Is your company ready for FRS 102? – Leases

Part 4- Lease Classification

Under SSAP 21, a 90% test was applied to help determine whether a lease was a finance lease or an operating lease. This presumed that where the present value of the minimum lease payments was 90% or more of the fair value of the asset then the lease was a finance lease. lease (2)

FRS 102 does not contain this presumption and instead uses more subjective judgement which looks at the substance of the lease rather than the form. FRS 102 gives the following examples which would normally lead to an asset being classed as a finance lease:

the lease transfers ownership of the asset to the lessee by the end of the lease term;
the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised;
the lease term is for the major part of the economic life of the asset even if title is not transferred;
at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and
the leased assets are of such a specialised nature that only the lessee can use them without major modifications

The removal of the 90% test may result in the classification of some leases changing.

Lease Incentives

Under FRS 102, lease incentives (a rent free period for example) will now be recognised over the full term of the lease.

Operating Lease Disclosures

Disclosure requirements for operating leases will also change under FRS 102. Entities must now disclose the total amount of non-cancellable operating rentals payable within one year, greater than one year and not less than 5 years, and after 5 years (rather than just annual commitments based on expiry date as required by SSAP 21).

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