Financial reporting involves the production of financial statements showing an entity’s profit or loss, assets, liabilities, and other additional information relating to the financial statements. In recent years there has been a shift from Financial Reporting Standards (FRS) to International Financial Reporting Standards (IFRS). One of the reasons for this transition is to standardise financial reporting practices across the globe, encouraging transparency and comparability across entities. The aim of this is to create a more accurate representation of an entity’s financial position.

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A key area experiencing significant change is that of leasing. IFRS 16 which relates to leases, its accounting treatment, its recognition, and disclosure is set to replace the previous FRS 102 section 20. There are several areas that differ between the two and it is important for entities to be aware of such.

• Right of Use Asset Recognition

Under IFRS 16, it is required that lessees are to recognise all leases on the balance sheet as Right of Use Assets, not considering whether it is classified as a finance or operating lease. FRS 102 s.20 distinguishes between finance and operating leases, the former being recognised the same as above and the latter recognising the payments as an expense on a straight-line basis over the term of the lease.  

• Lease Liability Recognition

In line with the IFRS 16 approach above, the lessee is to recognise a corresponding liability on the balance sheet which represents the present value of future lease payments. This may include items such as the extension or termination of a lease. Under FRS 102 s.20, finance leases are to be recognised as a liability on the balance sheet at present value. There is no recognition of a lease liability on the balance sheet for operating leases. As mentioned above, it is to be expensed on a straight-line basis.  

• Enhanced Disclosure

New disclosure requirements have been implemented due to IFRS 16. The objective of this is to again increase transparency. As a result of IFRS 16, lessees are to not only provide key assumptions relating to future lease payments but also are required to provide information on the significant judgements made in applying the standards. The scope of disclosures is therefore much broader in comparison to FRS 102 s.20. In FRS 102 s.20, focus is put on the specific disclosures of finance leases and operating leases separately such as description of agreements and total future minimum lease payments (including under non-cancellable operating leases if applicable).

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The transition from FRS 102 s.20 to IFRS 16 with regards to leasing represents a paradigm shift in the way entities will report on its financial information. The changes as a result of the transition will standardise the practice of financial reporting enhancing transparency around its accounting treatment, its recognition and disclosure. It is of great importance for entities to remain aware of the differences between the two standards to ensure accurate and compliant financial reporting.

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