FRS 102 Transition

A single transition approach

Entities applying the 2026 FRS 102 amendments for the first time use the modified retrospective approach. Unlike IFRS 16, which offered a choice, FRS 102 does not permit full retrospective transition, so comparatives are not restated.

The modified retrospective approach is required because it is simpler and needs less historical data. It is similar to one of the modified approaches that was permitted on transition to IFRS 16.

Modified retrospective: practical expedients

Under the modified retrospective approach, a number of practical expedients are available to reduce the transition workload. For each lease previously classified as an operating lease, the opening lease liability is not an expedient: paragraph 1.51(a) requires it to be measured at the present value of the remaining lease payments, discounted at the incremental or obtainable borrowing rate at the date of initial application, rather than reconstructed from the original commencement date. Separately, a lessee is not required to make any transition adjustment for leases of low-value assets that it will account for under paragraph 20.6 (paragraph 1.52(a)). The expedients in paragraph 1.53 can be applied lease by lease:

• Use of hindsight: when determining the lease term for contracts that contain options, entities may use hindsight, i.e. they can assess the option in light of facts and circumstances that exist at the transition date rather than at the original commencement date.
• Single discount rate: entities may apply a single discount rate to a portfolio of leases with reasonably similar characteristics (for example a similar remaining lease term, a similar class of underlying asset and a similar economic environment), rather than determining a rate for each individual lease.
• Leases ending within 12 months: a lessee may choose not to apply the opening lease liability and right-of-use asset requirements to leases whose term ends within 12 months of the date of initial application. These are accounted for in the same way as short-term leases (paragraph 1.53(c)), and their cost is included in the short-term lease expense disclosure.

Opening balance calculation

Under the modified retrospective approach, the steps to calculate opening balances at the transition date are:

1. Identify all in-scope leases as at the transition date
2. For each lease, determine the remaining lease payments including any escalation
3. Apply the incremental or obtainable borrowing rate at the transition date to discount those payments to present value; this gives the opening lease liability
4. The ROU asset is typically set equal to the opening lease liability (adjusted for any prepayments or accruals relating to the lease)
5. Deferred tax is recognised on any temporary difference between the carrying amounts of the ROU asset and lease liability where applicable
6. The net difference is recognised as an adjustment to opening retained earnings

Disclosures at transition

FRS 102 requires the financial statements for the first period of adoption to include:

• The amount of the current-period adjustment to profit or loss from applying the revised Section 20, to the extent practicable, or an explanation if that is impracticable (paragraph 1.44)
• That an expedient has been used where the paragraph requires it to be disclosed, namely not reassessing whether a contract is a lease (paragraph 1.45) and using IFRS 16 carrying amounts (paragraph 1.48)
• A description of the transitional provisions applied (paragraph 1.50)

To support the opening balance, AuditLease also provides a reconciliation of operating lease commitments previously disclosed to the opening lease liability, and the carrying amounts of ROU assets and lease liabilities at transition. These are supporting information commonly given to auditors, not additional FRS 102 disclosure requirements.