The Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102) has introduced significant changes to lease accounting for lessees. These changes are effective for all businesses with accounting periods commencing 1 January 2026.
These changes bring UK and Irish accounting practices closer to international lease accounting principles and will have an impact on financial reporting and key financial metrics for businesses with significant lease commitments.
Under the revised rules, almost all leases will be recognised on the balance sheet, with both a right-of-use asset and a corresponding lease liability using the present value of the remaining lease payments at the date of initial recognition.
As a result, the lease expense previously recognised in the profit or loss will be replaced by depreciation on the right-of-use asset and interest on the lease liability.
This represents a significant change from the previous distinction between operating and finance leases and may affect reported profit, assets, liabilities and key financial ratios.
The revised standard also introduces enhanced disclosure requirements. Businesses will need to provide greater transparency in their financial statements regarding lease arrangements, including information about lease commitments, the nature of lease agreements and their impact on the financial statements.
Certain leases are exempt from balance sheet recognition, including:
Higher-value assets, including vehicles, property and machinery, will not qualify for the low-value asset exemption.
The standard requires a modified retrospective method, meaning prior-year comparatives are not restated. Instead, the cumulative impact of applying the revised requirements is recognised as an adjustment to opening retained earnings at the beginning of the period of initial application.
For businesses with significant lease commitments, the changes could have a material impact on their financial statements, financial ratios and reporting processes.
The revised accounting treatment may affect key metrics such as gearing, leverage and interest cover. Businesses should also consider the potential impact on existing financing arrangements and loan covenants. Early engagement with lenders may be appropriate where changes to financial ratios could affect covenant calculations.
Businesses should now review their existing lease agreements to determine which arrangements are within the scope of the revised requirements, identify any applicable exemptions and ensure that the appropriate accounting treatment is applied.
At RBK, we can assist with reviewing your existing lease agreements, assessing the impact of the revised FRS 102 requirements, updating your accounting policies and supporting you with implementation.
If you would like to discuss how the changes may affect your business, please get in touch with our team.
Disclaimer: While every effort has been made to ensure the accuracy of information within this publication is correct at the time of publication, RBK do not accept any responsibility for any errors, omissions or misinformation whatsoever in this publication and shall have no liability whatsoever. The information contained in this publication is not intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without appropriate professional advice.
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