely aligned with IFRS 16 but simplified for SMEs. Both put leases on-balance-sheet. FRS 102 lets entities use the obtainable borrowing rate by default, applies the modified retrospective transition without complex catch-up adjustments, and has lighter disclosure requirements than IFRS 16.
What must a lessee disclose under FRS 102 Section 20?
A lessee gives a general description of its significant leasing arrangements, plus the further qualitative information needed to understand them, including the types of discount rate used. The amounts disclosed for the period are interest expense on lease liabilities, the expense for short-term leases and for leases of low-value assets, variable payments outside the liability, sublease income, the total cash outflow for leases, and gains or losses on sale and leaseback. Right-of-use assets are disclosed by class, with the carrying amount, additions and depreciation. The disclosures are set out in FRS 102.20.76-20.85. There is no lessee maturity analysis requirement in FRS 102: that requirement applies to lessors.
Keep going
What changed in 2026
The FRS 102 lease amendments: who is affected, when, and how to transition.
Learn moreFree FRS 102 lease calculator
Present value, right-of-use asset and P&L impact from your rent and rate.
Learn moreThe full FRS 102 guide
The standard end to end: scope, thresholds, transition and worked examples.
Learn moreDocumentation hub
Topic-by-topic detail: incentives, dilapidations, modifications, disclosures.
Learn more