UK Standards Guide · Last updated May 2026
FRS 102 Lease Accounting Changes (2026 Guide)
The biggest change to UK lease accounting in a generation. What changed, who is affected, and what finance teams need to do now.
From 2026, many UK businesses reporting under FRS 102 will need to bring most leases onto the balance sheet for the first time. That means new calculations, new disclosures, new accounting judgements and significantly more audit evidence.
This guide explains what is changing, who is affected, and what finance teams should do now to prepare.
At a glance
| Effective date | Accounting periods beginning on or after 1 January 2026 |
| Early adoption | Permitted |
| Main change | Most leases move onto the balance sheet as a right-of-use asset and lease liability |
| Who is affected | Most entities preparing accounts under FRS 102 |
| Who is not affected | Micro-entities applying FRS 105; some Section 1A entities |
| Transition options | Full retrospective or modified retrospective |
| Main challenge | Lease data, accounting judgements, transition calculations, and audit evidence |
| Authority | Financial Reporting Council (FRC) |
What is changing under FRS 102?
The Financial Reporting Council (FRC) has updated FRS 102 so that lease accounting for many UK businesses more closely follows the IFRS 16 model.
For accounting periods beginning on or after 1 January 2026, most leases will need to appear on the balance sheet as a right-of-use asset and a lease liability.
Under the previous model, many operating leases stayed off balance sheet. The new approach means businesses will need better lease data, clearer documentation, and more robust calculations and audit evidence.
For many businesses with a December year end, the first affected financial year will be the year ending 31 December 2026, with a transition date of 1 January 2025 under the modified retrospective approach.
Who is affected?
The changes affect most entities preparing accounts under FRS 102, including:
- Medium and large UK private companies
- Subsidiaries preparing separate FRS 102 accounts
- Groups not applying IFRS
- Charities and other entities reporting under FRS 102
Micro-entities applying FRS 105 are not affected. Some smaller entities applying Section 1A of FRS 102 should review the detailed requirements to confirm how the amendments apply to them.
Why this matters for finance teams
The changes affect more than just year-end accounts. Finance teams may need to:
- Identify all leases across the business — including property, vehicles, equipment, IT, and embedded leases in service contracts
- Gather missing lease agreements and confirm key terms
- Calculate right-of-use assets and lease liabilities for each in-scope lease
- Document key accounting judgements, including discount rates, lease terms, and exemption decisions
- Prepare new journals and accounting disclosures
- Explain balance sheet changes to lenders, investors, and other stakeholders
- Provide significantly more audit evidence than was required under the old model
For businesses currently relying on spreadsheets, this can become difficult to manage as lease portfolios grow or change over time.
What changes in practice
Balance sheet
New right-of-use assets and lease liabilities appear on the balance sheet. Net assets may change depending on the amounts and any deferred tax position.
EBITDA
EBITDA typically increases because rent moves below the EBITDA line — replaced by depreciation (which sits below EBIT) and interest expense.
Profit and loss
In early years, the combined depreciation and interest charge is usually higher than the old straight-line rent. This reverses in later years as interest reduces.
Loan covenants
Covenant ratios based on net debt, gearing, or EBITDA may be affected. Businesses with banking arrangements should review their covenants early.
Audit complexity
Auditors will review lease calculations, discount rate judgements, lease term assessments, and the evidence supporting them. More preparation is needed.
Data requirements
Lease terms, payment schedules, commencement dates, and option details all need to be captured accurately. Missing data can delay reporting.
Key concepts
Right-of-use asset
A right-of-use asset must be recognised for all leases other than those qualifying for the short-term or low-value exemptions. The asset is initially measured at cost — which includes the initial lease liability, plus any prepayments, initial direct costs, and estimated restoration obligations. It is then depreciated on a straight-line basis over the remaining lease term.
Lease liability
The lease liability is measured at the present value of future lease payments, discounted at the interest rate implicit in the lease — or, where that rate cannot be readily determined, at the lessee's incremental borrowing rate. The liability is then reduced as payments are made, with interest accruing on the outstanding balance using the effective interest method.
Incremental borrowing rate (IBR)
The incremental borrowing rate is one of the most significant judgements in the new model. It should reflect the rate at which the business could borrow over a similar term, for a similar asset, with similar security. This judgement should be clearly documented because it materially affects the lease liability and will typically be reviewed closely during audit.
Lease term
The lease term includes the non-cancellable period plus any optional extension periods where exercise is reasonably certain, and any optional termination periods where non-exercise is reasonably certain. The determination of the lease term requires documented professional judgement, particularly where the lease contains break clauses or renewal options.
Practical exemptions
Two exemptions are available, allowing certain leases to remain off balance sheet:
- Short-term leases: leases with a remaining term of 12 months or less. Payments are recognised as an expense on a straight-line basis. This exemption applies by asset class and must be disclosed.
- Low-value assets: leases where the underlying asset is of low value when new. Businesses must set their own threshold and apply it consistently. This exemption applies on a lease-by-lease basis.
The decision to apply an exemption is an accounting policy choice and the reasoning should be documented.
What finance teams need to document
The new standard is more judgement-intensive than the old model. Auditors will expect to see documentation supporting the following for each material lease:
- Lease term determination: the rationale for which optional periods have been included or excluded, particularly where there are break clauses or renewal options
- Discount rate selection: how the incremental borrowing rate was determined, including any benchmarks or market data used
- Exemption decisions: why a lease qualifies as short-term or low-value, and the threshold used for low-value assessments
- Lease modifications: how changes to lease terms or payments have been assessed and recorded
- Transition assumptions: the chosen transition method, practical expedients applied, and the reconciliation from previous operating lease commitments to the opening lease liability
What auditors will expect
Lease accounting under the new FRS 102 model is likely to attract more audit scrutiny than operating lease accounting did. Auditors will typically want to see:
- A complete and accurate lease register covering all in-scope leases
- Clear calculation workings for each lease liability and right-of-use asset
- Documented reasoning for each significant accounting judgement
- Evidence that the discount rate has been determined appropriately and consistently
- Amortisation schedules that can be agreed to the balance sheet and income statement
- A statutory note that is complete, consistent with the ledger, and correctly formatted
- A clear audit trail from each journal entry back to the underlying lease and calculation
Transition approaches
Businesses can choose between two transition approaches. See our FRS 102 Transition Guide for a full comparison and worked example.
Full retrospective
Apply the new rules as though they had always been in effect. Comparative periods are restated. Improves comparability but requires more historical data and calculations. Less common in practice.
Modified retrospective
Recognise the cumulative impact at the transition date only. No restatement of comparatives. Simpler operationally and expected to be the more common approach for UK businesses.
What businesses should do now
Many businesses will need significant preparation before their first affected reporting period. Key steps typically include:
Identify all leases
Review property, vehicle, equipment, IT, and other arrangements across the business. Include embedded leases within service contracts where the contract gives the right to use a specific asset.
Gather lease information
Collect lease agreements and confirm key details: commencement date, lease term, payment schedule, escalation clauses, renewal options, break clauses, and any incentives.
Assess accounting judgements
Document the reasoning for lease term assumptions, discount rate selection, and exemption decisions. These will be reviewed during audit.
Model the financial impact
Calculate the expected balance sheet and P&L impact. Understand how the changes affect EBITDA, net debt, and key performance metrics before year end.
Consider lender and stakeholder impact
Some loan covenants and reporting measures may be affected by the new balance sheet treatment. Proactive communication with lenders is advisable where covenants reference balance sheet figures.
Prepare for transition
Determine the preferred transition approach, prepare opening balance calculations and journals, and identify the data you will need for the required disclosures.
Frequently asked questions
When do the new FRS 102 lease rules start?
The new rules apply to accounting periods beginning on or after 1 January 2026. Early adoption is permitted. For businesses with a December year end, the first affected period will typically be the year ending 31 December 2026.
Are small companies affected?
It depends on the size and the section of FRS 102 applied. Micro-entities using FRS 105 are not affected. Entities applying Section 1A of FRS 102 should review the specific requirements for their circumstances, as some may have reduced obligations.
Do vehicle leases need to go on the balance sheet?
Yes, in most cases. Unless a vehicle lease qualifies as a short-term lease (remaining term of 12 months or less) or the vehicle is of low value when new, it will need to be recognised on the balance sheet as a right-of-use asset and lease liability.
What is the modified retrospective approach?
The modified retrospective approach recognises the cumulative effect of the new rules at the transition date without restating comparative figures. The opening lease liability is calculated as the present value of remaining lease payments at the transition date, discounted at the incremental borrowing rate at that date.
Does this affect EBITDA?
Yes. Under the new model, lease costs are replaced by depreciation (which sits below EBIT) and interest expense. Both are excluded from EBITDA, so EBITDA typically increases by an amount equal to the previous lease expense. This does not mean the business is more profitable — it is an accounting presentation change.
What if I do not have all the lease agreements?
Missing lease agreements are a common practical challenge. Finance teams should start gathering documents early. Where original agreements are unavailable, it may be possible to reconstruct key terms from invoices, correspondence, or the landlord or lessor.
Prepare for FRS 102 lease accounting with AuditLease
AuditLease is designed to help UK businesses prepare for the 2026 FRS 102 lease accounting changes. Instead of managing lease accounting across disconnected spreadsheets and working papers, finance teams can keep calculations, assumptions, and supporting evidence together in one place.
It supports: lease capture and organisation, right-of-use asset and lease liability calculations, transition calculations and journals, amortisation schedules, statutory note preparation, and audit evidence and review trails.
Official references
Related guides
This guide is provided for general informational purposes only and does not constitute accounting, audit or legal advice. You should seek professional advice specific to your circumstances before making any decisions based on this content.