FRS 102 right-of-use assets: a plain-English guide

A right-of-use (ROU) asset under FRS 102 is the amount a lessee recognises on its balance sheet representing the right to use a leased asset for the duration of the lease term. Following amendments to FRS 102 Section 20 effective for accounting periods beginning on or after 1 January 2026, most UK and Republic of Ireland lessees are now required to bring operating leases onto the balance sheet for the first time, recognising both an ROU asset and a corresponding lease liability.

If your organisation reports under FRS 102 and leases property, vehicles, or equipment, the way those leases appear in your financial statements has fundamentally changed. This guide explains what the ROU asset is under FRS 102, how it differs from the treatment under IFRS 16, and what finance teams need to get right from day one. If you report under IFRS 16 or AASB 16 rather than UK GAAP, our companion article What is a right-of-use asset? A plain-English IFRS 16 guide covers the same concept under the international standard.

Updated April 2026.

Why FRS 102 changed lease accounting

The old FRS 102 model required lessees to classify every lease as either a finance lease or an operating lease. Finance leases appeared on the balance sheet; operating leases did not. For most organisations, the majority of their leases (office space, vehicle fleets, IT equipment) were classified as operating leases and simply expensed as a rental charge each period. The true scale of lease obligations was invisible on the face of the balance sheet.

The Financial Reporting Council (FRC) addressed this through its 2024 Periodic Review, replacing Section 20 of FRS 102 with a model based on IFRS 16. The core principle is the same: if your organisation controls the right to use an asset for a period of time, that right has economic substance and belongs on your balance sheet. The ROU asset is the asset-side recognition of that right. The lease liability is its corresponding obligation.

The changes affect all entities reporting under FRS 102, including private companies, charities, housing associations, and small entities reporting under Section 1A. Industries with the most significant impact include retail (multiple property leases), transport and logistics (large vehicle fleets), healthcare, and any organisation with substantial office portfolios.

What gets included in the initial ROU asset value

Under FRS 102 Section 20, the ROU asset is initially measured at an amount equal to the lease liability, then adjusted for certain additional items. This is expressed slightly differently from IFRS 16 (which builds up the ROU asset from the present value of lease payments), but the result is substantially the same.

The initial ROU asset equals the lease liability at commencement, adjusted by:

• Plus: lease payments made at or before commencement. Any rent paid in advance before the lease start date, net of any lease incentives already received from the lessor.
• Plus: initial direct costs. Incremental costs that would not have been incurred but for obtaining the lease; legal fees for negotiating lease terms and broker commissions are the most common examples.
• Plus: estimated restoration and dismantling costs. Where the lease obliges the lessee to restore the asset to its original condition at the end of the term, the provision recognised under FRS 102 Section 21 is added to the ROU asset at commencement.
• Less: lease incentives received. Any cash incentives or rent-free periods provided by the lessor reduce the initial ROU asset value.

The lease liability itself is measured at the present value of future lease payments not yet paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate is not readily determinable, the incremental borrowing rate or (uniquely under FRS 102) the obtainable borrowing rate, which is covered in the next section.

Getting the initial figures right matters enormously. Every subsequent calculation flows from this starting point: depreciation, interest, and remeasurement. Errors at commencement compound throughout the lease life. For a detailed walkthrough of the underlying calculation mechanics, the IFRS 16 calculations guide covers the same approach; the mathematics are identical under FRS 102.

How the ROU asset is measured after initial recognition

Once recognised, the ROU asset is carried at cost less accumulated depreciation and any accumulated impairment losses. This is the same cost model that applies under IFRS 16 for most organisations.

The ROU asset is depreciated on a straight-line basis over the shorter of the lease term or the underlying asset's useful life. If the lessee is reasonably certain to exercise a purchase option at the end of the lease, the depreciation period extends to the full useful life of the underlying asset instead.

Determining the correct lease term requires judgement. Under FRS 102, as under IFRS 16, the lease term is the non-cancellable period plus any optional extension periods the lessee is reasonably certain to take, and minus any termination options the lessee is reasonably certain to exercise. This assessment is made at commencement and must be revisited when a significant event or change in circumstances occurs.

Impairment testing applies under FRS 102 Section 27. If there are indicators of impairment (for example, where the leased property is no longer in use or where a business is contracting), you must assess whether the carrying amount of the ROU asset exceeds its recoverable amount and write it down accordingly.

Key differences between FRS 102 and IFRS 16

FRS 102 Section 20 is closely modelled on IFRS 16, and the economics are the same. There are, however, several deliberate simplifications that finance teams need to be aware of, particularly those transitioning from IFRS 16 groups or preparing a subsidiary's standalone UK GAAP accounts alongside a group that reports under IFRS. For the full IFRS 16 treatment of ROU assets, see our companion guide: What is a right-of-use asset? A plain-English IFRS 16 guide.

1. The obtainable borrowing rate (OBR). Under IFRS 16, if the rate implicit in the lease cannot be readily determined, the lessee must use its incremental borrowing rate (IBR): an entity-level assessment that can be complex to calculate, particularly for smaller organisations. FRS 102 introduces a third option: the obtainable borrowing rate. The OBR is defined as the rate a lessee would pay to borrow, over a similar term, an amount equal to the total undiscounted value of lease payments. Because it is based on the lease payments themselves (figures already to hand) rather than a broader entity creditworthiness assessment, it is typically easier to obtain and document. In practice the OBR and IBR will often be close, but for organisations with limited borrowing history or complexity, the OBR is a welcome simplification.

2. Clearer guidance on low-value assets. Both standards exempt low-value assets from on-balance-sheet recognition, allowing those lease payments to be expensed directly. IFRS 16 provides only an indicative threshold of approximately USD $5,000 when new, leaving significant room for judgement. FRS 102 takes a more explicit approach: it provides lists rather than a monetary threshold. Assets that may qualify as low-value include office furniture, small printers, laptops, tablets, and telephones. Assets that cannot qualify include vehicles, land and buildings, construction equipment, farming equipment, boats, and ships. This clearer categorisation reduces the risk of inconsistent application and makes auditor challenge less likely.

3. Discount rate on lease modifications. Under IFRS 16, any lease modification that is not treated as a separate new lease triggers a remeasurement of the lease liability using a revised discount rate at the modification date. FRS 102 allows more flexibility: in certain circumstances, the lessee can retain the original discount rate rather than updating it at each modification. For organisations with frequent modifications in large property portfolios, this is a useful administrative simplification.

4. Portfolio discount rates. FRS 102 explicitly permits a lessee to apply a single discount rate to a portfolio of leases with reasonably similar characteristics, for example vehicle leases of similar term in the same economic environment. IFRS 16 also allows this in practice, but FRS 102 makes it more explicit, giving finance teams clearer authority to simplify large fleet calculations.

5. Transition method. IFRS 16 offered organisations a choice between full retrospective and modified retrospective transition. FRS 102 requires the modified retrospective approach only: no restatement of comparative periods. The cumulative effect of transition is recognised as an adjustment to opening retained earnings. This is simpler to apply, but it means prior-year comparatives will not reflect the new treatment, which can make year-on-year analysis harder to communicate to stakeholders.

How lease modifications affect your ROU asset under FRS 102

A lease modification is any change to the scope or consideration of a lease that was not part of the original terms. Extending the lease term, reducing the amount of space leased, and renegotiating rental amounts all constitute modifications. When a modification occurs, it triggers a remeasurement of the lease liability, and that adjustment flows through to the ROU asset.

When the lease liability increases (for example, after an extension), the ROU asset increases by the same amount. When the liability decreases (for example, after a partial termination), the ROU asset decreases. If the carrying amount of the ROU asset falls to zero but a further reduction is still needed, the excess is recognised immediately in profit or loss.

Some modifications are treated as a separate new lease: where the modification grants an additional right of use not included in the original arrangement and the consideration increases commensurately with the standalone price of that right. In those cases, a new ROU asset and a new lease liability are recognised at the modification date.

Modifications are one of the most operationally intensive aspects of FRS 102 lease accounting. Organisations with large property or fleet portfolios frequently process dozens of modifications each quarter: rent reviews, extensions, surrenders, and CPI adjustments. Without a system designed to track and process these, maintaining accuracy quickly becomes unsustainable.

Balance sheet and profit and loss impact

Bringing leases onto the balance sheet changes more than just presentation. It reshapes the numbers that matter most to investors, lenders, and auditors.

On the balance sheet, total assets increase (the new ROU assets) and total liabilities increase (the new lease liabilities). For organisations that previously held large off-balance-sheet operating lease portfolios, these changes can be substantial.

In the profit and loss account, the single rental charge that appeared as an operating expense under old FRS 102 is replaced by two items:

• Depreciation on the ROU asset, which flows through operating expenses.
• Interest on the lease liability, which flows through finance costs.

The total charge over the life of the lease is broadly similar to the old rental expense, but the pattern changes: the combined depreciation and interest charge is higher in the early years of a lease (because interest is front-loaded) and lower toward the end. This affects EBITDA, which improves under the new treatment because the lease cost moves below the EBITDA line.

Key financial ratios are also affected: gearing increases (higher liabilities), interest cover decreases (higher finance costs), and asset turnover ratios shift. Lenders and treasury teams should review covenant definitions ahead of transition to understand whether bank covenants are calculated on a pre or post FRS 102 basis.

A practical example: recognising an office lease

Here is a simplified example to ground the concepts above. The scenario mirrors the one in our IFRS 16 ROU asset guide so you can compare the two treatments side by side.

Scenario: A UK company enters a 5-year office lease with monthly payments of GBP 10,000. The obtainable borrowing rate (OBR) is 5% per annum. The company incurs GBP 5,000 in initial direct costs (legal fees). There are no lease incentives and no restoration obligation.

Step 1: Calculate the lease liability. Using a monthly discount rate derived from the 5% OBR*, the present value of 60 monthly payments of GBP 10,000 is GBP 533,503. This is the initial lease liability recognised on the balance sheet.

Step 2: Calculate the initial ROU asset. Under FRS 102, the ROU asset starts at the lease liability and is then adjusted upward for initial direct costs:

• Lease liability at commencement: GBP 533,503
• Initial direct costs: GBP 5,000
• Initial ROU asset: GBP 538,503

Step 3: Calculate Year 1 depreciation. The ROU asset is depreciated on a straight-line basis over 5 years (60 months). Annual depreciation = GBP 538,503 / 5 = GBP 107,701 per year (approximately GBP 8,975 per month).

Step 4: End of Year 1 balances. At the end of Year 1, the ROU asset carrying value is approximately GBP 538,503 minus GBP 107,701 = GBP 430,802. Meanwhile, the lease liability has reduced by actual payments made less interest accrued, arriving at a different balance of GBP 436,953. Both figures are correct; they carry different profiles because the lease liability unwinds at the effective interest rate while the ROU asset depreciates on a straight-line basis.

This divergence is expected and not an error. Finance teams often flag it as a reconciliation concern during their first FRS 102 period-end. The ROU asset and the lease liability start close together at commencement but move apart from that point onward.

*Note that the interest rate can be calculated as nominal or effective interest, which will produce slightly different present values. The figures above use an effective interest rate approach.

Common implementation questions

These are the questions finance teams ask most frequently when working through FRS 102 Section 20 for the first time.

Do short-term and low-value leases still need to be recognised? No. FRS 102 retains both exemptions. Short-term leases (a lease term of 12 months or less, including any renewal options) and low-value asset leases can be expensed directly to the profit and loss account rather than recognised on the balance sheet. See the lists under difference 2 above for guidance on what qualifies as low-value.

Does the lease term include extension options? Yes, if the lessee is reasonably certain to exercise them. A 3-year lease with a 2-year extension that the organisation expects to take is accounted for as a 5-year lease. Failing to include extension options is one of the most common errors identified by auditors in the first year of FRS 102 adoption. The assessment must be documented at commencement and revisited when circumstances change.

What discount rate should we use? Start with the rate implicit in the lease. If that is not readily determinable (which is most of the time in practice), use the incremental borrowing rate or the obtainable borrowing rate. For a portfolio of similar leases such as a vehicle fleet, FRS 102 explicitly permits a single portfolio rate, which significantly simplifies the calculation burden for organisations with large numbers of leases.

How do we handle the transition for leases that were previously off balance sheet? FRS 102 requires the modified retrospective approach. You do not restate comparative periods. At the transition date, you recognise the ROU asset and lease liability for each in-scope operating lease. The ROU asset is typically set equal to the lease liability at transition (a practical simplification that FRS 102 permits), with the opening adjustment going to retained earnings. For most organisations, this means transition work is concentrated in a single period rather than spread across two reporting years.

What should we watch for in the first audit under the new standard? Auditors will focus on five areas: completeness of the lease register (have all leases been identified?), accuracy of the discount rate selected and documented, correct determination of the lease term (extension options), proper accounting for modifications after the transition date, and disclosure adequacy in the notes. Having a system that maintains a full audit trail for every lease and every modification makes auditor queries significantly easier to resolve.

How LOIS supports FRS 102 compliance

LOIS is a lease accounting and management platform built and supported by CA-qualified lease accounting experts. The platform handles FRS 102 Section 20 compliance alongside IFRS 16, AASB 16, and FASB ASC 842, making it suitable for organisations that report under multiple standards or that operate subsidiaries in different jurisdictions.

For finance teams navigating FRS 102 for the first time, LOIS automates the initial measurement calculations, tracks lease terms and extension options, processes modifications with a full audit trail, and generates the disclosures and journals needed for period-end close. For organisations that prefer a fully managed approach, the LOIS managed service combines the platform with expert review and delivery of audit-ready outputs each month.

If you are preparing for FRS 102 transition or reviewing your current approach, explore the LOIS platform or speak with one of our lease accounting specialists.