BLM17050 - Lease accounting under IFRS 16 and FRS 102 (2024 amendments): transition
Source: gov.uk (2025-09-03)


This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm50000) chapter.

Transition to IFRS 16

In the first period in which a lessee adopts IFRS 16, a lessee has two options on how to apply the standard to its leases.

If a full retrospective approach is used, the cumulative effect of initially applying IFRS 16 is recognised as an adjustment to equity at the date of initial application, and comparative figures for the end of the previous period are also restated to reflect the adoption of IFRS 16. This approach effectively restates the financial statements as if IFRS 16 had always been applied. (IFRS 16.C5 (a)).

If a modified retrospective approach is used the cumulative effect of initially applying IFRS 16 is recognised as an adjustment to equity at the date of initial application. Comparative figures for the previous period are not restated but continue to reflect the lessee’s accounting policies under the previous standard used. (IFRS 16.C5(b)).

Under both approaches, as a practical expedient, an entity is not required to reassess whether a contract is, or contains, a lease at the date of initial application. Instead, the entity is permitted to apply IFRS 16 to contracts that were previously identified as leases under IAS 17 and IFRIC 4. (IFRS 16.C3)

When applying the modified retrospective approach, there are several practical expedients (IFRS 16.C10) available to lessees who previously accounted for operating leases under IAS 17 when considering:

discount rates,

initial direct costs,

use of hindsight in determining the lease term at the date of initial application,

whether right of use leases are onerous at the date of initial application, and

short-term leases.

IFRS 16 also sets out mandatory transition requirements in respect of sale and leaseback transactions (IFRS 16.C16-C18) and leases assumed by an entity as a result of a past business combination (IFRS 16.C19).

Transition to FRS 102 (2024 amendments) Section 20

In the first period in which a lessee adopts FRS 102 (2024 amendments) Section 20 entities should apply a modified retrospective approach. That is, the lessee shall not restate comparative information but should recognise the cumulative effect of applying the 2024 amendments to section 20 as an adjustment to the opening balance of retained earnings at the date of initial application. (FRS 102 (2024 Amendments 1.47).

The full retrospective approach available to IFRS reporters cannot be used. However, as a practical expedient, if an entity is included in consolidated accounts which were prepared using IFRS 16 it can choose to use the carrying amounts calculated for the purposes of those consolidated accounts. (FRS 102 (2024 amendments) 1.48). In these cases, a transition adjustment to opening reserves is more likely to arise.

As a practical expedient, an entity is not required to reassess whether a contract is, or contains, a lease at the date of initial application. Instead, the entity is permitted to only apply FRS 102 (2024 amendments) Section 20 to contracts that were previously identified as leases (FRS 102 (2024 amendments) 1.45).

FRS 102 (2024 amendments) also sets out mandatory transition requirements in respect of sale and leaseback transactions (1.58 to 1.60).

On transition to FRS 102 (2024 amendments) Section 20 there are a number of practical expedients (FRS 102 (2024 amendments) 1.53) available for lessees to leases previously classified as operating leases:

discount rates,

use of hindsight in determining the lease term at the date of initial application,

whether right-of-use leases are onerous at the date of initial application, and

short-term leases.

If you believe that there are issues with how an entity has accounted for the transition to either IFRS 16 of FRS 102 (2024 amendment) Section 20 you should seek advice from an HMRC Advisory Accountant.