Lease accounting has undergone a major transformation, posing challenges for UK-based finance professionals. In the UK, companies report under either FRS 102 (UK Generally Accepted Accounting Practice (GAAP)) or IFRS 16 (part of the International Financial Reporting Standards).
Issued by the UK’s Financial Reporting Council (FRC), FRS 102 is the standard for most mid-sized UK entities. IFRS 16, effective globally since 2019, requires leases to be capitalised on the balance sheet. With FRS 102 now being updated to closely mirror IFRS 16, it’s critical to understand how these frameworks align—and differ.
This guide breaks down FRS 102 vs. IFRS 16, exploring key differences in lease recognition, revenue, development costs, and more. We’ll also look at upcoming changes to FRS 102 and how lease accounting software like NetLease can help you stay ahead of compliance demands.
What is FRS 102?
FRS 102 is the main UK GAAP accounting standard for most unlisted companies in the UK and the Republic of Ireland. Introduced in 2015, it replaced older UK standards with a simplified framework based on IFRS for SMEs. It applies to entities not using full IFRS or other alternatives like FRS 101 or FRS 105.
FRS 102 covers all core areas of financial reporting, including leases (Section 20). Under current rules, lessees classify leases as either finance (on-balance sheet) or operating (off-balance sheet)—a model that often kept significant liabilities hidden.
As part of the 2024 periodic review, the FRC has amended FRS 102 to adopt a single lease accounting model similar to IFRS 16. Effective for periods beginning on or after 1 January 2026, this update will require most leases to be recognised on the balance sheet. We explore this shift—and how FRS 102 and IFRS 16 differ—throughout this guide.
What is IFRS 16?
IFRS 16 is the international lease accounting standard issued by the IASB, effective since 1 January 2019. It introduced a single accounting model for lessees, requiring nearly all leases to be recognised on the balance sheet as a right-of-use (ROU) asset and corresponding lease liability—eliminating the previous distinction between operating and finance leases.
This shift was aimed at increasing transparency around lease obligations. Lessees now depreciate the ROU asset and record interest on the liability, resulting in a front-loaded expense profile. Exceptions apply only to short-term and low-value leases, which may still be expensed.
For lessors, IFRS 16 largely retains the old dual model. But for lessees, it marks a significant change—one that has required global adoption of new systems and processes since 2019.
Key differences between FRS 102 and IFRS 16
Both FRS 102 and IFRS 16 aim to present lease transactions transparently, but they have developed under different frameworks. Historically, UK GAAP (FRS 102) was less prescriptive in some areas compared to IFRS, though the gap is closing with recent amendments. Here are some of the key differences.
Leases
Lease accounting is one of the most notable areas where FRS 102 vs. IFRS 16 diverge. IFRS 16 uses a single, on-balance sheet model for nearly all leases, while FRS 102 has historically allowed many leases to remain off-balance sheet. However, with changes coming in 2026, FRS 102 is moving closer to IFRS 16’s approach.
FRS 102 (UK GAAP)
Before 2026, FRS 102 requires lessees to classify leases as either finance (on balance sheet) or operating (off balance sheet). Operating leases—like most property or equipment rentals—are expensed straight-line through profit and loss, with only future commitments disclosed in the notes.
From 2026, amended Section 20 introduces a single lease model, aligning with IFRS 16. Most leases will now be capitalised, with recognition of both a right-of-use asset and lease liability. Exemptions will still apply for short-term or low-value leases.
IFRS 16 (International Standard)
IFRS 16 requires lessees to bring nearly all leases on balance sheet, recording both a lease liability and a right-of-use (ROU) asset. Only short-term and low-value leases can be expensed.
This model results in a front-loaded expense profile and improved Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) but increases reported debt and complexity. Lessees must also manage remeasurements and updates when lease terms change.
Tools like Netgain’s NetLease help automate this process and ensure ongoing compliance. By integrating directly with NetSuite, NetLease streamlines lease tracking, calculations, and journal entries—reducing manual effort and audit risk. Whether you're preparing for the 2026 FRS 102 updates or already reporting under IFRS 16, NetLease simplifies lease accounting across standards.
Learn more about NetLease and see how it can transform your lease compliance process.
Revenue
Revenue recognition is another key area where FRS 102 vs. IFRS 16 (via IFRS 15) diverge—primarily in how structured and prescriptive the guidance is. While IFRS 15 introduced a detailed five-step model, FRS 102 has historically followed more general principles. However, that’s changing with upcoming amendments to FRS 102.
FRS 102
Traditionally, FRS 102 relied on general principles—recognising revenue when risks and rewards are transferred, or when services are measurably complete. This flexible, judgement-based model worked for straightforward transactions but lacked clarity for complex contracts, leading to varied interpretations and timing differences.
That will change in 2025. As part of its 2024 amendments, the FRC is introducing a five-step revenue model aligned with IFRS 15. This includes identifying contracts, defining performance obligations, determining and allocating transaction price, and recognising revenue as obligations are satisfied. While this improves consistency, it also introduces complexity. FRS 102 reporters should begin reviewing contracts and systems now to prepare for the transition.
IFRS 16 (via IFRS 15)
IFRS 15, effective since 2018, requires a structured five-step approach to revenue recognition. It ensures revenue is recognised based on the transfer of control and the economic substance of contracts—ideal for multi-element arrangements like SaaS or bundled services.
Compared to FRS 102’s older model, IFRS 15 demands greater disclosure and stricter allocation of revenue across performance obligations. For companies operating globally or reporting publicly, this model brings needed consistency—but also requires robust systems and careful contract analysis.
As FRS 102 aligns with this model, the differences in revenue recognition under UK GAAP and IFRS will diminish—though the transition will require preparation.
Development Costs
When it comes to development expenditures—such as those for software, products, or new technologies—FRS 102 vs. IFRS 16 (via IAS 38) diverge in how strictly they enforce capitalisation. The difference mainly lies in the level of flexibility afforded to companies.
FRS 102
Under FRS 102, companies may choose to capitalise development costs if they meet certain criteria (e.g. technical feasibility and future economic benefit), but they are not required to. Many UK GAAP entities opt to expense these costs for simplicity, especially if amounts are small. While this policy choice offers flexibility, it can lead to inconsistent treatment across companies.
IFRS 16 (IFRS Standards)
IFRS, through IAS 38, takes a stricter approach. If development costs meet the recognition criteria, capitalisation is mandatory, not optional. This typically results in more intangible assets reported on the balance sheet. IFRS also provides more detailed guidance on what costs qualify.
For companies transitioning between the two frameworks, these differences may impact asset values, compliance processes, and comparability. IFRS reporters need robust tracking systems to ensure accurate project-level capitalisation, whereas FRS 102 allows a more streamlined, policy-driven approach.
Business Combinations
Business combinations—such as mergers or acquisitions—are treated differently under FRS 102 vs. IFRS. The main contrasts involve transaction costs, intangible asset recognition, and goodwill treatment, all of which impact reported profits and balance sheet composition.
FRS 102
FRS 102 allows transaction costs (e.g. legal or advisory fees) to be included in the acquisition cost, increasing goodwill. Intangible assets acquired can be separately recognised, but only if reliably measurable—otherwise, they may be folded into goodwill. Goodwill is amortised over its useful life (up to 10 years by default), and “negative goodwill” (bargain purchases) is deferred and amortised as well. This approach smooths expense recognition over time.
IFRS 16 (IFRS 3 and related standards)
Under IFRS, transaction costs are expensed immediately, reducing goodwill. Intangible assets must be separately identified and recorded if they meet the recognition criteria—no optional treatment. Goodwill is not amortised, but instead tested annually for impairment, potentially resulting in large write-downs.
While 2024 FRS 102 updates aim to better align with IFRS 3 (e.g. around contingent consideration), notable differences remain. Companies transitioning between the two frameworks should plan for potential restatements, especially in how intangibles and goodwill are presented.
Property, Plant and Equipment
While FRS 102 and IFRS share a similar approach to accounting for property, plant, and equipment (PPE), they differ in how borrowing costs are treated and in the level of required disclosures. These subtle distinctions can impact reported asset values and finance expenses.
FRS 102
FRS 102 allows companies to use either the cost model or revaluation model for PPE, with depreciation and impairment required in both cases. A key difference is that capitalising borrowing costs is optional—many smaller entities choose to expense them for simplicity. Disclosure requirements are also lighter, with less detailed reconciliation than IFRS.
IFRS 16 (IFRS standards)
Under IFRS (IAS 16 and IAS 23), companies must capitalise borrowing costs for qualifying assets. This results in higher initial asset values and lower interest expense compared to FRS 102. IFRS also tends to demand more detailed disclosures, including movements in asset balances and accumulated depreciation.
In practice, PPE treatment is largely aligned between the two standards, aside from borrowing cost capitalisation. Companies transitioning between frameworks should review historical project accounting and ensure systems like NetSuite are configured to support both models.
Discount Rate Application
Discount rates play a critical role in lease accounting under both FRS 102 and IFRS 16, affecting how lease liabilities are valued. While the core principles align, FRS 102 introduces some practical simplifications that differentiate it from the IFRS approach.
FRS 102
The amended FRS 102 requires lessees to use the rate implicit in the lease when available. If not, they may apply the new obtainable borrowing rate (OBR)—a simplified rate based on the lease’s own cash flows and term. This makes it easier for entities to estimate discount rates without complex credit modelling.
FRS 102 also permits using a single discount rate for portfolios of similar leases and allows public benefit entities to apply a risk-free rate if borrowing data isn’t available. These options are designed to ease adoption, especially for smaller or non-profit organisations.
IFRS 16
IFRS 16 defaults to the incremental borrowing rate (IBR) when the implicit rate isn’t known. The IBR must reflect the rate the lessee would pay for a similar asset under similar terms—often requiring judgement and market benchmarking.
IFRS 16 mandates recalculating lease liabilities with a revised discount rate for most lease modifications. While FRS 102 largely follows this, it includes reliefs for minor changes or scope reductions, offering more flexibility.
Overall, both standards rely on present value principles, but FRS 102’s OBR and modification reliefs provide a more accessible path for many UK entities. Tools like NetLease can automate discount rate selection and adjustments—streamlining compliance for both frameworks.
Recent changes to FRS 102
The landscape of FRS 102 is changing significantly due to a periodic review completed by the FRC in 2024. These recent changes to FRS 102 are particularly focused on bringing FRS 102 closer to the latest IFRS standards in key areas like leases and revenue recognition. Here, we summarize the major changes, when they take effect, and what impacts they may have on companies using FRS 102.
Changes to lease accounting in FRS 102
The most significant update in the 2024 amendments to FRS 102 is the complete overhaul of lease accounting. Lessees will no longer be permitted to keep operating leases off the balance sheet. Instead, a single lessee accounting model will be introduced—closely aligned with IFRS 16.
Under the revised Section 20 of FRS 102, companies will be required to:
- Recognise a right-of-use asset and a lease liability for most leases
- Apply the new model to virtually all leases, except:
- Short-term leases (12 months or less)
- Leases of low-value assets (as defined by company policy)
This change eliminates the historic distinction between finance and operating leases, which previously allowed many obligations to remain undisclosed in the primary financial statements. The FRC’s aim is to enhance transparency and comparability across financial reports.
While the core principle mirrors IFRS 16, FRS 102 introduces several simplifications and practical reliefs tailored for smaller or domestic entities:
- The Obtainable Borrowing Rate (OBR) offers an easier alternative to IFRS 16’s incremental borrowing rate
- Entities may use a single discount rate for portfolios of similar leases
- Public benefit entities are permitted to use a risk-free rate when borrowing data is unavailable
- Additional disclosures are required for exempt leases, such as a maturity analysis for short-term or low-value lease commitments
These adaptations make the updated FRS 102 model more accessible for entities that may lack the resources or complexity to adopt IFRS 16 in full. While the standards are converging in principle, the FRS 102 implementation remains distinctly practical for its UK audience.
When will the changes take effect?
The revised FRS 102 lease accounting rules apply to accounting periods beginning in 2026, with early adoption permitted—but only if a company adopts the full package of 2024 amendments (not just leases or revenue alone).
Other updates, like the new five-step revenue recognition model, take effect from 2025, placing companies in a transition phase throughout 2025.
To prepare, businesses—especially those with many leases—should begin gathering data and updating systems now.
NetLease offers a purpose-built solution to help automate lease tracking, right-of-use asset and liability calculations, and compliance reporting—ensuring a smooth and accurate transition to the new FRS 102 requirements.
Learn how NetLease can help you prepare for FRS 102 changes.
Potential impacts of FRS 102 changes
The shift to IFRS 16-style lease accounting under FRS 102 will have several notable impacts on financial statements and key metrics for UK GAAP reporters:
- Assets and Liabilities Increase: Most leases will move on balance sheet, increasing reported assets and liabilities—especially in lease-heavy industries like retail and transport.
- Changes in Financial Ratios: Key ratios will shift: asset turnover may fall, debt-to-equity may rise, and EBITDA may improve due to reclassifying lease expenses.
- Front-loaded Expenses: Lease costs will be higher in early years due to interest and depreciation, impacting profits compared to previous straight-line expense treatment.
- Greater Transparency: Lease obligations will be more visible, improving comparability and reducing reliance on off-balance sheet disclosures.
- Training and Education: Finance teams and auditors must understand new judgments, such as discount rates and lease term estimates, and revisit policies like lease vs buy.
- Systems and Processes: Many firms will need to replace spreadsheets with lease accounting tools. NetLease automates calculations, disclosures, and compliance workflows.
In addition to leases, the revenue recognition changes (five-step model) will impact how and when revenue is reported for many FRS 102 companies (especially those with multi-element contracts, subscriptions, construction projects, etc.). They too will need process changes and possibly system enhancements to handle things like contract asset or liability accounting, which IFRS 15 requires.
Transition requirements and methods
Transitioning to the new FRS 102 lease standard is designed to be straightforward. Unlike IFRS 16, which allowed a choice between full and modified retrospective approaches, FRS 102 requires a modified retrospective method—no restating of comparatives. Lessees will calculate lease liabilities and right-of-use (ROU) assets at the transition date and adjust retained earnings for any difference.
Key transition reliefs include:
- IFRS 16 carryforward: Entities can elect to carry over existing IFRS 16 lease balances as opening figures under FRS 102.
- Use of hindsight: Companies may factor in events known at the transition date, like exercised options.
- Grandfathering: No need to reassess old contracts for lease classification—only apply new rules going forward.
- Short-term lease exemption: Leases ending within 12 months of transition can be treated as short-term and excluded.
While the transition avoids restating prior years, gathering lease data and preparing schedules remains a significant task.
Learn more about FRS 102 vs. IFRS 16
Does FRS 102 follow IFRS 16?
Yes, in large part. With the recent amendments, FRS 102 is being updated to follow the core principle of IFRS 16 for lessee accounting—namely, bringing leases on the balance sheet. The goal is for FRS 102 to “mirror the accounting framework provided by IFRS 16,” though with some nuances and simplifications in certain areas.
In effect, FRS 102 (2026 onwards) will largely follow IFRS 16’s treatment of leases. That said, there are still nuanced differences in discount rate choices, low-value lease thresholds, disclosures, and transition options. So FRS 102 follows IFRS 16’s lead, but not word-for-word. Companies using FRS 102 can take comfort that they are now much closer to international best practices in lease accounting. If your company plans to move to full IFRS in the future (say to list on a stock exchange), the transition will be smoother because you’ll have already been doing something very similar under FRS 102’s new rules.
Who should use FRS 102?
FRS 102 is suited for UK and Irish companies not required to use IFRS—typically SMEs, private companies, or subsidiaries. It offers a simpler alternative to full IFRS with fewer disclosures, while incorporating many IFRS-aligned updates.
What is the equivalent of IFRS 16 in US GAAP?
ASC 842 is the U.S. GAAP equivalent of IFRS 16. Both bring leases on balance sheet, but ASC 842 retains operating vs. finance lease classification for expense reporting. Despite some differences, ASC 842 and IFRS 16 are broadly aligned in purpose and impact.
Simplify your FRS 102 and IFRS 16 lease accounting process
Adapting to new lease standards like FRS 102 and IFRS 16 can be complex—requiring careful management of lease data, discount rates, remeasurements, and disclosures. But with the right tools, compliance doesn’t have to be a burden.
NetLease is a purpose-built solution that automates lease accounting across IFRS 16, ASC 842, and the updated FRS 102. It streamlines journal entries, handles ROU asset and liability calculations, supports OBR and exemption rules, and integrates directly into your ERP—reducing manual effort and audit risk.
Whether you're transitioning to the new FRS 102 or managing multi-standard compliance, NetLease empowers finance teams to work more efficiently and accurately.
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