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 three narrow 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 102.20.9). 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 102.20.21 onwards), so a company that both leases in premises and sublets space applies two different models at once.
The three exemptions
A lessee may elect to keep three categories of lease off the balance sheet and expense the payments straight-line instead.
Short-term leases
FRS 102.20.10
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 102.20.11
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 102.20.12
Total consideration is a nominal (peppercorn) amount, common for charity premises and government grants of property.
Election: Lease by lease
Treatment: Right-of-use asset at fair value, credit treated as a grant or donation
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 102.20.50). 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 102.20.13): 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 102.20.13, incentives reduce the right-of-use asset, not the liability. The liability is simply the present value of the remaining payments.
The discount rate hierarchy
Section 20 sets out three rates in order of preference. In practice, most UK and Irish SMEs end up at the third.
1. 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 102.20.27).
2. 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 102.20.27).
3. Obtainable borrowing rate (OBR)
A simplification for entities that are not financial institutions: the rate the entity would pay to borrow the total lease payments. Most UK SMEs use this, often evidenced from a bank facility rate or a reference-rate base plus a credit spread (FRS 102.20.51-20.52).
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 102.20.33-20.39 requires qualitative disclosure of the nature of leasing activities plus quantitative disclosures: carrying amounts of right-of-use assets by class of underlying asset, depreciation charged, interest expense on lease liabilities, the expense recognised for short-term and low-value leases, and a maturity analysis of lease liabilities by time band.
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?
Three exemptions are available to lessees: short-term leases (12 months or less with no purchase option, elected by class of asset), leases of low-value assets such as laptops and small office equipment (elected lease by lease), and peppercorn leases at nominal consideration. Exempt leases are expensed straight-line; everything else goes on the balance sheet.
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 the incremental borrowing rate or, for entities that are not financial institutions, the obtainable borrowing rate (OBR). 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 incentives against the liability; under FRS 102.20.13 they reduce the asset.
What discount rate should a UK SME use for FRS 102 leases?
Most UK SMEs use the obtainable borrowing rate (OBR), the simplification in FRS 102.20.51-20.52 for entities that are not financial institutions. 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.
What must a lessee disclose under FRS 102 Section 20?
Lessees disclose qualitative information about the nature of their leasing activities and quantitative information including the carrying amounts of right-of-use assets by class, depreciation, interest expense on lease liabilities, the expense for short-term and low-value leases, and a maturity analysis of lease liabilities. The disclosures are set out in FRS 102.20.33-20.39.
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