FRS 102 lease accounting changes in 2026
FRS 102 is changing for accounting periods beginning on or after 1 January 2026. While the updates also affect areas such as revenue recognition and disclosures for small companies, one of the most significant changes is the way lessees account for leases. Businesses should also consider the wider commercial and tax implications of these changes.
What is changing?
Under the current rules, leases are classified as either finance leases (hire purchase) or operating leases.
- Finance leases are recognised on the balance sheet, with the lessee recording both an asset representing the right to use the leased item and a liability for future lease payments. Over the lease term, depreciation and interest are recognised.
- Operating leases are generally kept off the balance sheet, with lease payments recognised as an operating expense over the life of the lease.
From 1 January 2026, most leases will instead be recognised on the balance sheet, bringing FRS 102 more closely into line with IFRS. Lessees will typically record both a right-of-use asset and a corresponding lease liability.
The new requirements apply prospectively. Comparative figures will not be restated; instead, any transition adjustment will be recognised in opening reserves at the start of the first accounting period under the new rules.
The accounting requirements for lessors remain largely unchanged.
Exemptions
Two practical exemptions are available:
- Low-value assets, such as laptops (but not cars), can be accounted for using either the new or existing approach on a lease-by-lease basis.
- Short-term leases with a term of 12 months or less (and no purchase option) may also continue to be treated as operating leases, provided the policy is applied consistently within each class of assets.
Choosing whether to use these exemptions can have a noticeable impact on your financial statements.
Business impact
Recognising leases on the balance sheet may:
- Increase reported assets and liabilities.
- Affect company size thresholds and audit status.
- Reduce current ratio calculations and potentially influence banking covenants.
- Increase EBITDA by replacing lease expenses with depreciation and interest.
- Influence performance-related measures such as bonus schemes, share option targets and earn-out arrangements.
Although applying the available exemptions may reduce complexity, businesses should also consider how different accounting treatments affect key financial metrics and stakeholder reporting.
Micro-entities applying FRS 105 are not affected by the lease accounting changes, although other amendments, including those relating to revenue, still apply. Early adoption of the revised FRS 102 is also permitted, provided all amendments are adopted together.
Preparing for the changes
A good starting point is to identify every lease across the business. This should include obvious arrangements, such as property and vehicle leases, as well as contracts that may contain embedded leases.
Areas to review include:
- Property and facilities.
- Company vehicles.
- Dedicated parking spaces.
- IT equipment, including laptops.
- Office equipment such as printers and coffee machines.
- Service contracts that provide control over specific assets, such as catering or facilities agreements.
Once you’ve identified all relevant leases, assess whether they qualify for an exemption and whether using that exemption is appropriate for your business.
Tax considerations
For most businesses, the corporation tax position should remain broadly unchanged. Instead of claiming a deduction for lease rental payments, tax relief will generally arise through depreciation (or amortisation where applicable) and finance costs recognised in the accounts.
As the tax treatment broadly follows the accounting treatment, the changes are not expected to create significant deferred tax implications in most cases. However, businesses should consider the wider effects on financial reporting, covenants and commercial arrangements when planning for the transition.