What the new lease rules mean for UK businesses: A practical guide to FRS 102 amendments

New lease accounting rules are coming into effect under FRS 102—and they will change the way many UK businesses present their leases in financial statements. Starting from accounting periods beginning on or after 1 January 2026, most leases will now appear directly on the balance sheet.

If your business has lease agreements—whether for offices, vehicles, or equipment—it’s time to understand what’s changing, and how you can prepare with confidence.

Why the change?

The updated standard removes the distinction between operating and finance leases for lessees. This means virtually all leases will now be accounted for as assets and liabilities—similar to how finance leases were treated previously.

The objective? Greater transparency, better comparability between businesses, and a more accurate view of long-term commitments.

What will you need to do?

Under the new model, your business will need to recognise:

• A right-of-use asset representing the leased item

• A lease liability reflecting your obligation to make lease payments

To transition into the new framework, businesses will adopt a modified retrospective approach. In simple terms: you don’t need to restate prior-year financials, but you will need to calculate the opening lease positions and make adjustments to your balance sheet.

Key practical options (Expedients)

To help ease the transition, the standard allows for several simplifications:

• Short-term leases (less than 12 months remaining) and low-value assets can be excluded from the new rules.

• If you already report under IFRS 16, you may choose to carry forward your existing lease balances into the new FRS 102 model, promoting consistency across your group.

• You can also apply a single discount rate across groups of similar leases to streamline the calculation process.

These options are especially useful for smaller entities or groups with limited accounting resources.

What could be challenging?

1. Systems and processes: You may need to update your lease tracking and accounting software, especially if you haven’t been collecting data like lease terms, discount rates, or renewal options in detail.

2. Financial metrics: Putting leases on the balance sheet may affect key indicators like gearing ratios, EBITDA, or covenant calculations. Understanding these impacts early is essential.

3. Stakeholder communication: Lenders, investors, and auditors may have questions about the change. Clear internal and external communication will reduce confusion and build trust.

How to prepare now

While the effective date may seem far off, smart businesses are acting early. Here’s what you can start doing:

• Inventory all active leases and identify those affected.

• Assess your readiness: Can your current system handle the new model?

• Run early calculations to understand potential balance sheet impacts.

• Review lease strategies: Reconsider terms, renewal options, or lease-vs-buy decisions with the new model in mind.

Final thought

These changes aren’t just about compliance—they’re about clarity. By preparing now, you can ensure a smooth transition, reduce surprises, and even uncover opportunities to improve lease management.

If your team is unsure where to begin, seeking early guidance will help turn a technical update into a strategic advantage.