FRS 102 Lease Changes: What the New On-Balance-Sheet Rules Mean From January 2026

For years, UK companies reporting under FRS 102 have been able to keep most leases off the balance sheet, disclosing operating lease commitments in the notes rather than recognising them as assets and liabilities. From accounting periods beginning on or after 1 January 2026, that changes. Following the FRC’s periodic review of FRS 102, lessees move to a single on-balance-sheet model much closer to IFRS 16, and the impact is felt well beyond the finance team.

What’s Actually Changing

Under the new rules, the current distinction between operating and finance leases disappears for lessees. Instead, most leases require recognition of a right-of-use asset and a corresponding lease liability at the start of the lease term, based on the present value of future lease payments. The asset is then depreciated and the liability unwound through interest, replacing the simple straight-line rental charge most businesses are used to.

Who This Affects Most

Any business with a meaningful portfolio of leased assets, property leases, vehicle fleets, equipment, and machinery, sees a shift. Businesses that lease their premises rather than own them are likely to see the biggest change, since property leases tend to be the largest and longest-term commitments on the books.

Why It Matters Beyond the Numbers

Bringing leases onto the balance sheet inflates both assets and liabilities, which can affect key financial ratios such as gearing, EBITDA, and return on assets. This matters for businesses with bank covenants tied to these metrics, since a covenant breach could be triggered by an accounting change alone rather than any real deterioration in trading. It’s also worth reviewing how leases are presented to lenders, investors, and credit insurers.

Exemptions Still Available

Some relief remains. Short-term leases (broadly, twelve months or less) and leases of low-value assets can still be expensed on a straight-line basis, similar to current treatment. This gives smaller or lower-value arrangements, like some office equipment, a practical way to avoid the full recognition exercise.

Where Things Stand Now

With the change now in effect, many UK businesses with a calendar year end are just beginning their first accounting period under the new lease rules. This means the shift is no longer theoretical, it’s showing up in live numbers rather than forecasts. It’s not just about restating the balance sheet correctly either. The first set of accounts prepared under the new standard also needs to include specific disclosures: a reconciliation of previous operating lease commitments to the lease liabilities now recognised, the transition method applied, and the judgements made around discount rates and lease terms. Getting these disclosures right matters just as much as getting the numbers right, since they’re what give lenders and stakeholders confidence in how the transition was handled.

If you’re working through your first accounts under the new lease rules, or want a second opinion on your transition approach and disclosures, get in touch with Surrey Hills Tax - we’re happy to help.

Disclaimer: This article is for general information only and does not constitute tax advice. Tax treatment depends on individual circumstances and may change.