Navigating FRS 116: The Essential Guide to Lease Accounting
- Roger Pay
- 22 hours ago
- 8 min read
FRS 116 Lease Accounting Guide
Navigating FRS 116: The Essential Guide to Lease Accounting
In the modern financial landscape, FRS 116 (Leases) represents one of the most significant shifts in accounting standards. By bringing nearly all leases onto the balance sheet, it has fundamentally changed how businesses report debt, assets, and expenses.
Whether you are a CFO looking to optimize your financial ratios or a business owner trying to understand your compliance obligations, this guide breaks down the complexities of FRS 116.
What is FRS 116?
FRS 116 is the Financial Reporting Standard in Singapore that governs lease accounting, aligned with the international IFRS 16 standard. It replaced the old FRS 17 model, effectively eliminating the distinction between "operating leases" (off-balance sheet) and "finance leases" (on-balance sheet) for lessees.
The core change: Lessees must now recognize a Right-of-Use (ROU) Asset and a corresponding Lease Liability for almost all lease contracts.
The Impact on Your Financial Statements
Moving leases onto the balance sheet isn't just a bookkeeping exercise—it changes your key performance indicators (KPIs).
Financial Metric | Impact of FRS 116 | Why? |
|---|---|---|
Total Assets | Increase | Recognition of the ROU Asset. |
Total Liabilities | Increase | Recognition of the Lease Liability. |
EBITDA | Increase | Lease rent is replaced by Depreciation and Interest. |
Gearing Ratio | Higher | Increased debt/liabilities on the balance sheet. |
Operating Cash Flow | Increase | Principal repayments move to financing activities. |
Key Requirements for Compliance
To stay compliant with FRS 116, companies must follow a specific recognition and measurement framework:
Identification: Does the contract convey the right to control the use of an identified asset for a period of time in exchange for consideration?
Initial Measurement: The lease liability is measured at the present value of the lease payments. The formula for the present value (PV) of lease payments is:
PV=t=1∑n(1+i)tRt
Where R is the lease payment, i is the discount rate, and n is the number of periods.
Subsequent Measurement: The ROU asset is typically depreciated over the lease term, while the lease liability earns interest and is reduced by lease payments.
Optimization Strategies
To optimize your business position under FRS 116, consider the following strategies:
Leverage Exemptions: FRS 116 allows for two major "shortcuts." If a lease is Short-Term (12 months or less) or involves Low-Value Assets (e.g., tablets, personal computers, small office furniture), you can keep them off the balance sheet and recognize payments as an expense.
Reassess Discount Rates: Using an accurate Incremental Borrowing Rate (IBR) is crucial. A higher discount rate reduces the initial lease liability recognized, which can improve your debt-to-equity appearance.
Contract Structuring: Consider shifting toward service-based agreements where possible. If a provider retains substantive substitution rights over the asset, the contract may not qualify as a lease under FRS 116.
Pro Tip: FRS 116 compliance requires robust data management. Manual spreadsheets often lead to errors during audit season. Investing in lease accounting software can automate these calculations and ensure "audit-ready" reports.
Frequently Asked Questions
Does FRS 116 affect lessors? Mostly no. Lessor accounting remains largely unchanged, maintaining the distinction between operating and finance leases.
How does FRS 116 affect my taxes? In many jurisdictions, tax authorities may still follow the legal form of the lease rather than the FRS 116 accounting treatment. It is vital to prepare a tax reconciliation to account for these temporary differences.
Need help calculating your ROU Assets? We can help you model your lease liability or explain how specific contract clauses (like variable lease payments or extension options) impact your financial reporting.
Sample Calculation table for a Lease Agreement
To illustrate the application of FRS 116 (Leases), let’s walk through a sample calculation for a standard commercial lease.
In this example, we will assume the lease payments are made in arrears (at the end of each period), which is common in many service and equipment contracts.
Case Study: Office Equipment Lease
Lease Term: 5 Years
Annual Lease Payment: $10,000 (payable at year-end)
Incremental Borrowing Rate (IBR): 5%
Initial Direct Costs: $1,000 (legal fees/commissions)
Step 1: Initial Measurement
First, we calculate the Lease Liability by finding the Present Value (PV) of the five $10,000 payments. Using the formula: PV=∑(1+i)nR
Lease Liability: ~$43,295
Right-of-Use (ROU) Asset: Lease Liability ($43,295) + Initial Direct Costs ($1,000) = $44,295
Step 2: Lease Amortization Schedule
This table shows how the liability "unwinds" over time and how the asset is depreciated.
Year | Opening Liability | Interest (5%) | Lease Payment | Closing Liability | Depreciation (Straight-line) | ROU Asset (Carrying Amt) |
0 | - | - | - | $43,295 | - | $44,295 |
1 | $43,295 | $2,165 | ($10,000) | $35,460 | ($8,859) | $35,436 |
2 | $35,460 | $1,773 | ($10,000) | $27,233 | ($8,859) | $26,577 |
3 | $27,233 | $1,362 | ($10,000) | $18,595 | ($8,859) | $17,718 |
4 | $18,595 | $930 | ($10,000) | $9,525 | ($8,859) | $8,859 |
5 | $9,525 | $475* | ($10,000) | $0 | ($8,859) | $0 |
*Slight adjustment for rounding. |
Key Takeaways from the Table
Front-Loaded Expenses: Notice that in Year 1, your total P&L impact is $11,024 (Interest $2,165 + Depreciation $8,859). In Year 5, it is only $9,334. Under the old standard, your expense would have been a flat $10,000 every year.
Current vs. Non-Current: At the end of Year 1, the "Current Liability" is the portion of the principal you will pay in Year 2 ($10,000 payment - $1,773 interest = $8,227). The remaining $27,233 is recorded as a "Non-Current Liability."
Audit Trail: This schedule provides the exact figures needed for your journal entries and year-end disclosures, ensuring you remain compliant with Singapore’s FRS 116 requirements.
Adjusting the Calculation for Payments Made in Advance (at the Start of the Year)
Adjusting the calculation for payments made in advance (also known as "Lease Annuity Due") changes the timing of the liability reduction and the interest calculation.
When you pay at the start of the year, your liability decreases immediately on Day 1, meaning you accrue less interest over the term.
Case Study: Office Equipment Lease (Payments in Advance)
Lease Term: 5 Years
Annual Lease Payment: $10,000 (payable at the start of each year)
Incremental Borrowing Rate (IBR): 5%
Initial Direct Costs: $1,000
Step 1: Initial Measurement (In Advance)
Because the first payment is made immediately, it is not discounted. The liability is the first $10,000 plus the present value of the remaining 4 payments.
Lease Liability (at start): ~$45,460
Right-of-Use (ROU) Asset: $45,460 + $1,000 = $46,460
Step 2: Amortization Schedule (Payments in Advance)
In this scenario, the "Interest" for the year is calculated on the Net Liability (Opening Balance minus the payment made that morning).
Year | Opening Liability | Payment (Start of Year) | Net Liability (to accrue interest) | Interest (5%) | Closing Liability | ROU Asset (Carrying Amt) |
0 | - | - | - | - | $45,460 | $46,460 |
1 | $45,460 | ($10,000) | $35,460 | $1,773 | $37,233 | $37,168 |
2 | $37,233 | ($10,000) | $27,233 | $1,362 | $28,595 | $27,876 |
3 | $28,595 | ($10,000) | $18,595 | $930 | $19,525 | $18,584 |
4 | $19,525 | ($10,000) | $9,525 | $476 | $10,001 | $9,292 |
5 | $10,001 | ($10,000) | $1 | $0* | $0 | $0 |
*Rounding differences apply. |
Key Differences to Note
Lower Total Interest: By paying in advance, you pay less total interest over the 5 years ($4,541 vs. $6,705 in the "in arrears" example) because the principal balance is reduced sooner.
Asset Value: The ROU Asset starts higher in this case because the present value of payments made earlier is mathematically greater.
Day 1 Entry: On the first day of the lease, your journal entry would show a Lease Liability of $45,460, but $10,000 of that would be cleared immediately by the first cash payment.
Summary of Impact
Choosing between "in advance" and "in arrears" isn't just about cash flow; it changes your interest expense and depreciation schedule, which affects your net profit margins.
How Bestar Singapore can Help
Navigating FRS 116: The Essential Guide to Lease Accounting
Implementing FRS 116 is more than just a compliance checkbox—it is a strategic financial shift that requires technical expertise and precision. Bestar Singapore provides a comprehensive suite of services designed to help businesses navigate these complexities while optimizing their financial standing.
Here is how Bestar Singapore can support your business in mastering FRS 116.
1. Expert Lease Identification & Classification
Not every contract is a lease. Bestar’s consultants help you distinguish between lease components and service components (which can remain off-balance sheet).
Asset Assessment: We identify which agreements fall under FRS 116 and which qualify for "Low-Value" or "Short-Term" exemptions.
Contract Review: We analyze your existing agreements to ensure you aren't over-capitalizing expenses that should be classified as services.
2. Precise Financial Modeling & Calculations
The biggest challenge of FRS 116 is the math. Bestar simplifies this by providing "audit-ready" schedules.
Incremental Borrowing Rate (IBR) Support: We help you determine the most accurate discount rate to ensure your Lease Liability is not overstated.
Amortization Schedules: We generate detailed schedules for Right-of-Use (ROU) Assets and Lease Liabilities, covering both payments in advance and in arrears.
Variable Payment Adjustments: We manage the complex recalculations required when leases are tied to CPI or other market indices.
3. Impact Analysis on Key Financial Ratios
Because FRS 116 increases visible debt, it can impact your ability to borrow. Bestar provides strategic advisory to manage this:
Debt Covenant Review: We analyze how the standard affects your current loan agreements and assist in discussions with lenders.
EBITDA Optimization: We help you understand the shift from rental expenses to depreciation/interest and how this impacts your reported profitability.
4. Seamless Technology Integration
Manual spreadsheets are the leading cause of FRS 116 reporting errors. Bestar helps you modernize your accounting stack.
Software Selection: We guide you in choosing and implementing cloud-based lease accounting software (e.g., Xero, QuickBooks, or specialized lease tools).
Automation: We set up systems that automatically track lease modifications, renewals, and terminations, reducing the manual workload for your finance team.
5. Compliance & Statutory Reporting
As a leading firm in Singapore, Bestar ensures your financial statements meet all ACRA and IRAS requirements.
Disclosure Preparation: We draft the detailed footnote disclosures required under FRS 116, ensuring full transparency for auditors and stakeholders.
Tax Reconciliation: Since accounting treatment often differs from tax treatment, we provide clear tax impact analysis to ensure accurate filing.
Why Choose Bestar Singapore?
"At Bestar, we bridge the gap between complex accounting standards and practical business growth." With a multidisciplinary team of audit, tax, and advisory specialists, Bestar provides a one-stop solution that ensures your transition to or maintenance of FRS 116 is seamless, compliant, and strategically advantageous.
Ready to streamline your lease accounting?
Checklist of documents Bestar would need to perform an initial FRS 116 impact assessment for your company
To perform an initial FRS 116 impact assessment, Bestar Singapore (or any professional audit/accounting firm) requires a clear "paper trail" of your current lease obligations.
This checklist is designed to help you gather the necessary data to accurately quantify your Right-of-Use (ROU) Assets and Lease Liabilities.
Phase 1: The Lease Inventory (The "What")
Before calculations begin, you must identify every contract that might contain a lease.
[ ] Master Lease Listing: An Excel summary of all active leases (Property, Vehicles, Equipment, IT hardware).
[ ] Full Legal Contracts: Copies of the original signed lease agreements and any supplemental deeds.
[ ] Service Agreements: Contracts for services (e.g., security, cleaning, IT outsourcing) that might have "embedded leases"—where a specific asset is dedicated solely to your use.
Phase 2: Financial & Payment Terms (The "How Much")
These documents provide the numbers for the PV (Present Value) calculation.
[ ] Payment Schedules: Documentation of fixed monthly/annual rent, including any "stepped" rent (gradual increases).
[ ] Variable Payment Details: Information on payments tied to an index (like CPI) or sales turnover (common in retail).
[ ] Lease Incentives: Proof of rent-free periods, fit-out allowances, or cash incentives received from the lessor.
[ ] Initial Direct Costs: Invoices for legal fees, stamp duties, or brokerage commissions incurred to secure the lease.
Phase 3: Judgment & Estimates (The "How Long")
FRS 116 requires "reasonable certainty" regarding the future. Bestar will need your management’s input on:
[ ] Extension & Termination Options: Evidence or internal memos regarding your intent to exercise (or not exercise) options to renew or break a lease.
[ ] Incremental Borrowing Rate (IBR): Recent loan offer letters or corporate bond rates to help determine the appropriate discount rate.
[ ] Restoration Obligations: Estimates for "make-good" costs (the cost to return the property to its original state at the end of the lease).
Phase 4: Current Accounting Records
[ ] Trial Balance: Specifically, the accounts where rental expenses were previously recorded.
[ ] Existing Lease Disclosure: A copy of your most recent audited financial statements (specifically the "Lease Commitments" note).
[ ] Fixed Asset Register: To check if any leases were already capitalized under the old FRS 17 "Finance Lease" model.
Document Collection Framework
How Bestar Uses This Data
Once you provide these documents, Bestar's team will:
Filter Exemptions: Identify leases under 12 months or "low-value" items (typically < US$5,000 when new).
Model the Impact: Calculate the Day-1 impact on your Balance Sheet.
Bridge the Gap: Create a reconciliation between your old "Operating Lease Commitments" and your new "Lease Liabilities."
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