FRS 116 Leases for Singapore SME Lessees (2026): Right-of-Use Accounting, Exemptions and the Tax Trap

Sign a five-year office lease in Singapore and, under FRS 116, that lease no longer sits quietly off your balance sheet as a monthly rental expense. Instead, it shows up on day one as a right-of-use asset and a matching lease liability, often the single largest addition to a small company’s balance sheet in the year it takes new premises. Directors who have not budgeted for this are frequently surprised when their gearing ratios move, their EBITDA looks better than it should, and their accountant asks for a discount rate they have never had to think about before.

FRS 116 Leases has applied to Singapore-incorporated companies preparing financial statements under the full Financial Reporting Standards since annual periods beginning on or after 1 January 2019. Yet many SME lessees, particularly those renting a single office, retail unit or warehouse, still account for their lease the old way: an expense in the profit and loss statement, nothing on the balance sheet. That is no longer correct unless a specific exemption applies, and getting it wrong creates a real risk of a qualified opinion or management letter point at the next statutory audit.

This article sets out, in practical terms, how a Singapore SME lessee should apply FRS 116, what the short-term and low-value asset exemptions actually cover, how the tax treatment diverges from the accounting treatment (a point that catches almost everyone out), and where the Singapore Financial Reporting Standard for Small Entities (SFRS for SE) still allows the old operating lease treatment.

What FRS 116 Changed for Lessees

Under the old FRS 17, a lessee classified every lease as either a finance lease (on balance sheet) or an operating lease (off balance sheet, expensed as incurred). FRS 116 removed that distinction for lessees entirely. Now, unless an exemption applies, a lessee must recognise, at the commencement of almost every lease:

• A right-of-use (ROU) asset, representing the right to use the underlying leased asset for the lease term; and
• A lease liability, representing the obligation to make future lease payments.

The lease liability is initially measured at the present value of the unpaid lease payments, discounted using the interest rate implicit in the lease or, if that cannot be readily determined, the lessee’s incremental borrowing rate. The ROU asset is initially measured at the amount of the lease liability, adjusted for any prepaid rent, lease incentives received, initial direct costs, and any estimated dismantling or restoration costs.

A Worked Example

A Singapore trading company signs a five-year lease for office space at S$60,000 a year, payable in arrears. Its incremental borrowing rate is 6% per annum. The present value of the five payments is approximately S$252,700. That figure goes on the balance sheet as both the ROU asset and the lease liability at commencement. Each year, the company then recognises depreciation on the ROU asset (typically straight-line over the shorter of the useful life and the lease term) and interest expense on the lease liability, which reduces over time as the principal is repaid.

Note the effect on the profit and loss statement: instead of a flat S$60,000 annual rental expense, the company now recognises depreciation of roughly S$50,548 a year plus a front-loaded interest charge that starts at S$15,165 and tapers to S$3,396. Total expense over the lease term is unchanged, but the timing and presentation are not; EBITDA improves because interest and depreciation sit below that line, while gearing and total liabilities both increase because of the new lease liability.

The Two Exemptions Every SME Should Know

FRS 116 gives lessees two elective exemptions from full balance sheet recognition. Both are elections made lease-by-lease (for low-value assets) or by class of underlying asset (for short-term leases), and both simply allow the lease payments to be expensed on a straight-line basis over the lease term instead.

Two traps are worth flagging. First, a lease with a purchase option can never qualify as a short-term lease, no matter how short the stated term. Second, the low-value exemption is assessed by reference to the value of the underlying asset when new, not its remaining value, and it cannot be used if the lessee is likely to sublease the asset. For the typical Singapore SME, the exemptions realistically cover items like printers, water coolers and short-term car rentals, not the main office, retail unit or warehouse lease, which will almost always require full ROU accounting.

The SFRS for Small Entities Alternative

Companies that qualify to apply the Singapore Financial Reporting Standard for Small Entities are not required to apply FRS 116. Section 20 of SFRS for SE preserves the old finance lease versus operating lease distinction, meaning a qualifying small entity can continue to expense straight-line rental on an operating lease without putting a ROU asset and lease liability on the balance sheet at all.

To qualify for SFRS for SE, a company must be a “small entity” as defined, and must not have public accountability, broadly meaning it does not have debt or equity instruments traded in a public market and does not hold assets in a fiduciary capacity for a broad group of outsiders as its primary business. Many family-run SMEs, holding companies and single-office trading businesses in Singapore will meet these criteria and may find that continuing on SFRS for SE, rather than migrating to full FRS, materially simplifies their lease accounting. This is a decision that should be revisited with your accountant whenever a new lease is signed, an audit threshold is crossed, or a bank or investor starts asking for full FRS-compliant statements.

Tax Treatment: Where Accounting and Tax Diverge

This is the point that trips up the most finance teams. IRAS has confirmed, following its 2017 consultation and subsequent guidance, that the income tax treatment of leases is not aligned with the FRS 116 accounting treatment. For an operating lease that is not treated as a sale agreement, a lessee continues to claim a tax deduction for the contractual lease payments incurred each year under Section 14(1) of the Income Tax Act, rather than the accounting depreciation and interest expense recognised in the profit and loss statement.

This means every company applying full FRS 116 to an operating lease will have a permanent difference in presentation and a timing difference in the tax computation: the accounting expense (depreciation plus interest) will not equal the tax-deductible amount (the contractual lease payment) in any given year, even though the two converge to the same total over the life of the lease. Your tax computation needs to add back the accounting depreciation and interest, then deduct the actual contractual lease payment incurred for the year.

The position is different where a lease arrangement giving rise to a ROU asset meets the definition of a finance lease under Section 10D(3) of the Income Tax Act and is treated as a sale agreement under the conditions in the Section 10D Regulations. In that scenario, the lessee is instead allowed to claim capital allowances on the underlying asset (if it qualifies as plant and machinery) together with the interest expense portion of the lease payments, rather than a deduction for the lease payments as a whole. This tax treatment applies regardless of whether the company reports under full FRS 116 or SFRS for SE, so even small entities that avoid ROU accounting still need to test whether their finance leases meet the Section 10D sale-agreement conditions.

Practical Checklist for SME Lessees

Why This Matters Beyond the Financial Statements

Recognising lease liabilities on the balance sheet is not a cosmetic change. It affects covenant calculations under existing bank facilities (many of which reference gearing or debt-to-equity ratios calculated before FRS 116 existed), it changes how a company’s financial position looks to prospective investors or purchasers in due diligence, and it affects the numbers your auditor tests when forming an opinion on your financial statements under Section 201 of the Companies Act, which requires that a company’s financial statements comply with the accounting standards and give a true and fair view. Directors also carry personal responsibility for ensuring financial statements are properly prepared, so treating FRS 116 as a bookkeeping footnote rather than a substantive balance sheet event is a real governance risk, not just an accounting nicety.

If your company is negotiating a new lease, renewing an existing one, or preparing for its first statutory audit since FRS 116 took effect, it is worth reviewing your lease population now rather than at year end, when the discount rate assumptions and amortisation schedules need to be built from scratch under time pressure.

Related Reading

• Accounting for Fixed Assets and Depreciation in a Singapore Company
• Fixed Asset Register and Depreciation for Singapore SMEs (2026)
• Setting Up a Basic Chart of Accounts for a Singapore SME
• Section 19A Capital Allowances Singapore 2026: Plant and Machinery Tax Deduction Guide
• How to Prepare for Your First Statutory Audit in Singapore

— The Editorial Team, Raffles Corporate Services