Financial Reporting Standard – FRS 116 Leases

This standard is released on 30 June 2016 and is effective for annual periods beginning on or after 1 January 2019.
This standard removes the concept of operating and finances lease for lessee and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value.

A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments.

The right-of-use assets is accounted similar to other non-financial assets. It is accounted at cost and subsequently measured at cost less accumulated depreciation and any accumulated impairment losses and adjusted for any re-measurement.

Lease liabilities is measured similarly to other financial liabilities. It is initially accounted on a present value basis of its non-cancellable lease payments (including inflation-linked payments), and also includes payments to be made in optional periods if the lessee is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease.

Depreciation is recognised for the right-of-use asset and interest expenses recognised on the lease liability.
FRS 7 Statement of Cash Flows also requires cash repayments of the lease liability to be classified into a principal portion and an interest portion.

If the lease is revised yearly e.g. like JTC land leases, the right-of-use assets and lease liabilities are re-measured yearly.

As this is a new accounting standard, an entity has to adopt this standard retrospectively in accordance with FRS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

FRS 1 requires an entity to present a statement of financial position as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies an accounting policy retrospectively or makes a retrospective restatement, as defined in FRS 8 Accounting Policies, Changes in Accounting Estimates and Errors, or when the entity reclassifies items in the financial statements.

It means that entities upon first year of adoption has to present balance sheets for at least 3 periods and the balance sheets for the prior periods has to be accounted using the new standard and can’t just copy wholesale from prior period financial statements.

Hence its best for entities to start preparing the information required upon initial adoption now for the comparative figures.

If you need assistance in the preparation of the information, do contact us for a quote.