The revised FRS 102 Section 20 uses the same basic lessee model as IFRS 16, with a right of use asset and a lease liability for most leases. The differences are mainly optional simplifications: a wider low value exemption, an alternative discount rate, fewer rate updates on modifications, a simpler sale and leaseback option, one transition method and lighter disclosures. A UK GAAP preparer that does not take the simplifications should get a result comparable with IFRS 16.

Where do the two standards agree?

As part of the Periodic Review 2024, the FRC replaced the old Section 20, which followed IAS 17, with an on balance sheet model based on IFRS 16 (Basis for Conclusions B20.3). It applies to accounting periods beginning on or after 1 January 2026 (paragraph 1.37), seven years after IFRS 16 took effect for periods beginning on or after 1 January 2019.

The common ground is substantial:

  • a lessee recognises a right of use asset and a lease liability at the commencement date (FRS 102 paragraph 20.45);
  • both standards allow exemptions for short term leases and low value assets, with the short term election made by class of asset and the low value election lease by lease (IFRS 16.5 and 16.8; FRS 102 paragraphs 20.5 and 20.7);
  • a short term lease is 12 months or less at commencement, and a lease containing a purchase option is never short term;
  • the right of use asset is initially measured at cost, built up from the liability, payments made at or before commencement less incentives, initial direct costs and restoration costs, as HMRC’s Business Leasing Manual at BLM17035 sets out for both standards;
  • lessors keep the finance and operating lease classification (FRS 102 paragraph 20.86), as IFRS 16 substantially carried forward the IAS 17 lessor model.

The FRC deliberately made its simplifications optional, so that groups reporting under both frameworks could keep one set of numbers (B20.6). For the IFRS model itself, see the IFRS 16 overview.

How does the low value exemption differ?

This is the largest practical difference. When IFRS 16 was issued, the IASB’s effects analysis described low value assets as those with a value when new in the order of US$5,000 or less, with examples such as tablets, personal computers, small office furniture and telephones.

FRS 102 sets no monetary figure. Instead paragraph 20.11 lists assets that would not be of low value: cars, vans, buses, coaches, trams, trucks and lorries; cranes, excavators, loaders and bulldozers; telehandlers and forklifts; tractors and harvesters; boats and ships; railway rolling stock; aircraft and aero engines; property; and production line equipment. Outside that list the preparer has flexibility (B20.8). As under IFRS 16, the test is absolute, not based on materiality (paragraph 20.9). The asset must be usable on its own and not highly dependent on other assets (paragraph 20.10), and a head lease of an asset that is sublet never qualifies (paragraph 20.12).

The FRC expects this wider definition to keep a smaller proportion of leases off the balance sheet than IFRS 16 would (B20.11). An entity can still choose a lower threshold to match its group policy (B20.8). More detail is in lease exemptions for short term and low value assets.

Which discount rate can a UK GAAP lessee use?

Both standards start with the interest rate implicit in the lease. Under IFRS 16, if that cannot be readily determined, the lessee uses its incremental borrowing rate (BLM17035). FRS 102 paragraph 20.49 lets the lessee choose, lease by lease, between the incremental borrowing rate and a new obtainable borrowing rate.

The FRS 102 glossary defines the incremental borrowing rate as the rate a lessee would pay to borrow, over a similar term and with similar security, the funds needed to obtain an asset of similar value to the right of use asset. The obtainable borrowing rate is the rate it would pay to borrow, over a similar term, an amount similar to the total undiscounted lease payments. Dropping the security and asset value elements makes it easier to evidence, often from a lender’s indicative quote (B20.12(a)). Public benefit entities that cannot determine any of these rates use the rate obtainable on their deposits (paragraph PBE20.50).

What happens when a lease is modified?

FRS 102 paragraph 20.70 treats a modification that adds a right to use more assets, at a price commensurate with its stand alone price, as a separate lease. For other modifications paragraph 20.71 remeasures the liability using a revised discount rate, but paragraph 20.72 allows the old rate to be kept in three situations: the extra consideration is insignificant to the original lease, the scope and price both fall in proportion, or only the payments fall without any reduction in scope. The FRC presents this as reducing the occasions on which a new rate has to be found (B20.12(b)).

How do sale and leaseback transactions differ?

Under both standards the first question is whether the transfer is a sale under the revenue standard. If it is not, the seller keeps the asset and records a financial liability for the proceeds (IFRS 16.103; FRS 102 paragraph 20.126).

Where it is a sale, IFRS 16 measures the right of use asset at the retained proportion of the old carrying amount and recognises only the gain on the rights transferred, as BLM17045 describes. FRS 102 paragraph 20.123(a) offers that approach or an alternative: measure the right of use asset in the normal way, defer any excess of proceeds over carrying amount and spread it over the lease term, and recognise any shortfall immediately. The FRC describes this as similar to the previous FRS 102 approach (B20.12(c)).

How does transition compare?

IFRS 16 allowed a full retrospective approach or a modified retrospective approach, with two options for measuring the right of use asset. FRS 102 requires the modified approach. Comparatives are not restated, and the cumulative effect goes to opening retained earnings (paragraph 1.47). For former operating leases, the liability is the present value of remaining payments at the incremental or obtainable borrowing rate, and the asset equals the liability adjusted for prepaid or accrued rent (paragraph 1.51; B20.17).

Two FRS 102 reliefs help groups and smaller lessees. Paragraph 1.48 lets a subsidiary bring in the lease balances already calculated under IFRS 16 for group reporting. Paragraph 1.53 allows a single rate for a portfolio, leases ending within 12 months to be treated as short term, and hindsight in setting the lease term. Paragraph 1.45 removes the need to reassess which contracts contain a lease.

Which other differences are worth knowing?

  • Scope. FRS 102 excludes leases that could cause a loss to either party because of non typical contractual terms, which fall under Section 12 instead (BLM17010; B20.1).
  • Public benefit entities. FRS 102 has rules for leases at nil or below market rent, where the non exchange element is accounted for under Section 34 (B20.13 to B20.16). IFRS has no equivalent.
  • Disclosures. BLM17040 compares the IFRS 16.53 list with FRS 102 paragraphs 20.80 and 20.81. Small entities under Section 1A give a general description of significant leasing arrangements and the short term, low value and variable payment expense amounts (paragraphs 1AC.31A and 1AC.32A).

What does this look like for a UK subsidiary?

Illustration only. A subsidiary of an IFRS group prepares FRS 102 accounts and leases a van, ten laptops and a large office printer that cost £7,000 new. Under IFRS 16 the group would probably capitalise the printer because it is above the US$5,000 benchmark. Under FRS 102 the van must be capitalised because vans are on the paragraph 20.11 list. The laptops can be exempt under both standards, and the printer may be treated as low value if it meets paragraph 20.10.

The subsidiary can either use the wider exemption and keep separate workings, or follow the group threshold and reuse group balances under paragraph 1.48. Following the group policy avoids keeping two lease registers. The tax side is covered in FRS 102 changes from January 2026, and FRS 105 leases explains why micro entities still use the old model: the FRC made no amendments to FRS 105 Section 15 because it expected the costs of alignment to significantly exceed the benefits.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.