Key changes to FRS 102: accounting for leases
Significant revisions to Financial Reporting Standard 102 (FRS 102), the standard applicable in the UK and Republic of Ireland, have been made, bringing substantial mandatory changes to lease accounting. These amendments to FRS 102 are mandatory for accounting periods commencing on or after 1 January 2026. Early adoption is permitted, provided all amendments to FRS 102 are applied simultaneously, however, comparatives for prior periods are not restated.
These changes are expected to impact many businesses across all sectors. These could be material, not just from an accounting perspective but also other practical and commercial considerations. Businesses need to take a proactive approach.
We at Moore Kingston Smith are here to help you understand and prepare for these crucial changes.
Why is this happening?
These changes improve transparency and bring UK standards in line with international accounting rules.
What steps should businesses take next?
1. Identify your lease(s)
As a first step, businesses need to identify whether a contract is, or contains, a lease. Some leases are exempt, for example if they are low-value or short-term. Taking expert advice is recommended, as judgement is required.
Some arrangements previously treated as service contracts may now fall within the scope of lease accounting and vice versa. This assessment is a critical first step.
2. Calculate the lease liability and right of use (ROU) asset
Lease liability
This is measured at the present value of minimum lease payments, including any expected payments at the end of the lease.
The lease liability should be discounted over the lease term using either (i) the interest rate implicit in the lease, (ii) the incremental borrowing rate or (iii) the obtainable borrowing rate (most common).
ROU asset
The ROU asset is initially measured at the amount of the lease liability plus any initial direct costs (e.g. legal fees) incurred by the lessee and any upfront lease payments made, less any lease incentives.
Disclosure requirements
The new standard provides an extensive list of qualitative and quantitative disclosures that lessees are required to make. Whilst the impact to lessors is not as significant, there are changes that would need to be considered.
What does this mean for your financial statements and business?
For businesses with material leasing arrangements, the impact can be wide ranging:
- Assets and liabilities increase, affecting gearing and balance sheet presentation.
- EBITDA is typically impacted, as former operating lease costs are replaced with depreciation and interest.
- Profit profiles change due to the frontloaded expense pattern.
- Loan covenants, bonus arrangements and dividend capacity may all be affected.
This is more than just an accounting exercise early engagement with lenders, management and other key stakeholders is essential.
How we can help
Early action can help avoid surprises and ensure a smoother transition to the updated FRS 102 reporting framework.
At Moore Kingston Smith, we are already helping clients understand the impact of the revised standard – we are providing clarity and direction by identifying how the changes affect them, highlighting accounting policy choices and advising on disclosure requirements. For many businesses this isn’t just an accounting change, it has real commercial consequences.
With the use of advanced, AI-based technology, we carry out impact assessments and lease contact reviews with detailed analysis.
We also provide strategic advice and tailored training for finance teams covering the impact of the changes on KPI’s and loan covenants and can advise on communication with lenders or investors regarding lease changes.
If you would like to discuss how the changes affect your business, please get in touch with our team who can reduce the burden of transitioning to the revised standard.
Contact us for a no-obligation discussion.
