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| Old GAAP | FRS 102 | Further Comment On Differences |
| Leases | Leases (S.20) | |
| A lease is a contract between a lessor and a lessee for the hire of a specific asset. The lessor retains ownership of the asset but conveys the right to use the asset to the lessee for an agreed period of time in return for the payment of specified rentals. | A lease is an agreement whereby the lessor conveys to the lessee, in return for a payment or a series of payments, the right to use an asset for an agreed period of time. | No differences to note. |
| Old GAAP did not specifically deal with biological asset however any such assets were accounted for in line with SSAP 21. | Section 20 specifically scopes out the measurement of biological assets held by lessees under finance leases and biological assets provided by lessors under operating leases. These are accounted for under Section 34. | Where an entity has previously accounted for leases for biological assets (e.g. cattle, calves, sheep, lambs), then they will now have to account for these under the Biological standard, i.e. Section 34. |
| Not specifically dealt with however FRS 5 required the same approach as detailed in Section 20. | Arrangements that do not take the legal form of a lease – but that convey rights to use assets in return for payments are, in substance, leases and are accounted for as such. | No differences expected where the entity previously adopted FRS 5 under old GAAP. |
| Leases are classified into finance leases and operating leases. The distinction between a finance lease and an operating lease is usually evident from the terms of the contract between the lessor and the lessee. | A lease is classified at inception as a finance lease if it transfers to the lessee substantially all the risks and rewards incidental to ownership. All other leases are treated as operating leases. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. Such transactions were not dealt with under SSAP 21 however FRS 5 was followed which gave the same conclusion. | No differences expected in this area as old GAAP had similar concepts. |
| A presumption that transfer of risk and rewards occurred if the present value of the minimum lease payments discounted at the interest rate implicit in the lease, amounts to 90% or more of the leased asset. | No 90% rule provided only that it is a finance lease if it transfers substantially all of the fair value of the asset. | This requires further judgement under FRS 102; however it is likely the same conclusion will be reached as substantially all the risks and rewards of ownership could be transferred where the lease payments represents 90% or more of the fair value of the asset. |
| All incentives for the agreement of a new or renewed operating lease are recognised as an integral part of the net payment agreed for the use of the leased asset, irrespective of the incentive’s nature or form or the timing of payments. Lease incentives were released to the P&L up to the first break clause/market rent review. | The aggregate benefit of incentives is recognised as a reduction of rental expense over the lease term on a straight-line basis, unless another systematic basis is representative of the time pattern of the benefit of the leased asset. Lease incentives are therefore recognised over the life of the lease. This will result in the credit being released to the P&L over a longer time period. | This difference will result in lease incentives being credited to the profit and loss over a longer period of time under FRS 102. Assuming the entity takes the exemption in Section 35.10(P) to not retrospectively adjust lease incentive accruals prior to the date of transition (the accruals will continue to be released up to the first market rent review/break clause) the only adjustment required will be for any lease incentive received since the date of transition. In this case there will be an impact on the profit and loss for the reduction in the lease incentive credit and the related deferred tax to reflect the fact that tax may have been charged on the additional credit in the comparative year of the first set of FRS 102 financial statements which will be reimbursed in the tax computation over its life. If the exception is not availed of, then a detailed exercise will need to be performed for each lease incentive similar to the example attached but will obviously be looking at incentives received pre transition. See example attached which provides the journals required on transition (Example 85 – Lease Incentives Since Date Of Transition). |
| Not applicable. | Section 35.10(P) – a first time adopter is not required to retrospectively adjust the deferred element for lease incentives in relation to lease incentive received before the date of transition. Instead the entity can continue to release the incentives received prior to this date up to the break clause/first market rent review (i.e. continue to use old GAAP rules). Note however where lease incentives have been received in the comparative year of the first set of FRS 102 financial statements, the lease incentives will have to be recalculated such that it is released over the life of the lease. Deferred tax will need to be recognised on the lease incentive adjustment for the comparative year as this will be tax deductible in future tax computations. | See example attached which illustrates the aforementioned points (reference Example 85 – Lease Incentives Since Date Of Transition). |
| Not applicable. | Section 35.10(K)also allows a first time adopter to elect to assess whether an arrangement containing a lease exists at the date of transition as opposed to looking at the facts when the arrangement was entered into. | Where such an arrangement was not previously accounted for as a finance lease, an assessment at the date of transition should be made as to whether a finance lease exists. As stated in most cases such transactions would usually have been accounted for as a finance lease in any event. |
| Initial recognition of finance leases is at the present value of the minimum lease payments, derived by discounting them at the interest rate implicit in the lease. | Same as old GAAP except that it should be accounted for at the lower of the fair value of the asset or the PV of the lease payments. | While there is a difference here, in reality the two definitions should not result in any material differences in the majority of cases. Entities should review finance leases to assess whether this could result in material differences. |
| Payments under operating leases are recognised as an expense on a straight line basis over the lease term, unless another systematic basis is more representative of the time pattern of the user’s benefit. | Similar to old GAAP. The rental payments are recorded as an expense on a straight-line basis over the lease term, unless another systematic basis is representative of the time pattern of the user’s benefit. | No differences. |
| Disclosure required of the following years commitment under non-cancellable operating leases identifying when the contractual terms expire within the categories across. | Disclosure required of the total minimum lease payments under non-cancellable operating leases over their lives analysed into amounts payable within one year, between two and five years and > 5 years. | This is a disclosure difference. In effect under old GAAP, only the prior years’ commitment was disclosed however under FRS 102, the total commitments under finance leases for the remaining life of the operating leases are disclosed. For example, take an operating lease with an annual cost of €50,000 with 3 years to run from the year end date, under FRS 102 an entity would classify €50,000 less than one year and €100,000 in the column between two and five years. Under old GAAP, only the €50,000 for the following year would have been shown in the 2-5 year column. |
| No requirement to include direct costs on initial measurement of finance leases. | Direct costs are included on initial measurement of finance leases where considered material. | Where in the rare case, direct (e.g. costs incurred in negotiating or arranging a lease) costs are considered material and were not previously included, then retrospective adjustment will be required on transition. |
| FRS 26 adopters required to identify embedded derivatives in a lease. | No requirement to identify or account for embedded derivatives in a lease. | For non-FRS 26 adopters under old GAAP, no differences arise. For FRS 26 adopters, a transition adjustment may be required to derecognise the embedded derivative. This adjustment is not likely to be applicable to many entities. |
| The inception is the earlier of the time the asset is brought into use and the date from which the rentals first accrue. | Under Section 20, the inception of the lease is the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provisions of the lease. | It will be very rare for differences to arise on transition unless there is specialist equipment being leased which is being constructed. |
| No detailed guidance so practices differ from entity to entity. | Where lease payments increase annually by fixed instalments expected to compensate for expected annual general inflation over the lease period, the fixed minimum increment that reflects general inflation should be recognised as incurred. If these fixed amounts are not linked to a general inflation rate and/or have a capped rate then the total operating lease payments should be expensed on a straight line based over the life of the lease. | Where under old GAAP, lease agreements included fixed increases for expected annual inflation over the lease period, entities should review these leases to assess whether these have been recognised as incurred (and should not be released over the term). Where these have not been expensed as incurred (or if they were and should not have been) a review will be required to assess whether this results in a material difference. For most entities it is likely that this will not be material. It will only be applicable where the leases are still in existence. See attached an example of how such a lease should be accounted for under Section 20 (Example 86 – Operating Lease With Inflationary Increases). Where it is material, the journals required where the amounts should have been expensed as incurred are: Dr/Cr Asset/liability for previous lease payments deferred/previous lease payments accrued Dr/Cr Profit and loss reserves restate referred tax Dr/Cr Deferred tax on balance sheet Being journal required to restate the opening balance sheet so that no asset/liability exists for deferred/accrued payments which were previously held to write off the increments over the life of the lease and the associated deferred tax. The journals required in the comparative year on using the above journals are posted to profit and loss reserves would be to: Dr/Cr Asset/liability for previous lease payments deferred/previous lease payments accrued Dr/Cr Operating lease costs Dr/Cr Deferred tax on balance sheet Dr/Cr Deferred tax in profit and loss Being journal to reverse previous release of deferred/accrued amounts under old GAAP and related deferred tax. The deferred tax balance recognised at this end of year should be reversed over a 5 year period in line with the tax transition rules. A similar journal shall be required in the 2015 year excluding the deferred tax effect of the movement as the movement will be taxed in that period (hence no taxing differences). |
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