Lease Accounting Under FRS 102 (2026 Changes): A Practical Guide

The Big Change: FRS 102 Leases from 2026

The 2026 FRS 102 triennial review amendments introduced a new lease accounting model closely aligned with IFRS 16 — effective for accounting periods beginning on or after 1 January 2026. For most UK lessees, this is the most operationally significant change in the triennial review. Previously, FRS 102 Section 20 required lessees to classify leases as either operating (off-balance sheet) or finance (on-balance sheet) — the new model brings virtually all leases onto the balance sheet.

The New Model: Right-of-Use Assets and Lease Liabilities

Under the revised FRS 102, lessees recognise a right-of-use (ROU) asset and a corresponding lease liability for most leases. The lease liability is measured at the present value of future lease payments, discounted at the interest rate implicit in the lease or, if that cannot be determined, the lessee's incremental borrowing rate. The ROU asset is initially measured at the lease liability amount plus initial direct costs and prepaid lease payments. Subsequent accounting mirrors IFRS 16: the lease liability is unwound using the effective interest method; the ROU asset is depreciated over the shorter of the lease term and the asset's useful life.

Practical Exemptions

Two practical expedients are available (as in IFRS 16): short-term leases (12 months or less) and leases of low-value assets can be accounted for using the old operating lease approach — expensed on a straight-line basis without balance sheet recognition. These exemptions are elected by asset class for short-term leases and on a lease-by-lease basis for low-value assets.

Impact on Financial Statements

Bringing leases onto the balance sheet increases total assets and total liabilities, potentially affecting gearing ratios and banking covenants. The income statement changes: operating lease charges previously shown as a single operating expense are replaced by depreciation of the ROU asset (above EBITDA line) and interest on the lease liability (below EBITDA). This improves EBITDA — important for companies with bank covenants based on EBITDA multiples — but increases interest charges.

Transition

FRS 102 permits a simplified transition approach, similar to the modified retrospective method in IFRS 16 — no restatement of comparatives, with the cumulative impact recognised in opening retained earnings on transition date.

Further Reading

• IFRS 16 Leases Guide
• FRS 102 Update 2026
• Accounting Standards CPD

Study with Learnsignal: Accounting standards CPD for finance professionals navigating FRS 102 changes. Browse CPD.