BLM10020 - Lease accounting: accounting standards: key differences between IAS 17 and FRS 102
As explained at BLM10015 prior to the introduction of IFRS 16, IAS 17 was the relevant leasing accounting standard for entities applying either IFRS or FRS 101. As IAS 17 is similar to FRS 102, FRS 102 is explained in detailed in this manual and the key differences between IAS 17 and FRS 102 are highlighted below.
IAS 17 supplementary guidance
IAS 17 is supplemented by
- IFRIC 4 Determining whether an arrangement contains a lease.
- SIC 15 Operating leases – Incentives.
- SIC 27 Evaluating the substance of transactions involving the legal form of a lease.
IFRS 16 replaces IAS 17, IFRIC 4, SIC 15 and SIC 27. FRS 102 is not supplemented by any additional guidance.
IFRIC 4 provides guidance on commercial arrangements that do not take the legal form of a lease but which convey rights to use assets in return for a payment or series of payments. These principles are already captured in FRS 102, see BLM00030. Similarly, whilst the detailed requirements of SIC 27 are not captured in FRS 102, FRS 102 is clear that determining whether or not an arrangement contains a lease is based on the substance of the arrangement.
The guidance in SIC 15 is captured in FRS 102, see BLM12025.
Residual values and guarantees
IAS 17 contains a definition for both a guaranteed residual value and unguaranteed residual value. Although these terms are not defined in FRS 102 the accounting principles in relation to residual values and impact on lease classification and measurement are the same. See BLM11025 for further details.
Lease classification
An important difference between FRS 102 and IAS 17 is that IAS 17 requires the land and building elements of a lease to be considered separately for the purposes of lease classification. Unless title is expected to pass to the lessee at the end of the lease term, leases of land should be treated as operating leases. The lease of the building however might be classified as a finance lease. FRS 102 contains no requirement to consider these elements separately.
Operating leases: lessee accounting
As noted in BLM12020 FRS 102 has specific guidance on how lease payments are spread where payments to the lessor are structured to increase in line with expected general inflation to compensate for the lessor’s expected inflationary increases. IAS 17 does not include any specific requirement to diverge from “straight line” basis for inflation increases.
Finance lease: lessee accounting
BLM15040 explains the method for apportioning rent under FRS 102. IAS 17 contains similar guidance but also allows some form of approximation to allocate the finance charge to periods during the lease term to simplify the calculation. FRS 102 does not refer to using a form of approximation.