MAH, Chartered Accountants

Category: Accounting standards

  • FRS 102 Lease Accounting Changes 2026: Complete Guide for Lessees

    FRS 102 Section 20 Leases undergoes major updates from the 2024 Periodic Review, effective 1 January 2026, requiring UK and Irish entities to recognize most leases on the balance sheet as right-of-use (ROU) assets and lease liabilities, aligning with IFRS 16 principles. This shift ends the operating vs. finance lease split for lessees, increasing reported assets and liabilities while front-loading expenses via depreciation and interest essential knowledge for accountants, SMEs, and financial directors preparing financial statements. What does FRS 102 lease accounting mean for your business in 2026? Read on for step-by-step compliance.​

    What Are the Key FRS 102 Lease Accounting Changes for 2026?

    Revised Section 20 mandates on-balance-sheet treatment for lessees, capturing nearly all leases unlike prior rules that kept operating leases off-balance-sheet. Expect higher assets (ROU) and liabilities (future payments discounted), impacting ratios like gearing and EBITDA preparers must review contracts early to avoid surprises. Lessors retain the finance/operating distinction, but lessees face uniform recognition; applies to all FRS 102 users, including Section 1A small entities.​

    • Effective Date: Annual periods beginning on or after 1 January 2026; early adoption allowed with full Periodic Review changes.​
    • Transition: Retrospective with cumulative effect in opening equity; no restatement of comparatives.​
    • Tax Implications: HMRC may allow spreading of adjustment debits/credits over years.​

    Recognition Exemptions: Short-Term and Low-Value Leases

    Lessees can elect exemptions to skip balance sheet recognition for simplicity answer: yes, but only for specific cases, applied consistently by asset class.​

    Exemption TypeCriteriaAccounting TreatmentKey Notes
    Short-Term Leases≤12 months from commencement, no purchase option ​Straight-line expense (like old operating leases)Includes rent-free periods; reassess term for options ​
    Low-Value AssetsAbsolute low value (e.g., tablets, phones, small furniture; excludes property, cars) ​Straight-line expense, lease-by-leaseNo subleasing; asset must stand alone, not broken into parts ​

    Disclosures still apply to exempted leases; portfolio approach permitted for similar leases.​

    How to Identify a Lease Under FRS 102 (2026 Rules)

    A lease exists when a contract conveys the right to control an identified asset for a period in exchange for consideration control means directing use and capturing economic benefits. Common question: Is my service contract a lease? Check for explicit/implicit asset specification without supplier substitution rights.​

    • Identified Asset: Named (e.g., specific vehicle) or implicit (e.g., delivered rail stock); no substantive substitution (practical + economic benefit to supplier).​
    • Portions: Physically distinct (e.g., building floor) qualifies; capacity shares only if substantially all.​
    • Separate Components: Allocate by standalone prices (lease vs. maintenance); optional expedient combines by asset class.​
    • Intra-Group Tip: Enforceability matters-no contract, no lease.​

    Example: Leasing two lorries with services? Split CU32k total: CU11.2k each lorry, CU9.6k non-lease.​

    Determining Lease Term: Extensions, Breaks, and Rolling Leases

    Lease term = non-cancellable period + reasonably certain extensions – reasonably certain non-exercises of terminations. Factors: asset importance, fit-outs, past practice, economics.​

    • Reassessment Triggers: Lessee-controlled changes (e.g., new info on options).​
    • Rolling Leases: Assess enforceability/penalties for non-cancellability; may qualify as short-term.​
    • LTA 1954: Statutory renewals impact post-expiry occupation.​

    Example: 10-year lease + 5-year extension option? If fit-outs and history suggest certainty, term = 15 years.​

    Lease Liability Measurement: Step-by-Step Calculation

    Step 1: Identify payments fixed/in-substance fixed, index/rate variables (at commencement), residuals, certain purchases/penalties.​

    Step 2: Discount using implicit rate (if known), else incremental borrowing rate (funds for similar asset/term/security) or obtainable rate (undiscounted payments). Portfolio OK for similars.​

    Example (5-year CU10k p.a. arrears, 7% rate): PV = CU41,002 liability. Unwinds with interest (total expense = cash).​

    Remeasurements:

    • Term/purchase: Revised rate.​
    • Index change: Unchanged rate (when effective).​
    • Modifications: Separate if scope/consideration proportional; else revise ROU proportionately.​

    Right-of-Use Asset: Initial and Ongoing Measurement

    ROU = liability + prepayments – incentives + initial costs + dismantlings/grants, then depreciate (cost model standard; revaluation/investment property options). Adjust for liability remeasurements (min zero).​

    FAQ: Common FRS 102 2026 Lease Questions

    Does FRS 102 2026 affect tax? Balance sheet changes may trigger spreading relief.​
    Impact on covenants? Higher liabilities strain ratios—model now.​
    Software needed? Yes for PV calcs (PV/NPV/XNPV functions).​
    Small entities? Full compliance under 1A.​

    Next Steps for FRS 102 Compliance in 2026

    1. Inventory contracts (including non-legal leases).​
    2. Collect data: terms, rates, options.​
    3. Test exemptions and portfolios.​
    4. Update policies/systems; train staff.​
    5. Engage advisors for transitions/tax.​

    Stay compliant FRS 102 changes reshape reporting.
    For tailored advice, consult MAH Chartered Accountants.

  • Understanding National Insurance Contributions in the UK: Changes and Implications

    Understanding National Insurance Contributions

    Understanding National Insurance Contributions

    National Insurance Contributions (NICs) play a vital role in the UK’s social security system, funding essential state benefits such as retirement pensions, unemployment benefits, and maternity allowances. Recently, policymakers have introduced changes to employer NICs, which will impact businesses and employees. To understand these changes, it is essential to first grasp what NICs are and how they function.

    What Are National Insurance Contributions?

    NICs are a form of social security tax that employees, employers, and the self-employed pay. These contributions are crucial for maintaining eligibility for various state benefits. For instance, employees pay NICs through the Pay As You Earn (PAYE) system, while the self-employed use self-assessment.

    Types of National Insurance Contributions

    • Class 1 NICs: Employees and employers pay these through the PAYE system. Employees contribute a percentage of their earnings, and employers also contribute a significant portion.
    • Class 2 and Class 4 NICs: The self-employed pay these. Class 2 is a weekly flat rate, and Class 4 is based on profits.
    • Class 3 NICs: Individuals can pay these voluntarily to fill gaps in their NIC records.

    Upcoming Changes to Employer NICs

    Starting from April 2025, policymakers will implement several changes. Firstly, they will adjust the threshold at which employers start paying NICs, which will affect business costs. Additionally, they will increase the rate at which employers pay NICs, further impacting their expenses. Meanwhile, they will enhance the Employment Allowance to help offset some of these costs, particularly benefiting smaller businesses.

    Implications of the Changes

    Employers will face increased costs due to these changes, which may affect their hiring decisions and wage growth. However, the increased Employment Allowance will mitigate some of these costs. Furthermore, these changes aim to raise significant revenue for the government, which policymakers will use to fund public services and social security benefits. Consequently, this will ensure that vital benefits continue to be available to those who need them.

    Conclusion

    In conclusion, understanding NICs is essential for both individuals and businesses in the UK. Policymakers have introduced these changes to employer NICs to have significant implications, affecting business strategies and government revenue. While these changes may increase costs for employers, they also highlight the importance of NICs in funding vital social security benefits. Ultimately, these changes will contribute to a more sustainable social security system.

    Additional Resources:

    • GOV.UK: Policymakers provide detailed guidance on NIC rates and thresholds here.
    • HMRC: Individuals can find information on PAYE and self-assessment processes on this site.
    • Office for Budget Responsibility: Analysts forecast NICs revenue and economic impact on this platform.

  • ISA 600: A New Era for Group Audits

    ISA 600 (Revised): A Proactive, Risk-Based Approach to Group Audits

    Download the presentation on the revised ISA 600 Download

    The Financial Reporting Council issued the revised ISA 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors) in September 2022. This revised standard, effective for group audits for periods commencing on or after December 15, 2023, introduces significant changes to enhance the quality and effectiveness of group audits. The main changes center around a proactive, risk-based approach, revised component definitions, and strengthened communication requirements.

    Proactive Risk-Based Approach

    A significant change is the introduction of a proactive risk-based approach. Now, group auditors must emphasize:

    • Identifying and assessing risks of material misstatement at the group level.
    • Planning the group audit based on these assessed risks.
    • Performing audit procedures that respond to the assessed risks, regardless of location within the group.

    This shift requires a deeper understanding of the group’s operations. Auditors must focus on where the risks reside, rather than the size or financial significance of individual components.

    Clarification of ISA 220 (Revised) Requirements

    The revised ISA 600 clarifies how the requirements of ISA 220 (Revised), Quality Management for an Audit of Financial Statements apply to group audits. This includes focusing on:

    • The resources needed for the engagement.
    • The direction, supervision, and review of the engagement team’s work.
    • Explicitly including component auditors within the ‘engagement team’.

    Revised Definition of a Component

    The definition of a component has been revised for clarity and flexibility.

    Old Definition: Previously, a component was an entity or business activity for which group or component management prepared financial information to include in the group financial statements. Components were often determined by size, with audit procedures focused on the component itself. Some procedures had a group focus.

    New Definition: Now, a component is an entity, business unit, function or business activity (or combination thereof). The group auditor determines this for planning and performing audit procedures in a group audit. Furthermore, the group auditor must perform a group risk assessment to find where the risks are within the group. The audit work then follows those identified risks, regardless of which component they reside in.

    Key Changes:

    • The concepts of “significant component” and “financially significant component” are removed.
    • The updated definition offers flexibility and applies to branches, divisions, shared service centers, and non-controlled entities.
    • There is now an emphasis on considering the nature of events or conditions that may give rise to risks of material misstatement.
    • Auditors can choose the scope of work for targeted testing at each component based on risk assessment and significant accounts.

    Examples of components:

    • A single legal entity may have more than one business unit (e.g., a bank with branches) where financial information is aggregated.
    • A group may have three legal entities with similar characteristics, operating in the same location, under the same management, and using a common system of internal control. In these cases, the group auditor may treat these entities as one component.
    • A group may centralize activities through a shared service center. If these activities are relevant to the group’s financial reporting, the group auditor may determine that the shared service center is a component.

    Robust Two-Way Communication

    The revised ISA 600 stresses robust two-way communication between the group auditor and component auditors. Moreover, it strengthens professional skepticism requirements.

    Documentation and Access

    The revised standard enhances documentation requirements. In addition, it clarifies how to handle restrictions on access to people or information, offering guidance on how to overcome these restrictions.

    Conclusion

    In conclusion, the revisions to ISA 600 represent a significant move towards a more risk-focused and effective approach to group audits. By emphasizing proactive risk assessment, clarifying component definitions, and strengthening communication, the revised standard aims to improve the quality of group audits and enhance confidence in group financial statements.

    Streamline your group audit compliance and understand ISA 600 with the expertise of MAH Chartered Accountants.

  • Common Accounting Mistakes and How to Avoid Them in 2025

    Common Accounting Mistakes and How to Avoid Them

    Managing business finances effectively is crucial for long-term success, yet many entrepreneurs make avoidable errors. In this guide on Common Accounting Mistakes and How to Avoid Them, we highlight frequent financial missteps that can hurt your business. From mixing personal and business finances to ignoring cash flow, learn practical solutions to stay organized, maintain accuracy, and ensure smooth financial management in 2025 and beyond.

    1. Mixing Personal and Business Money

    A common mistake is using the same bank account for both personal and business expenses. This can create confusion, especially during tax season.

    How to Avoid It: Open a separate bank account just for your business and only use it for business-related expenses.

    2. Not Checking Accounts Regularly

    Failing to regularly check your accounts can lead to mistakes that go unnoticed. This means you might miss errors or discrepancies.

    How to Avoid It: Set aside time each week or month to compare your financial records with your bank statements.

    3. Ignoring Cash Flow

    Some business owners focus only on profits but forget about cash flow, which is the money coming in and going out. This can lead to financial problems.

    How to Avoid It: Keep an eye on your cash flow by tracking how much money you receive and spend each month.

    4. Not Using Accounting Software

    Relying on paper records or old systems can increase the chance of making mistakes. Modern accounting software can make things easier and more accurate.

    How to Avoid It: Use user-friendly accounting software like QuickBooks or Xero to help manage your finances.

    5. Forgetting Small Expenses

    Small expenses can add up over time if not tracked properly, affecting your overall profits.

    How to Avoid It: Make sure to record all expenses, no matter how small, using an app or spreadsheet.

    6. Delaying Tax Payments

    Many businesses are surprised by tax bills because they didn’t plan ahead.

    How to Avoid It: Set aside a portion of your earnings each month for taxes and consult a tax expert if needed.

    7. Poor Invoice Management

    If you don’t manage invoices well, it can lead to cash flow issues when customers don’t pay on time.

    How to Avoid It: Create a clear system for sending invoices and follow up with customers who haven’t paid.

    8. Being Disorganized

    Disorganized financial records can lead to lost receipts or missed transactions, making tax time stressful.

    How to Avoid It: Keep all financial documents organized, whether digitally or in physical files.

    Conclusion

    By being aware of these common accounting mistakes and how to avoid them in 2025, businesses can keep their finances in good shape. Simple steps like using separate accounts, checking records regularly, and using software can make a big difference. Staying organized and planning ahead will help ensure success in the coming year!

    Choose MAH Chartered Accountants for expert guidance and customized financial solutions.

  • The Importance of Accurate Bookkeeping for Growing Businesses

    Accurate Bookkeeping for Growing Businesses

    Accurate bookkeeping is essential for the success and growth of any business. It forms the backbone of effective financial management, empowering business owners to make informed decisions, adhere to regulatory requirements, and promote long-term growth. In this article, we will explore the importance of accurate bookkeeping for growing businesses and outline best practices that can be implemented to enhance financial management.

    The Significance of Accurate Bookkeeping

    Financial Clarity and Insight
    Accurate bookkeeping provides a clear picture of a company’s financial health. By meticulously recording all transactions, businesses can track income and expenses, enabling them to assess their financial performance. This insight is vital for identifying strengths, weaknesses, and potential areas for improvement, allowing for strategic planning and resource allocation.

    Informed Decision-Making
    With reliable financial data at hand, business leaders can make informed decisions regarding investments, budgeting, and expansion plans. Accurate records facilitate better cash flow management, helping businesses avoid potential pitfalls such as cash shortages or overspending. This proactive approach to financial management supports sustainable growth.

    Tax Compliance
    Maintaining accurate books is essential for ensuring compliance with tax laws. Businesses are legally required to keep detailed financial records, which helps in preparing tax returns accurately and on time. Poor bookkeeping can lead to tax penalties or audits, which can be detrimental to a business’s reputation and finances.

    Building Trust with Stakeholders
    Transparent and well-maintained financial records instill confidence in investors, lenders, and partners. Accurate bookkeeping demonstrates accountability and stability, making it easier to secure financing or attract investment. Stakeholders are more likely to engage with businesses that show a commitment to sound financial practices.

    Best Practices for Effective Bookkeeping

    1. Utilize Accounting Software
      Implementing reliable accounting software can streamline the bookkeeping process, reduce errors, and enhance efficiency. Tools like QuickBooks or Xero can automate many aspects of bookkeeping, allowing for real-time tracking of financial transactions.
    2. Conduct Regular Audits
      Regularly auditing financial records helps identify discrepancies or errors early on. This practice ensures that books are up-to-date and accurate, minimizing the risk of significant issues arising later.
    3. Train Staff on Financial Processes
      Ensuring that employees involved in bookkeeping are well-trained in financial processes is crucial. Proper training reduces the likelihood of errors and promotes consistency in record-keeping practices.
    4. Maintain Consistent Financial Reviews
      Regularly reviewing financial statements allows businesses to stay on top of their financial situation. Monthly or quarterly reviews help identify trends and inform strategic decisions.
    5. Seek Professional Help When Needed
      Hiring professional bookkeepers or accountants can enhance accuracy and compliance with financial regulations. Professionals bring expertise that can help businesses navigate complex financial landscapes effectively.

    Conclusion

    Accurate bookkeeping for growing businesses is not just a routine task but a strategic necessity. It delivers crucial insights into financial health, ensures compliance with legal requirements, and builds trust among stakeholders. By adopting best practices in accurate bookkeeping for growing businesses, companies can improve operational efficiency, make well-informed decisions, and set the stage for sustainable growth in today’s competitive market.

    For personalized financial solutions and expert guidance, consider collaborating with MAH Chartered Accountants, who are committed to supporting your business’s success.

  • The Role of Chartered Accountants in Business Growth

    Chartered Accountants in Business Growth

    In today’s fast-paced business landscape, where financial acumen and strategic planning are paramount, chartered accountants have evolved from being mere number-crunchers to pivotal partners in driving business growth. Their expertise spans a wide range of critical areas, including financial planning, tax management, auditing services, and strategic advice. This article delves into the multifaceted roles that chartered accountants play in fostering sustainable business success.

    Understanding Your Financial Position

    The foundation of any successful business strategy is a clear understanding of its current financial health. Chartered accountants provide comprehensive analyses that assess cash flow, identify potential risks, and help businesses set realistic growth targets tailored to their unique situation. By creating accurate financial statements such as balance sheets and income statements, they offer insights into profitability and liabilities. This foundational knowledge enables businesses to focus on improvements in cash management and cost control.

    Strategic Financial Planning

    Chartered accountants excel at providing a broad perspective on company finances. They assess current financial health, forecast future trends based on market conditions and economic indicators, and suggest strategies for capital allocation that align with long-term objectives. By aligning financial goals with overall business objectives, they ensure every investment propels the company closer to its vision.

    Business Expansion and Diversification

    For businesses looking to expand geographically or diversify their offerings, chartered accountants can conduct feasibility studies assessing market conditions and projecting financial outcomes. They ensure expansions align with core strategies while mitigating potential risks associated with new ventures.

    Compliance Management

    Beyond traditional accounting tasks like tax preparation, chartered accountants stay abreast of regulatory changes ensuring compliance across various legal frameworks—labor laws to environmental norms—and avoid costly fines or reputational damage by guiding companies through complex regulatory landscapes.

    Tax Planning Strategies

    Chartered accountants are adept at navigating complex tax laws to minimize liabilities while ensuring compliance with legal requirements. They handle tax return preparations efficiently to meet deadlines without penalties.

    Auditing Services & Risk Management

    CAs provide auditing services essential for detecting fraud by implementing anti-fraud controls within organizations. Their expertise helps identify operational inefficiencies allowing for streamlined processes that enhance productivity.

    Strategic Business Advice & Technology Integration

    Chartered accountants offer valuable insights beyond finance; they assist in developing comprehensive growth strategies by analyzing market trends identifying new opportunities for expansion or diversification while optimizing operational efficiency through technological advancements like digital accounting systems which enhance reporting accuracy & decision-making speed. In conclusion, engaging a chartered accountant is not merely an expense but an investment in your business’s future success. Their multifaceted role ensures not only compliance but also strategic guidance crucial for navigating today’s dynamic marketplace effectively towards sustained growth & profitability. 

    Key Takeaways:

    • Financial Clarity: Understand your current position through detailed analysis.
    • Strategic Planning: Align finances with long-term goals.
    • Compliance Management: Stay ahead of regulatory changes.
    • Tax Optimization: Minimize liabilities legally.
    • Risk Management: Implement fraud controls.
    • Technological Integration: Streamline operations digitally.

    By leveraging these strengths offered by chartered accountants’ businesses can achieve sustainable success amidst ever-changing economic environments.

    For personalized financial solutions and expert guidance, consider collaborating with MAH Chartered Accountants, who are committed to supporting your business’s success.

  • The main requirements of a strategic report

    The main strategic report must contain the following sections as per the Companies Act 2006 s414C:


    (a) a fair review of the company’s business;

    (b) a description of the principal risks and uncertainties facing the company;

    (c) the review required is a balanced and comprehensive analysis, consistent with the size and complexity of the business, of:
    (i) the development and performance of the business of the company during the financial year; and
    (ii) the position of the company’s business at the end of that year;

    (d) the review must, to the extent necessary for an understanding of the development, performance or position of the company’s business, include:
    (i) analysis using financial key performance indicators; and
    (ii) where appropriate, analysis using other key performance indicators, including information relating to environmental matters and employee matters;

    (e) the report may also contain such of the matters otherwise required to be disclosed in the directors’ report as the directors consider are of strategic importance to the company;
    (f) the report must, where appropriate, include references to, and additional explanations of, amounts included in the company’s annual accounts;

    S172 statement

    The strategic report of large companies must include a statement which describes how the directors have had regard to the considerations set out in s172 Companies Act 2006 when fulfilling their duty to promote the success of the company, these being;

    (a) the likely consequences of any decision in the long term;
    (b) the interests of the company’s employees;
    (c) the need to foster the company’s business relationships with suppliers, customers and others;
    (d) the impact of the company’s operations on the community and the environment;
    (e) the desirability of the company maintaining a reputation for high standards of business conduct; and
    (f) the need to act fairly as between members of the company.

    The FRC issued guidance that companies who are below the limits for a large company but are not eligible for small and medium company exemptions, such as FCA authorised investment firms involved in MiFID securities, have to include a s172 statement.

    Companies are large if they meet at least 2 of the following critieria:

    • Turnover of more than £36m
    • Balance sheet total of more than £18m
    • More than 250 employees

  • Provisions & contingent liabilities and assets

    IAS 37 and FRS 102 s21 apply to provisions, contingent liabilities, and contingent assets. They establishe the principles and rules for the recognition, measurement, and disclosure of provisions, contingent liabilities, and contingent assets in the financial statements.

    Provisions

    Provisions are liabilities that are recognized in the financial statements when it is probable that an outflow of economic resources will be required to settle the liability, and the amount of the liability can be estimated with sufficient reliability. Examples of provisions include warranty claims, restructuring costs, and legal claims.

    An entity shall recognise a provision only when:
    (a) the entity has an obligation at the reporting date as a result of a past event;
    (b) it is probable (ie more likely than not) that the entity will be required to transfer economic benefits in settlement; and
    (c) the amount of the obligation can be estimated reliably.

    The recognized provision is recorded as a liability in the balance sheet, and the expense is recognized in the income statement.

    Contingent liabilities

    Contingent liabilities are potential liabilities that are not recognized in the financial statements unless it is probable that an outflow of economic resources will be required to settle the liability, and the amount of the liability can be estimated with sufficient reliability. Examples of contingent liabilities include legal claims, environmental liabilities, and guarantees.

    Contingent liabilities are not recognized in the financial statements unless it is probable that an outflow of economic resources will be required to settle the liability, and the amount of the liability can be estimated with sufficient reliability (ie its a provision). If the contingency is not probable or the amount cannot be estimated with sufficient reliability, the contingent liability is disclosed in the notes to the financial statements.

    Contingent assets

    Contingent assets are potential assets that are not recognized in the financial statements unless it is probable that an inflow of economic resources will be received, and the amount of the asset can be estimated with sufficient reliability. Examples of contingent assets include litigation recoveries, insurance claims, and tax refunds.

    Contingent assets are not recognized in the financial statements as assets can only be reocgnised if the flow of future economic benefits is virtually certain.

    Disclosure of a contingent asset is required when an inflow of economic benefits is probable.

    Disclosures

    The standards also require disclosures in the financial statements to provide information about the nature, timing, and amount of the provisions, contingent liabilities, and contingent assets. The entity should disclose the carrying amount of the provisions, the changes in the carrying amount of the provisions, and any significant assumptions used in estimating the provisions. The entity should also disclose the nature, timing, and amount of the contingent liabilities and contingent assets, and any changes in the likelihood or the amount of the contingent liabilities and contingent assets.

    If there is an ongoing court case the full disclosure about contingent liabilities may be seriously prejudicial, so it may be possible to make limited disclosures.

  • Related parties

    Related parties are entities or persons that are related to the entity preparing the financial statements. Related parties may include the entity’s parent, subsidiaries, associates, joint ventures, and directors, key management personnel, and their immediate families.

    Related parties may also include entities or persons that have the ability to exercise significant influence over the entity, such as major shareholders, close members of the entity’s governing body, or other entities or persons that have a close relationship with the entity.

    The definition of related parties and the identification of related parties are important in the preparation of the financial statements, as transactions with related parties may be subject to special disclosure requirements and may require special accounting treatment to ensure that they are presented in a consistent and transparent manner.

    You should refer to the accounting standards for the precise definitions.

  • How to account for leases under IFRS 16

    To account for leases under IFRS 16, the entity should follow the principles and rules of accounting for leases, which are the principles and rules that govern the recognition, measurement, and disclosure of leases in the financial statements.

    IFRS 16 is the International Financial Reporting Standard that applies to leases. IFRS 16 replaces the previous leases standard, IAS 17, and introduces a single, on-balance sheet model for lessees. Under IFRS 16, lessees are required to recognize a right-of-use asset and a lease liability for all leases, except for short-term and low-value leases.

    The key steps in accounting for leases under IFRS 16 are as follows:

    1. Identify the lease: The first step in accounting for leases under IFRS 16 is to identify the lease. A lease is a contract that conveys the right to use an asset for a specified period of time in exchange for consideration. A lease is classified as a finance lease or an operating lease based on the nature of the underlying asset and the extent to which the risks and rewards of ownership of the asset are transferred to the lessee.
    2. Measure the right-of-use asset and the lease liability: The second step in accounting for leases under IFRS 16 is to measure the right-of-use asset and the lease liability. The right-of-use asset is measured at the present value of the lease payments, discounted at the lessee’s incremental borrowing rate. The lease liability is measured at the present value of the lease payments, discounted at the lessee’s incremental borrowing rate, plus any lease incentives received by the lessee.
    3. Recognize the right-of-use asset and the lease liability in the balance sheet: The third step in accounting for leases under IFRS 16 is to recognize the right-of-use asset and the lease liability in the balance sheet. The right-of-use asset is recognized as a non-current asset, and the lease liability is recognized as a non-current liability. The right-of-use asset and the lease liability are recognized at the commencement date of the lease.

    The right of use asset has to be depreciated over the lease term. At each year end the value of the remaining asset should be compared to the lease liability to assess for any impairment.

    The business may have coded rental/lease payments to the rent nominal in the p&l. This needs to be reclassified to reducing the lease liability. Instead the p&l will show the lease interest payable for the year.

    The lease term is generally used for the calculations, unless there is a break clause at the option of the lessee etc.

    There is an exemption available for short leases such as 1 year lease/tenancy agreements.