The Financial Reporting Council (FRC) announced in December 2022 that FRS 102 (UK GAAP) lessee accounting will change in order to come in line with IFRS 16. This could happen from 2026 or soon after. So what might this imminent change mean for those looking after businesses’ tax returns?
For possible answers to this question we can look back to 2019 when companies who use IFRS or FRS101 adopted IFRS 16. The on-balance sheet approach proposed by FRED 82 is essentially the same as IFRS 16 lessee accounting, barring certain expedients yet to be finalised. HMRC’s response to IFRS 16 was to introduce specific tax legislation in Finance Act 2019: this legislation is still with us, and it appears fit for purpose in dealing with the changes proposed to FRS 102.
In our experience, a major part of the challenge when companies moved operating leases to an on-balance sheet approach was remembering that the basic principles of taxation had not changed – we might need to follow different looking P&L accounting entries for tax purposes, however, it remains true that rentals are deductible on revenue account and certain other items (which may find their way into a right-of-use asset) are still not deductible.