FRS 102 Lease Accounting Changes: What Businesses Need to Know

Posted: 19 May 2026

The accounting rules for leases under FRS 102 have changed significantly, bringing UK GAAP much closer to the approach already adopted under IFRS 16. For many businesses, the changes will increase the number of lease liabilities appearing on the balance sheet and may affect reported profits, banking covenants and key performance indicators.

This article explains the new rules, who is affected and the practical steps businesses should now be taking.

What Has Changed?

Historically, FRS 102 distinguished between:

• Finance leases — recognised on the balance sheet; and
• Operating leases — generally kept off balance sheet, with rental payments recognised in profit and loss as incurred.

Under the revised FRS 102 lease accounting requirements, most leases for lessees must now be brought onto the balance sheet.

This means businesses will generally recognise:

• A right-of-use asset representing the right to use the leased item; and
• A corresponding lease liability representing future lease payment obligations.

The changes apply to accounting periods beginning on or after 1 January 2026, although early adoption is permitted.

Why Were the Rules Changed?

The Financial Reporting Council (FRC) introduced the amendments to improve transparency and comparability in financial reporting.

Previously, businesses with significant operating lease commitments — particularly property leases — could appear less leveraged than they actually were because obligations were disclosed only in the notes to the accounts.

The revised standard aims to give users of financial statements a clearer picture of:

• A business’s financial commitments;
• The assets it controls; and
• Its true level of indebtedness.

Which Businesses Are Most Affected?

The changes will particularly impact businesses with substantial operating leases, including:

• Retail and hospitality businesses;
• Property-intensive businesses;
• Logistics and transport companies;
• Professional practices with long office leases; and
• Businesses leasing vehicles or equipment.

For some entities, the effect on the balance sheet may be significant.

Are Any Leases Exempt?

Yes. Certain leases can remain off balance sheet.

The main exemptions are:

• Leases with a term of 12 months or less.
• Leases for assets of relatively low value, such as:
• Small office equipment;
• Basic IT hardware; or
• Minor office furnishings.

However, materiality and judgement remain important.

How Will the Accounting Work?

At the commencement of a lease, the lessee will generally:

1. Measure the lease liability at the present value of future lease payments; and
2. Recognise a matching right-of-use asset.

Over time:

• The liability is reduced as lease payments are made;
• Interest expense is recognised on the liability; and
• The right-of-use asset is depreciated.

This differs from the previous straight-line rental expense approach used for operating leases.

What Are the Practical Impacts?

Balance Sheet Growth

Both assets and liabilities will increase, potentially significantly.

Changes to Profit Measures

EBITDA may improve because rental expenses are replaced by depreciation and interest.

However, finance costs will increase.

Impact on Banking Covenants

Businesses should carefully review:

• Debt covenants;
• Gearing ratios;
• EBITDA-based measures; and
• Facility agreements.

Some agreements may require renegotiation or clarification with lenders.

Systems and Data Challenges

Businesses may need to:

• Identify all lease arrangements;
• Gather historic lease data;
• Calculate discount rates; and
• Track modifications and renewals.

For groups with numerous leases, implementation may take considerable time.

What Should Businesses Be Doing Now?

Businesses should start preparing well in advance of their first reporting period under the revised rules.

Key actions include:

Reviewing Existing Lease Arrangements

Identify all contracts that may contain leases, including embedded leases within service agreements.

Assessing the Financial Impact

Prepare preliminary calculations to understand the likely effect on:

• Net assets;
• Profitability;
• Covenants; and
• Stakeholder reporting.

Engaging with Lenders and Stakeholders

Where covenant impacts are expected, early discussions are advisable.

Will Tax Be Affected?

In many cases, the accounting changes will not directly change the corporation tax treatment of lease payments.

However, deferred tax implications may arise, and businesses should consider the wider tax and commercial implications carefully.

Final Thoughts

The revised lease accounting rules under FRS 102 represent one of the most significant UK GAAP accounting changes in recent years for many businesses.

Although the principles are familiar to IFRS reporters, many entities reporting under FRS 102 will need to prepare for substantial balance sheet and reporting impacts for the first time.

Early planning is essential. Businesses that begin reviewing lease portfolios and assessing the implications now will be in a much stronger position when the new rules take effect.

If you would like advice on how the FRS 102 lease accounting changes may affect your business, the team at RJP LLP would be pleased to help.

partners@rjp.co.uk