October 6, 2026 Lease accounting under FRS 102: what businesses need to do
What clients need to know and how to prepare
The revised lease accounting requirements under FRS 102 came into effect for accounting periods beginning on or after 1 January 2026. Businesses with property, vehicle, plant, equipment or IT leases previously treated as operating leases may now need to recognise most of those leases on the balance sheet.
For many businesses, the practical impact will emerge as they prepare their first accounts under the revised requirements. Reviewing lease arrangements before the year-end process begins can help identify any accounting, tax or commercial implications and allow time to address them.
The cash payments under a lease do not change, but the revised treatment can affect how a business’s financial position and performance are reported. The summary below outlines the main accounting, tax and commercial implications.
Summary of key points
- Most leases are now recognised on the balance sheet as a right-of-use asset and lease liability.
- Reported assets and liabilities are likely to increase.
- Operating profit and EBITDA may increase, but finance costs will also increase.
- Profit may be lower in the early years of a lease and higher in later years.
- Net assets may change because lease assets and liabilities unwind at different rates.
- The corporation tax computation may become more complex, with possible deferred tax implications.
- Clients should identify lease arrangements and gather key lease information now.
Accounting impact
Businesses will generally recognise a right-of-use asset for the asset being used and a lease liability for future payments. This will usually increase both assets and liabilities and may make the company appear more highly geared.
In the profit and loss account, rental expense will usually be replaced by depreciation and interest. Operating profit and EBITDA may increase, but finance costs will also increase. Overall profit over the lease term should usually be broadly unchanged, but profit may be lower in the early years and higher in later years.
Net assets may also change because the right-of-use asset and lease liability will not always reduce at the same rate. This could affect distributable reserves, banking covenants, bonus calculations or other commercial measures.
What may not be included?
Not every arrangement for using an asset will necessarily fall within the new lease accounting rules. For example, some short-term leases, low-value asset leases and certain licences or service arrangements may be outside the main recognition requirements.
A licence to occupy office space, such as a flexible serviced office or hot-desk arrangement, may not always be a lease if the business does not control an identified space or the provider can move the business to alternative space. Each arrangement will need to be reviewed based on its terms, including whether there is an identified asset and whether the client controls how and when that asset is used.
Corporation tax impact
The changes are mainly accounting changes and will not necessarily increase the total corporation tax paid over the life of a lease. However, the tax computation may become more complex because depreciation, lease payments and finance costs may need to be considered separately.
Depreciation on right-of-use assets will usually need to be reviewed in the tax computation, and deferred tax may arise where the accounting and tax treatment differ. The tax charge in the accounts may therefore increase or decrease from year to year, even if the overall cash tax effect is broadly unchanged.
Client action checklist
- Prepare a list of all leases, hire purchase, rental, licence and serviced office agreements.
- Gather start dates, end dates, payments, rent reviews, break clauses and renewal options.
- Identify any short-term or low-value leases that may qualify for exemption.
- Consider whether any service contracts contain embedded leases.
- Assess whether covenants, reserves, bonus arrangements or other commercial agreements could be affected.
How we can help
We can help identify affected leases, calculate the opening balances on transition, prepare the accounting entries and consider the tax and disclosure implications.
If your business has material leases, we recommend starting the review early so there is time to understand the accounting, tax and commercial impact before your first affected year end. Contact us if you would like support assessing how the requirements affect your business.