Significant revisions to FRS 102 are changing the way almost all businesses account for their leases, bringing UK accounting standards more closely into line with international standards (IFRS). This guide explains what is changing, how the new lease accounting works in practice, the impact it will have on your accounts, and the transition arrangements, so you can prepare with confidence.
What are the FRS 102 changes?
The FRS 102 lease changes are effective for accounting periods beginning on or after 1 January 2026. Despite the amount of press the changes have attracted, the good news is that it is not too late to get ready – there is still time to familiarise yourself with what is changing and what it means for your business.
There are two key changes under the revised standard:
- FRS 102 lease accounting: almost all leases will be brought onto the balance sheet for lessees, as a right-of-use (“RoU”) asset and a corresponding lease liability.
- FRS 102 revenue recognition: the previous criteria are replaced with a new five-step model that focuses on control rather than risks and rewards.
The revised FRS 102 introduces a model closely aligned to IFRS 16, requiring almost all leases to be brought onto the balance sheet if you are a lessee. The long-standing distinction between finance leases and operating leases is effectively removed – almost everything comes on balance sheet.
Which leases are exempt?
Businesses can still elect to treat the following as traditional operating leases, recognised on a straight-line basis through the income statement:
- Short-term leases – leases with a term of 12 months or less.
- Low-value leases – assessed on an absolute basis, not on whether they are material to the entity. This might cover assets such as laptops, tablets or small items of furniture. The standard sets no monetary threshold but does provide a helpful list of assets that can never be low value, including cars, boats, land and buildings.
How the new FRS 102 lease accounting works
As a result of the changes, businesses will recognise a new liability (the lease liability) and a new asset (the right-of-use asset) on the balance sheet. Let’s take each in turn.
The lease liability
Initial recognition. The lease liability is recorded at the present value of the expected future lease payments. To calculate it you:
1. Identify the remaining payments due over the lease term.
2. Arrive at a discount rate. This is either:
- the interest rate implicit in the lease; or
- if that is not identifiable, either the incremental borrowing rate (the rate you would pay to borrow a similar amount, over the same term, with the same security profile) or the more practical obtainable borrowing rate (the rate you could realistically obtain from a bank for a comparable asset).
3. Discount the remaining payments using that rate.
Subsequent recognition. In later periods the liability accretes (increases) by the interest charge as the present-value calculation unwinds, and reduces by the cash payments made to the landlord.
The right-of-use asset
Initial recognition. The opening value of the RoU asset is the lease liability plus any payments made before the lease began, lease incentives, direct costs, and rectification costs such as dilapidations.
Subsequent recognition. The RoU asset is then depreciated on a straight-line basis over the lease term.
To see how these inputs come together in our step-by-step worked FRS 102 lease accounting example.
What is the impact on your accounts?
Bringing leases on balance sheet changes the shape of both the income statement and the balance sheet.
Income statement. Where you previously had operating leases recognised as straight-line rental expenditure, that rental cost is replaced by depreciation (of the RoU asset) and interest (on the lease liability). Because of this, EBITDA increases — but the front-loaded nature of discounting means profit before tax may fall in the early years.
Balance sheet. Both assets and liabilities increase, potentially significantly, as previously off-balance-sheet items come on. Net assets typically decrease initially, because the RoU asset depreciates faster than the lease liability reduces.
| Income statement | Effect |
| EBITDA | ↑ |
| Depreciation | ↑ |
| Finance costs | ↑ |
| Profit before tax (initially) | ↓ |
| Balance sheet | Effect |
| Right-of-use asset | ↑ |
| Lease liabilities | ↑ |
| Net assets (initially) | ↓ |
These movements are not just presentational. You may need to reconsider your gearing and covenant position if you have borrowings, and the increase in gross assets may affect your eligibility for audit and accounting exemption thresholds. We explore these wider commercial effects in detail in our guide to the impact of revised FRS 102 on financial metrics and business implications.
When do the FRS 102 lease changes take effect?
The effective date is periods commencing on or after 1 January 2026. In practice this will generally affect December 2026 year ends onwards, though earlier year ends can be caught if you have a short period of account.
Transition arrangements
Modified retrospective approach
FRS 102 provides a simpler transition path than the international standards: entities use the modified retrospective approach only.
- How it works: the cumulative effect of recognising lease liabilities and RoU assets is taken as an adjustment to the opening balance of retained earnings at the date of initial application (1 January 2026 for most entities).
- Comparatives: these are not restated.
The transition impact must also be disclosed appropriately in the accounts.
Practical expedients
Several expedients are available to ease the transition:
- Portfolio approach – apply a single discount rate to a portfolio of leases with similar characteristics (such as similar terms or asset classes), rather than calculating lease by lease.
- Hindsight – use hindsight to determine the lease term, for example whether extension or termination options will be exercised.
- Short-term / low-value exception – choose not to recognise a liability and RoU asset for leases ending within 12 months of transition, or for low-value assets.
Next steps
The new FRS 102 lease changes represent a real shift, but with a clear understanding of the mechanics and an early start they are very manageable. The technical model is only half the picture – the practical work of identifying every lease and determining the right inputs is where finance teams tend to spend their time.
Our Financial Reporting Advisory team supports businesses across the full journey, from interpreting the reporting standard to running the calculations and supporting the audit. If you would like to talk through how the lease changes affect your specific circumstances, get in touch – we will help you turn a technical standard into a clear, well-evidenced set of accounts.
Related articles in our changes to FRS 102 series:
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