FRS 102 Lease changes: What business owners need to know by 2026

Russell Flynn ACA details upcoming changes to financial reporting and the impact this has on how you account for leases.

If your business leases things such as property, vehicles, or equipment then your accounting is about to change on these matters, and potentially quite significantly!

From 1 January 2026, FRS 102 lease recognition changes as a result of updates to Section 20 will take effect, bringing in new rules on how leases are to be reported. What once formed a part of your profit and loss will now get a lot more attention.

That’s why I’ve written this blog post, so that you’re informed and prepared when it's introduced for the impact with regards to audit thresholds, what to disclose in your financial statements, and the potential impact on your ability to raise finance moving forward. 

Read on to find out more about what’s coming, why it matters, and what you can do to prepare for it in order to stay ahead.

In this blog post:

1. Right-of-use assets: Your new balance sheet addition 

Previously many leases, especially operating leases (those that permit the use of an asset without transferring its ownership rights), weren’t shown on your balance sheet. Instead, you recorded the monthly payment as an expense as part of the profit and loss account. Soon that will not be the case anymore!

Under the new rules in Section 20, nearly all leases will now result in a right-of-use (ROU) asset being added to your balance sheet, along with a corresponding liability for future lease payments. This means your balance sheet is about to get heavier.

Specifically this impacts:

• Commercial property leases
• Vehicle or fleet agreements
• Equipment hire

You’ll now need to:

• Record the ROU asset at cost (this should include initial lease payments, and direct costs incurred)
• Depreciate the asset over the lease term
• Recognise a liability based on the present value of lease payments

2. Calculating present value: Why discounting isn't just for sales

Lease liabilities must now reflect the present value of future lease payments. You’ll use:

• The interest rate implicit in the lease if you know it, or;
• Your incremental borrowing rate, namely what it would cost to borrow the funds to finance the lease

Unfortunately this adds complexity and also means:

• A larger liability on your balance sheet
• Changes to key ratios (debt-to-equity, current liabilities, etc.)
• A matching ROU asset on the asset side of your balance sheet

The reason this then matters is because lenders, investors, and your board (where relevant) will see this when they review your accounts. If the amount of debt in your accounts suddenly looks higher, be ready to explain why.

3. Disclosure: You'll need to disclose a lot more about your leases

As you may have identified already, the new standards demand more transparency. You therefore need to expect to disclose:

• Total lease liabilities
• A reconciliation of the opening and closing balances of lease liabilities
• Interest expenses from leases liabilities
• Cash outflows related to lease payments
• Lease maturity breakdowns (what’s due within 12 months vs. later)

This will provide a view as to your lease situation and the impact on your financial position.

4. Audit thresholds and the hidden risks for growing businesses

Here’s where it gets more complicated. The need to report and therefore the increase in assets and liabilities could potentially tip your business over the UK’s audit thresholds, namely:

• Turnover: £15 million
• Gross assets: £7.5 million
• Employees: More than 50

Even if your business is not of these size thresholds yet, you need to look out for your balance sheet figures potentially pushing you into audit territory. Whilst you may benefit from a first-year exemption, prepare for the fact that it could affect you for years to come, given conducting an audit isn’t an insignificant expense.

Ask yourself:

• Will these changes result in us breaching the threshold?
• Are we ready for the cost, time, and scrutiny of an audit?
• Should we plan differently for capital investments or leases moving forward?

5. What should business owners implement today?

The time for preparation is now and here are the things for you to consider:

• Do an inventory of your leases: Whether you use a broker, or not, make sure you know all the leases your business has. Property, cars, tech, and tools, review the terms because it all counts in helping you present the value of future lease payments.
• Model the impact: Work with your accountant to run scenarios. See how the changes affect your balance sheet, and key ratios. Remember you need to prepare your accounts in accordance with the new rules.
• Upgrade your systems: Your monthly reporting needs to reflect these changes long before 2026 ends.
• Get audit-ready: Even if you don’t trip the thresholds yet, it’s worth preparing in case you’re likely to in the future.

Educate your team: Your finance team needs to understand the new requirements, and your leadership team needs to grasp the potential implications. 

For consideration

This is a technical update with likely strategic implications. Businesses that prepare and handle it well will not only stay compliant but also be in a better position to manage relationships with investors, banks, and stakeholders. For this reason, you shouldn’t wait until 2026 is here, the time to prepare is now, so that you can stay ahead of the game.

Unsure where to start? A first step would be to ask, ‘what leases do we have, how will this impact our accounts?’

You can then progress everything from there!

This post was created on 05/12/2025.

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