ACCA SBR ^UK Syllabus C. Reporting The Financial Performance Of A Range Of Entities - Leases - Notes ^{9 / 24}

Section 20 of FRS 102, which covers leases, is very different from the recent standard IFRS 16, particularly as regards lessees.

IFRS 16 introduced a 'right-of-use' model.

FRS 102 makes a distinction between finance leases and operating leases.

Finance lease:

A lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred.

Operating lease:

A lease other than a finance lease.(FRS 102: Section 20)

From these definitions you can see that the classification of a lease is based on the extent to which the risks and rewards of ownership lie with the legal owner, the lessor, or are transferred to the user, the lessee.

If a lease transfers substantially  all  the  risks  and  rewards normally associated with the ownership of an asset it should be classified as a finance lease.

All other leases should be classified as operating leases.

You will have come across this distinction in your studies of IFRS 16, where it still applies to lessor accounting.