With the FRS 102 periodic review amendments a key focus on financial reporting updates this Autumn, we thought we’d share some of the questions that are most commonly cropping up. Here they are:
The new lease accounting rules will not apply for entities that use FRS 105. When determining whether an entity is eligible for FRS 105, does gross assets need to be computed on an FRS 102 basis?
Reassuringly, the answer is no. This point is dealt with in a footnote to paragraph 4a of FRS 100. This states that ‘in establishing whether the eligibility criteria have been met, turnover and balance sheet total shall be measured in accordance with FRS 105; the measurement of turnover and balance sheet total in accordance with FRS 101 or FRS 102 need not be considered.’
Where there is a month-to month or ‘evergreen’ lease, will the short-term lease exemption be available?
A lease of this nature might qualify as a short term lease, which would mean that the current ‘off balance sheet’ accounting would be acceptable for the lessee. However, it’s important to remember that lease contracts can be implied as well as explicit. In its 2025 Factsheet ‘ Lease Accounting under FRS 102’, the ACCA states that ‘where such (informal) arrangements are in place (between related parties at below market rent), both parties usually expect the arrangements to continue for a significant period of time’ – particularly as the lessee would have a significant economic incentive to continue the arrangement because it is unlikely the lessee could rent premises under a similar arrangement for below-market rates of rent.
If rent is linked to (e.g.) CPI, do the figures get ‘rebalanced’ over time as our view of that changes?
Yes, that’s right. The initial calculations are done on the presumption of no inflationary increase. When the CPI increase takes effect, the lessee remeasures the lease liability based on the revised lease payments. The other side of the remeasurement adjusts the right of use asset.
Given that the transitional rules mean comparatives are prepared on the ‘old’ basis of accounting, is a note required explaining the impact?
There is no specific requirement for this but it would make sense to include some disclosure where the current year and comparative figures are significantly different, in order to inform a true and fair view. When applying the revised rules on leasing (unlike for the revised rules on revenue recognition), full retrospective adoption of the new rules is not allowed, even though for many it would present a more true and fair view to go back and restate comparatives.
Could the impact of the right of use asset push a company over the audit limit?
This could be the case because the relevant balance sheet threshold for determining the need for an audit is gross assets, not net assets. However, don’t forget that audit thresholds do increase for periods commencing on or after 6 April 2025, based on recent legislative changes in Statutory Instrument 2024/1303.
Peter Herbert
October 2025
