FRS 116 - Leases
... better known as:
"Why is there no rental expense on my P&L? What is ROU Depreciation? Why have my assets increased so much? I never took out a lease??"
A new Singapore Financial Reporting Standard, FRS 116 - Leases was introduced effective 1 Jan 2019. FRS 116 superseded FRS 17 which previously covered leases.
Under FRS 17, leases could be classified as either Operating or Finance leases, depending on the risk and rewards of ownership. Operating leases could previously be expensed directly to the P&L, while for Finance leases, the lease liability had to be recognised on the Balance Sheet.
For most tenancy agreements, most risk and rewards of ownership would stay with the landlord and not transfer to the tenant, therefore rental costs could be classified as Operating leases expensed directly to the P&L.
Lessee Accounting Treatment under FRS 116
Under FRS 116, lessees do not distinguish between a finance lease and an operating lease. Instead, the lessee recognises a lease liability reflecting future lease payments and a “right-of-use” asset on the assumption that economically a lease contract is equal to acquiring the right to use an asset with the purchase price paid under instalments.
Lessees will recognise interest expense on the lease liability and a depreciation charge on the “right-of-use” asset which must be recognised in the company’s financial statements.
Rental expense will be treated as a lease payment, with each payment being split between principal and interest instead of hitting the P&L directly.
Exemptions
Because the calculations can be quite complex for companies to be recognising ‘right-of-use’ assets and lease liabilities for all leases, FRS 116 provides certain recognition exemptions. In such cases, the payments made in accordance with the contract are expensed when incurred.
Leases with a lease term of 12 months or less and containing no purchase options; and
Leases where the underlying asset has a low value when new (such as personal computers or small items of office furniture - around USD5,000 or less).
💾 FRS_116_(2022).pdf | FRS_116_IE_(2022).pdf
Financial Statements: FRS 116 - Leases