FRS 102 Lease Transition: Choosing the Right Discount Rate
Frequently Asked Questions
Does this apply to all operating leases?
In principle, yes, but there are exemptions for short-term leases and leases of low-value assets (20.5). Most property leases held by UK SMEs are expected to fall within the new requirements unless they are very short term.
Do rent-free periods affect the calculation?
Yes. Rent-free or reduced-rent periods are included in the lease term and reflected as nil or lower payment value in the the schedule of future cash payments for the present value calculation.
What happens if lease payments do not align with month end?
The lease liability is based on the present value of contractual lease payments at contractual lease payment dates, NOT, the nearest month end date. In the UK typical commercial rent dates are 25/03, 24/06, 29/09 and 25/12.
What journals are posted at your lease transition?
Typical entries include recognising the lease liability, the right-of-use asset, and any adjustment to retained earnings for the difference between the two after considering existing balances such as incentives, accruals and prepayments.
How are rent reviews applied?
Rent reviews are incorporated into the lease cash flow profile based on contractual terms. Where lease payments change, the lease liability is remeasured and the adjustment is typically recognised against the right-of-use asset. At commencement, you use the current rent level. You do not forecast future increases.
Useful life versus lease term in practice?
Under FRS 102, the lease term normally drives the measurement of the right-of-use asset. In practice, management needs to apply judgement where lease terms and underlying asset lives differ, documenting assumptions and renewal expectations.
How should historical accruals or prepayments be treated?
Existing lease-related accruals and prepayments are considered as an adjustment to the right-of-use asset at transition, to avoid double counting or omission of lease costs.