Lease accounting is how a business records the leases it holds. Under the current standards a lessee recognises a right-of-use asset and a lease liability for almost every lease, then charges depreciation on the asset and interest on the liability, in place of a single rent expense.
For years, many leases were invisible on the balance sheet: a company could rent buildings and equipment worth millions and show only the rent in profit and loss. IFRS 16 closed that gap for international reporters in 2019, ASC 842 did the same under US GAAP, and FRS 102 follow for accounting periods beginning on or after 1 January 2026. The result is that a reader of the accounts can see the full picture of what an organisation controls and what it owes.
Which standard applies depends on the framework the entity reports under, not on the lease itself. The table below is the short version, and each standard has its own section further down.
| IFRS 16 | FRS 102 from 2026 | ASC 842 | |
| Issued by | IASB | Financial Reporting Council | FASB |
| Applies to | Entities reporting under full international standards | UK and Ireland GAAP reporters | US GAAP reporters |
| In force from | Periods beginning on or after 1 January 2019 | Periods beginning on or after 1 January 2026 | Public business entities, fiscal years beginning after 15 December 2018. Other entities, fiscal years beginning after 15 December 2021 |
| Lessee classification | Removed. Single model | Removed for lessees. Single model | Retained. Operating or finance |
| Most leases on balance sheet | Yes | Yes | Yes, for both classifications |
| Exemptions | Short-term and low value | Short-term and low value | Short-term policy election. No low-value exemption equivalent to IFRS 16 |
| Lessor accounting | Largely unchanged, classification retained | Largely unchanged, classification retained | Classification retained |
IFRS 16 is the international accounting standard for leases, effective for accounting periods beginning on or after 1 January 2019. It replaced IAS 17 and introduced a single lessee model: instead of classifying leases as operating or finance, a lessee recognises a right-of-use asset and a lease liability for almost every lease.
IFRS 16 applies to listed groups and any entity that reports under full international standards. It changed how the cost of a lease reaches the accounts: rather than a flat rent charge, the lessee depreciates the right-of-use asset and charges interest on the liability, so the expense is higher in the early years. It also lifts reported assets, debt, and EBITDA, which matters for covenants and comparisons. Two exemptions keep the smallest leases off the balance sheet: short-term leases of twelve months or less, and leases of low-value assets.
UK organisations report leases under one of two frameworks. IFRS 16 applies to listed groups and entities that use full international standards. FRS 102 is UK and Ireland GAAP, used by most private mid-market companies, charities, and smaller groups that do not apply full IFRS. Which one you use determines your lease rules.
The two are converging, but they are not identical. This guide covers IFRS 16 in full, and our FRS 102 2026 guide covers UK GAAP. If you are not sure which applies to you, our comparison of IFRS 16 and FRS 102 walks through the decision and the differences that remain.
For accounting periods beginning on or after 1 January 2026, the FRS 102 Periodic Review 2024 amendments replace Section 20. The lessee distinction between operating and finance leases is removed, and most leases move on-balance-sheet as a right-of-use asset and lease liability, aligned with IFRS 16 but with simplifications. Early adoption is permitted.
This is the single biggest near-term change in UK lease accounting. Thousands of entities that kept operating leases off the balance sheet must now bring them on, which affects gearing, profit profile, and loan covenants. The change is explained in full in our FRS 102 2026 guide, with sector detail for charities in our Charities SORP 2026 guide and for public bodies in our public sector IFRS 16 guide.
ASC 842: Lease accounting under US GAAP
ASC 842 is the FASB lease accounting standard for entities reporting under US GAAP. It replaced ASC 840 and requires lessees to recognise a right-of-use asset and a lease liability for most leases. Unlike IFRS 16 and revised FRS 102, it keeps the operating and finance classification for lessees.
The standard took effect for public business entities for fiscal years beginning after 15 December 2018, and for other entities for fiscal years beginning after 15 December 2021. Calendar-year public companies therefore adopted it on 1 January 2019, the same year IFRS 16 took effect internationally.
The classification is what most often surprises readers coming from IFRS 16. Under ASC 842 both operating and finance leases go on the balance sheet, so the classification no longer decides recognition. It decides what happens afterwards. An operating lease produces a single straight-line lease cost across the term. A finance lease produces two charges, amortisation of the right-of-use asset and interest on the liability, which front-loads the expense in the same way IFRS 16 does.
| THE PRACTICAL DIFFERENCE
Under IFRS 16 and revised FRS 102 a lessee asks whether a lease is on the balance sheet. Under ASC 842 a lessee asks what shape the expense takes once it is already there. |
Two further differences matter to organisations reporting under more than one framework. ASC 842 does not provide a low-value exemption equivalent to the one in IFRS 16, so the short-term policy election is the main relief available. And the presentation differs: operating lease cost sits within operating expenses and its cash payments within operating activities, whereas finance lease interest and principal are presented separately.
Our full guide to ASC 842 covers scope, the five classification criteria, the two expense patterns, presentation and the differences from IFRS 16 in detail.
Under the on-balance-sheet model, a lessee records two things at the start of a lease: a lease liability, measured at the present value of the future lease payments, and a right-of-use asset, representing its right to use the leased item. The asset is then depreciated, and the liability unwinds as payments are made.
This replaces the old straight-line rent charge with depreciation on the asset and interest on the liability, which front-loads the cost. The mechanics of measuring the two figures are set out in our guide to calculating a right-of-use asset, and the bookkeeping is shown step by step in our guide to IFRS 16 journal entries.
For lessees applying IFRS 16, the split between operating and finance leases was removed from 2019, and revised FRS 102 follows the same broad approach from 2026. Under ASC 842, however, lessees continue to classify leases as operating or finance, although both types are generally recognised on the balance sheet. Lessors also continue to classify leases as operating or finance.
That change catches many people out, because operating leases were the norm for property and equipment and were kept off the balance sheet. Our guide to operating leases versus finance leases explains the old distinction, why it was removed for lessees, and where it still matters.
Both standards let lessees keep two kinds of lease off the balance sheet: short-term leases, with a term of 12 months or less and no purchase option, and leases of low-value assets. These can continue to be expensed like the old operating leases, which keeps the change proportionate for smaller portfolios.
IFRS 16 does not set a formal monetary threshold for low-value assets. When developing the standard, the IASB indicated an order of magnitude of around US$5,000 for the underlying asset when new. FRS 102 does not set a figure, but it gives examples of assets that are not low value, such as land and buildings, vehicles, and production equipment. The exemptions are optional and apply only to lessees, so an organisation can choose to recognise all leases if it prefers consistency.
A right-of-use asset is a balance-sheet asset, so lease accounting now sits close to fixed asset accounting. Many organisations track right-of-use assets alongside owned fixed assets, because both need a register, depreciation, and a clear record from recognition through to the end of their life.
This is why lease accounting and asset management increasingly overlap. A right-of-use asset behaves much like a fixed asset once it is on the books, and the same discipline applies: an accurate register, a consistent depreciation policy, and a clean record of changes. Our fixed asset management hub and our complete guide to fixed asset registers cover that side in depth.
The 2026 change turns lease accounting from a note in the accounts into a live calculation that has to be maintained: present values, depreciation, interest, remeasurements, and disclosures. For anything beyond a handful of leases, dedicated software can reduce spreadsheet risk and support audit preparation.
Spreadsheets handle a few leases but struggle with many, especially when remeasurements and disclosures are involved, and first-year adoption carries the highest audit scrutiny.
FMIS lease accounting software is built for lessee financial accounting under IFRS 16, ASC 842 and revised FRS 102. It does five things:
| SCOPE
FMIS Lease Accounting supports lessee financial accounting. It does not provide lessor accounting, and it is not a broad operational lease administration system. |
Lease accounting changed to make hidden commitments visible. Under the old rules, a business could lease large amounts of property and equipment and show almost nothing on its balance sheet, which made it hard to compare a company that leased with one that borrowed to buy. The standards were rewritten to close that gap.
The sequence is worth knowing. The old international standard, IAS 17, and the old FRS 102 both split leases into operating and finance, and let operating leases sit off the balance sheet. IFRS 16 replaced IAS 17 from 2019 and put most leases on the balance sheet for lessees. FRS 102 has now followed, for periods beginning on or after 1 January 2026. The common thread is transparency and comparability: the same economic commitment should look the same in the accounts, whether a business leases an asset or borrows to buy it.
Most FRS 102 reporters with leases will be affected from 2026, including small entities, although exemptions and scope exclusions may limit the impact. The effect is greatest for organisations with large lease portfolios such as retailers, healthcare providers, and professional firms. The practical work is to identify the leases, gather the data, and model the effect before the first reporting period begins.
Starting early avoids a last-minute scramble and any awkward conversations with lenders. A sensible order of work is to build the lease population first, then settle the data and the policy choices, then run the impact assessment.
A few terms recur throughout lease accounting, and knowing them makes the rest of the hub easier to follow. The right-of-use asset and lease liability are the two figures recognised at the start, the lease term drives the calculation, and the discount rate converts future payments into a present value.
IFRS 16 requires lease payments to be discounted to present value using the interest rate implicit in the lease, if that can be readily determined. In practice it usually cannot, so the lessee uses its incremental borrowing rate: the rate it would pay to borrow the funds needed to obtain a similar asset over a similar term.
The discount rate matters because it sets both the opening lease liability and the interest charged each period. A higher rate gives a smaller liability and a larger early interest charge. Our guide to calculating the right-of-use asset and lease liability works through the rate and the arithmetic with a full example.
Under IFRS 16 a lessee must disclose the carrying amount of right-of-use assets by class, the depreciation charged on them, interest on lease liabilities, and a maturity analysis of those liabilities. The aim is to let a reader understand the amount, timing, and uncertainty of the cash flows that leases create.
Disclosures also cover the total cash outflow for leases, additions to right-of-use assets, and any expense for short-term or low-value leases taken under the exemptions. FRS 102 from 2026 asks for a lighter set of disclosures than full IFRS 16, in keeping with its simplified approach, but the principle is the same: show the reader what the leases add to the balance sheet and the profit and loss account.
Does FRS 102 now match IFRS 16?
Closely, but not exactly. The 2026 FRS 102 model is based on IFRS 16 and produces similar outcomes, but it includes simplifications, such as allowing an obtainable borrowing rate and requiring fewer lease modifications to use a revised discount rate, so the detail differs.
When do the FRS 102 lease changes apply?
They apply to accounting periods beginning on or after 1 January 2026, with early adoption permitted if all the Periodic Review 2024 amendments are applied at the same time.
What is a right-of-use asset?
A right-of-use asset is the asset a lessee recognises for its right to use a leased item over the lease term. It is measured initially from the lease liability plus certain costs, and then depreciated over the lease term.
When did IFRS 16 come into effect?
IFRS 16 came into effect for accounting periods beginning on or after 1 January 2019, replacing the previous standard, IAS 17. For UK entities that report under FRS 102 rather than full IFRS, the equivalent on-balance-sheet treatment applies for periods beginning on or after 1 January 2026.
What is the difference between IFRS 16 and IAS 17?
IAS 17 let lessees keep operating leases off the balance sheet, showing only the rent. IFRS 16 replaced it in 2019 with a single model that brings almost every lease on, as a right-of-use asset and a lease liability. The main effect is higher reported assets, debt, and EBITDA.
Which leases are exempt from IFRS 16?
IFRS 16 gives a lessee two exemptions: short-term leases of twelve months or less with no purchase option, and leases of low-value assets such as small items of office equipment. Leases that qualify can stay off the balance sheet and be expensed on a straight-line basis.
John de Robeck leads new business and partnerships at FMIS, working with organisations to understand asset and equipment maintenance requirements, software fit and related compliance considerations.
https://www.fmis.co.uk/wp-content/uploads/2026/09/ifrs-16-vs-frs-102-lease-accounting-office-featured.webp
500
500
John de Robeck
https://www.fmis.co.uk/wp-content/uploads/2026/04/FMISNavyTeal-1-150x80-1.webp
John de Robeck2026-09-04 16:15:472026-09-29 16:33:37IFRS 16 vs FRS 102: Which Lease Accounting Standard Applies to You?
https://www.fmis.co.uk/wp-content/uploads/2026/09/asc-842-lease-accounting-us-gaap-featured-image.webp
450
500
John de Robeck
https://www.fmis.co.uk/wp-content/uploads/2026/04/FMISNavyTeal-1-150x80-1.webp
John de Robeck2026-09-04 16:07:062026-09-29 16:34:53ASC 842 Lease Accounting: A Guide for US GAAP Reporters
https://www.fmis.co.uk/wp-content/uploads/2026/09/accounting-office-banner-calculating-lease-liability.webp
450
500
John de Robeck
https://www.fmis.co.uk/wp-content/uploads/2026/04/FMISNavyTeal-1-150x80-1.webp
John de Robeck2026-09-03 09:33:012026-09-29 16:30:34How to Calculate a Right-of-Use Asset and Lease Liability
https://www.fmis.co.uk/wp-content/uploads/2026/09/diverse-accountants-ifrs16-lease-management.webp
450
500
John de Robeck
https://www.fmis.co.uk/wp-content/uploads/2026/04/FMISNavyTeal-1-150x80-1.webp
John de Robeck2026-09-03 09:27:172026-09-29 16:32:21IFRS 16 Journal Entries: A Step-by-Step Worked Example
