FRS 102 Lease Accounting Checklist for 2026

1. Identify all lease arrangements

The starting point is a complete inventory of all arrangements that may meet the definition of a lease under the amended FRS 102.

A lease exists where a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. This covers more than formal rental contracts — it can include embedded leases within supplier or service agreements.

Finance teams should review contracts across property, vehicles, IT equipment, plant and machinery, and any other arrangements where the business has the right to use an asset.

2. Gather source lease agreements

For each identified lease, the original agreement and any amendments or side letters must be obtained. Where agreements have been lost or are unavailable, it may be possible to reconstruct key terms from invoices, correspondence, or directly from the landlord or lessor.

Auditors will ask for source documents, so early collection avoids delays at year-end. A central register or document store for lease agreements is strongly recommended.

3. Extract key lease terms

For each lease, the following terms need to be recorded:

• Commencement date — when the lessee obtains the right to use the asset
• Lease term — including any renewal or extension options that are reasonably certain to be exercised
• Lease payments — fixed payments, in-substance fixed payments, variable payments based on an index or rate, and expected residual value guarantees
• Currency — if the lease is in a foreign currency, the spot rate at commencement is required
• Break clauses and options — any right to terminate or extend the lease term

4. Assess lease term and renewal options

Under FRS 102, the lease term must include any optional extension periods that the lessee is reasonably certain to exercise, and must exclude any termination options that are reasonably certain to be exercised.

This judgement — which periods are included in the lease term — is one of the most significant accounting decisions in lease accounting, and auditors will expect it to be documented. Finance teams should consider economic incentives, reliance on the asset, and the cost of moving or replacing the asset when making this assessment.

The judgement should be written down and retained as part of the audit evidence.

5. Determine the discount rate

The lease liability is calculated as the present value of future lease payments, discounted at an appropriate rate. FRS 102 requires the use of the interest rate implicit in the lease where this can be readily determined.

In practice, the implicit rate is often not readily determinable. Most UK businesses will use the incremental borrowing rate — the rate they would pay to borrow over a similar term with similar collateral.

This rate is another significant judgement area. Finance teams should document how the rate was determined and obtain support for the rate used. Common approaches include using bank facility rates, market comparable rates, or interest rate benchmarks adjusted for company and lease-specific factors.

6. Assess exemptions

Two exemptions from the on-balance-sheet requirement are available:

• Short-term leases — leases with a remaining term of 12 months or less at the commencement date of the lease (or, for existing leases on transition, at the transition date). Note that lease term judgements apply here too.
• Low-value assets — leases where the underlying asset is of low value when new. FRS 102 does not specify a threshold, but IFRS 16 uses USD 5,000 as a guideline. This is a judgement and should be documented.

Both exemptions are accounting policy choices that must be applied consistently. Where exemptions are applied, the lease payments are recognised as an expense on a straight-line basis or another systematic basis over the lease term.

7. Model the balance sheet impact

Before the first affected period, it is worth estimating the impact of bringing leases onto the balance sheet. This helps finance teams, management, and lenders understand the expected changes to total assets, total liabilities, and key financial ratios.

The FRS 102 lease impact tool on this site provides a quick estimate based on lease payments, term and discount rate.

For businesses with banking covenants linked to net debt, leverage ratios, or EBITDA, the financial covenant impact should be assessed and discussed with lenders in advance where appropriate.

8. Prepare the transition calculation and journals

Most UK businesses will use the modified retrospective transition method, which means:

• No restatement of comparative figures
• The lease liability is measured as the present value of remaining lease payments at the transition date, discounted at the incremental borrowing rate at that date
• The right-of-use asset is set equal to the lease liability at transition (with certain adjustments)

The opening transition journal is:

Any prepaid or accrued lease payments, initial direct costs, or lease incentives also affect the right-of-use asset value.

9. Prepare the statutory disclosure

FRS 102 requires specific disclosures in the notes to the financial statements for lease accounting. Finance teams should prepare these disclosures in advance and check them against the disclosure requirements in the standard.

Required disclosures include: the carrying amount of right-of-use assets and related depreciation, the lease liability balance and maturity analysis, total cash outflows for leases, and short-term and low-value exemption disclosures where applicable.

10. Prepare audit evidence

Auditors will expect clear support for the lease accounting. See the lease accounting audit evidence checklist for a detailed breakdown of what is typically expected.

At a minimum, finance teams should ensure the following are available for each lease:

• Source lease agreement
• Written judgement on lease term and any options
• Written judgement on discount rate with supporting evidence
• Assessment of any exemptions applied
• Calculation of the initial lease liability (present value workings)
• Amortisation schedule
• Opening transition journal
• Statutory disclosure draft

Common mistakes to avoid

• Starting too late. The data collection and judgement documentation process takes time. Start at least six months before the first affected period end.
• Missing embedded leases. Review supplier contracts carefully — some service arrangements contain an embedded lease component.
• Undocumented judgements. Auditors will challenge undocumented decisions on lease term and discount rate. Write them down at the time, not afterwards.
• Using a single rate for all leases. The discount rate should reflect the specific lease — term, security and currency all affect the appropriate rate.
• Ignoring covenant impact. Lease liabilities count as debt under many facility agreements. Finance teams should check covenant definitions before transition.

Frequently asked questions

This guide is for general information only and does not constitute accounting or legal advice. Finance teams should consult a qualified accountant for advice specific to their circumstances. AuditLease is software, not an advisory service.