Are you ready for the major changes to lease accounting rules under FRS 102?

If your business holds one or more operating leases – such as for shops, restaurants, hotels or equipment – significant changes are on the horizon that could impact your financial reporting and operational decisions. From 1 January 2026, amendments to FRS 102 will fundamentally alter how leases are accounted for in your annual financial statements.

To help avoid last-minute complications, now is the time to review your existing lease arrangements – particularly those that will remain active beyond the transition date – and assess the potential impact on your financial position and reporting obligations.

What’s changing?

Under the revised FRS 102, which brings UK GAAP closer in alignment with international standards such as IFRS 16, you will now be required to recognise nearly all leases on the balance sheet instead of simply disclosing future operating lease commitments in the notes to the accounts.

The two additional categories that will need to appear in the financial statements are:

• A right-of-use (ROU) asset, representing the lessee’s right to use the leased property.
• A lease liability, reflecting the present value of future lease payments.

The ROU asset and lease liability will be calculated based on future lease payments, discounted to present value using an appropriate rate. While lease payments are typically straightforward to determine from contract terms, the discount rate is often not specified. You will therefore need to estimate this using incremental borrowing rate or another obtainable borrowing rate relevant to your business.

Additional complexities may arise from lease modifications, rent reviews, or other changes to lease terms, which will require reassessment of both the asset and liability.

The Financial Reporting Council has introduced a modified retrospective approach for transition, meaning comparative figures do not need to be restated.

Exemptions are available for:

• Short-term leases (less than 12 months)
• Low-value assets

However, most property leases are unlikely to qualify for these exemptions.

Illustrative example

Consider a high street property lease with an annual cost of £100,000 (excluding VAT) over a 5-year term, assuming interest of 8%.

This change will have a significant impact on meeting any loan covenant requirements which link to debt-to-equity ratio, interest coverage or current ratio as there will be extra liabilities on the balance sheet and finance costs on the P&L without any changes to the actual lease agreements.

It will also mean that like-for-like comparisons of the Key Performance Indicators will be more difficult as there will be significant impacts on financial metrics such as EBITDA and net assets in the first year of transition.

Therefore, conducting an early assessment is essential to identify the implications for your financial statements and to ensure you have sufficient time to communicate these changes to key stakeholders.

How we can help

We understand that navigating the new requirements can feel complex – especially for businesses managing multiple lease arrangements. However, with our expertise in advising retail and hospitality businesses, we’re here to guide you every step of the way and help you with any of the following:

• assessing the impact on your financial statements;
• identifying and gathering relevant lease data;
• helping you determine appropriate discount rates;
• navigating transitional provisions and exemptions.

For tailored advice and support on the new FRS 102 lease accounting requirements, please contact us.