What counts as a lease under FRS 102 Section 20?

Under FRS 102 Section 20, a contract contains a lease when it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. That control test has three parts: there must be an identified asset, the customer must have the right to obtain substantially all of the economic benefits from using it, and the customer must have the right to direct how and for what purpose the asset is used. A contract that satisfies all three parts is a lease, regardless of what the contract is called or which department signed it.

For most UK and Irish finance teams, the obvious leases are already captured: property, vehicles, photocopiers. The harder work in 2026 is the contract review, working through IT managed service agreements, facilities management arrangements, outsourced logistics contracts, and co-location data centre deals to determine whether an identified asset is buried inside a broader service. This guide provides the decision framework to do that work systematically. For a full overview of the FRS 102 changes and what they mean for your balance sheet, see FRS 102: what UK businesses need to know about the new standard. For the transition process itself, the step-by-step FRS 102 Section 20 transition checklist covers the full five-phase process.

Updated May 2026.

The three-part definition

FRS 102 Section 20 defines a lease using the same conceptual framework as IFRS 16. Three conditions must all be satisfied. If any one fails, the contract is a service arrangement, not a lease. If all three are met, the contract contains a lease that requires on-balance-sheet recognition unless a short-term or low-value exemption applies.

• Identified asset: the asset must be specified, either explicitly (named in the contract) or implicitly (the nature of the arrangement makes it clear which asset is involved). An asset is not identified if the supplier has a substantive right to substitute it with a different asset throughout the period of use and would benefit economically from exercising that right.
• Right to substantially all economic benefits: the customer must have the exclusive right to derive substantially all of the economic benefits from the asset during the contract period. This is typically satisfied when the customer has exclusive use of the asset throughout the contractual term.
• Right to direct use: the customer must have the right to direct how and for what purpose the asset is used during the period of use. This is where the analysis often gets nuanced, particularly for contracts that look like services but grant the customer significant operational control.

These three conditions are cumulative. A managed IT service contract that names specific server hardware (identified asset), gives your organisation exclusive capacity from those servers (substantially all economic benefits), and lets your team determine how those servers are used (right to direct) is a lease, not a service, regardless of what the supplier calls it.

What counts as an identified asset?

Under FRS 102, an asset is identified when it is either explicitly named in the contract or when only one specific physical asset could be involved given the nature of the arrangement. A particular warehouse at a specific address qualifies, as does a named vehicle registration number or a specific server assigned to your organisation in a data centre rack.

An asset is not identified when the supplier retains a genuine and practical ability to substitute it. The substitution right must be substantive: the supplier must be able to substitute an alternative asset in practice (not just theoretically), and must benefit economically from doing so. A cloud computing contract where your data runs across a shared pool of servers the supplier can reconfigure at will, generating cost savings for the supplier in the process, typically does not contain an identified asset. The substitution right is genuine and economically motivated.

By contrast, a co-location arrangement where your organisation owns the hardware and the data centre contract covers only the physical space, power, and cooling is a different question: the physical space (the cage or the rack) may itself be an identified asset under the FRS 102 definition, even if the servers inside it are yours.

How to work through a contract: the decision tree

Apply this decision sequence to every contract where an identified physical asset might be involved. Work through the questions in order. Stop as soon as you reach a "not a lease" outcome.

Embedded leases: contracts that aren't called leases

An embedded lease is a lease that sits inside a contract structured and titled as a service agreement. The FRS 102 definition does not care about the contract's title: what matters is whether, in substance, the arrangement conveys control of an identified physical asset. Finance teams often encounter embedded leases for the first time when auditors asked for the contract list and found items that finance had not previously reviewed as potential leases.

Four contract types produce embedded leases most frequently:

• IT managed services with dedicated hardware: a contract for server or networking infrastructure where specific named equipment is assigned exclusively to your organisation for the contract period. If your team controls how that hardware is used, the hardware component is a lease.
• Facilities management with specific equipment: a facilities management company assigns a specific industrial cleaning machine to a production site for three years, under contract terms that give the site manager authority over how and when that machine operates. The cleaning service is a service component; the machine is a lease component.
• Outsourced logistics with identified vehicles: a transport contract where specific named vehicles (identified by registration or fleet number) are exclusively assigned to your routes and your team determines scheduling and routing. The vehicle capacity is a lease.
• Co-location data centre arrangements: a contract for a specific cage, cabinet, or rack in a data centre. The physical space is an identified asset. If you control access and use of that space, the arrangement contains a lease for the physical location, even if the servers inside are separately owned.

The lease vs. service distinction

Consider a finance controller reviewing a three-year outsourced facilities agreement. The critical question is not what the contract is called, but whether the supplier can swap the specific equipment for different equipment without the controller's agreement, and whether that substitution would save the supplier money. If the answer to both is yes, the arrangement is a service. If the supplier is locked to a specific asset on-site that the organisation controls, it is a lease.

A cloud computing contract where your data runs across a shared pool of servers the supplier can reconfigure at will, generating cost savings for the supplier in the process, is a service. The substitution right is genuine and economically motivated. By contrast, a contract that gives your IT team root access to a named physical server in a third-party data centre, with no right for the provider to move your workloads without consent, contains a lease component for that server.

The practical test: ask the supplier whether they could reassign or replace the asset during the contract period, and whether doing so would reduce their costs or improve their operations. If the answer is yes to both, the substitution right is real and the contract is likely a service. If the asset is effectively locked to your site and your use, it is a lease.

What is not a lease under FRS 102?

FRS 102 Section 20 explicitly excludes certain contract types from the lease definition. These exclusions apply regardless of the contractual term or the value of the arrangement.

Why getting lease identification wrong matters

An asset that should be on the balance sheet but isn't produces an understated right-of-use asset, a missing lease liability, and an understated depreciation and interest charge in profit or loss. For organisations with multiple unidentified embedded leases, the aggregate misstatement can be material. Auditors reviewing the transition for the first time will ask for the full contract list, the assessment methodology, and the documented judgement for any contract assessed as not containing a lease.

Getting the identification right at transition matters more than at any other point: a missed lease found post-transition requires restatement, not just a prospective adjustment. The next step after confirming a contract is a lease is calculating the right-of-use asset and lease liability at commencement, which the FRS 102 right-of-use assets guide covers in detail.

Frequently asked questions about lease identification under FRS 102

How LOIS supports lease identification and data collection

Once every contract has been assessed and the leases confirmed, the next practical challenge is collecting the data needed for measurement: commencement dates, lease terms, payment schedules, incremental borrowing rates, and the elected practical expedients. For organisations working through this for the first time under FRS 102, the volume of data across property, equipment, and embedded contracts can be significant.

LOIS is a lease accounting and management platform built by CA-qualified lease accounting experts. The platform supports data collection through standardised upload templates that handle property, fleet, and embedded lease data in any standard format. Once loaded, LOIS automates the FRS 102 Section 20 calculations, maintains a full audit trail for every lease modification, and produces the disclosure outputs auditors require. For organisations transitioning from spreadsheets, LOIS also validates incoming data against the existing portfolio, flagging discrepancies before they reach the financial statements.

For the full transition process, including the five-phase approach to FRS 102 Section 20 adoption, see the FRS 102 Section 20 transition checklist. For a broader overview of what the revised standard means for UK businesses, see FRS 102: what UK businesses need to know about the new standard.