What is changing under FRS 102 in 2026? New FRS 102: Amendments to lease accounting
The Financial Reporting Council (FRC) has issued comprehensive improvements to FRS102, The Financial Reporting Standard, applicable in the UK and Republic of Ireland. These include amendments to Section 20 Leases, which will be effective for periods beginning on or after 1 January 2026.
What is changing under FRS 102 in 2026?
The Financial Reporting Council (FRC) issued a major set of amendments to FRS 102 – The Financial Reporting Standard applicable in the UK and Republic of Ireland, following a Periodic Review in 2024, with the most significant changes affecting lease accounting (the other major changes being in relation to revenue recognition-not discussed here). These revisions apply to accounting periods beginning on or after 1 January 2026, with early adoption allowed if all amendments are applied at the same time.
The overarching aim of the changes is to improve transparency and comparability in financial reporting. In practice, this means bringing more lease obligations onto the balance sheet and reducing inconsistencies between companies that lease assets and those that borrow to buy them.
Which part of FRS 102 is most affected?
The most substantial change relates to Section 20 Leases, which has been entirely replaced. The new section is largely based on IFRS 16 Leases, although it has been adapted with the intention of remaining proportionate and practical for UK and Ireland entities.
While other sections of FRS 102 have been updated, Section 20 is where most businesses will feel a tangible impact.
What is the biggest change to lease accounting for lessees?
The headline change is the removal of the distinction between operating and finance leases for lessees. Under the previous treatment, operating leases are kept off the balance sheet, with rental costs recognised on a straight line basis. From 2026, that approach largely disappears.
Instead, most leases will now be recognised on the balance sheet, meaning obligations that were previously disclosed only in the notes will now be visible within the primary financial statements.
What needs to be recognised on the balance sheet?
Under the revised Section 20, a lessee must recognise two new items at the start of a lease. The first is a right of use asset, which represents the right to use the leased asset over the lease term. The second is a lease liability, which reflects the present value of future lease payments.
Initially, the right of use asset is usually measured at the same amount as the lease liability, with adjustments for lease incentives, payments made before the lease starts and any initial direct costs. Over time, the right of use asset is depreciated, while the lease liability is reduced as payments are made and increased by the finance charge as the discount unwinds. The right-of-use asset will also be subject to consideration of impairment under Section 27.
How will this affect the income statement?
The familiar operating lease rental expense will no longer appear for most leases. Instead, companies will recognise depreciation on the right of use asset and a finance charge on the lease liability.
Although the total expense recognised over the full lease term is broadly the same, the pattern changes. Costs are typically higher at the start of a lease and reduce over time. This shift can have a noticeable impact on reported profit, EBITDA and other performance measures, even though underlying cash flows are unchanged.
Are any leases exempt from the new rules?
Yes. To keep the standard proportionate, the FRC has retained exemptions for short term leases (those of less than 12 months) and leases of low value assets. These can continue to be accounted for in a way similar to operating leases under the current rules.
Importantly, FRS 102 does not impose a strict monetary threshold for low value assets. Instead, it relies on judgement, with clear examples of assets that would not qualify, such as land and buildings, vehicles and major production equipment.
Do the changes affect lessors in the same way?
No. For lessors, the impact is expected to be limited. While Section 20 has been rewritten, the fundamental approach to lessor accounting remains largely unchanged. As a result, most lessors will not see a significant difference in how leases are accounted for in their financial statements.
How does FRS 102 differ from IFRS 16?
Although the new lease model is based on IFRS 16, FRS 102 includes several practical simplifications. These reflect the experience of IFRS 16 adoption and the challenges faced by smaller and mid sized entities.
For example, lessees can use an obtainable borrowing rate rather than calculating a highly technical incremental borrowing rate. The standard also reduces the number of situations where lease modifications require a full reassessment and offers a simpler approach to sale and leaseback transactions. These adjustments help reduce complexity without undermining the quality of reporting.
When do the FRS 102 lease changes take effect and how do companies transition?
The amendments apply to periods beginning on or after 1 January 2026, with early adoption available. On transition, companies must apply a modified retrospective approach. This means prior year comparatives are not restated; instead, a cumulative adjustment is made to retained earnings at the date of initial application.
For groups that already report under IFRS, the standard allows existing IFRS 16 lease balances to be carried forward into FRS 102. This practical expedient can significantly reduce transition effort and risk.
Which businesses will be most affected?
All FRS 102 reporters, including those applying Section 1A for small entities, are within scope. However, the impact will be greatest for organisations with extensive lease portfolios, such as those in retail, transport, healthcare, telecommunications and professional services.
Bringing lease liabilities onto the balance sheet can affect gearing, interest cover, profitability ratios and banking covenants. Experience from IFRS 16 suggests that early dialogue with lenders and stakeholders is critical.
How should companies prepare for the 2026 changes?
Preparation should start well in advance. Companies need to identify and review all lease agreements, assess the impact on financial statements and KPIs, and ensure systems and processes are fit for purpose. For some, this may involve implementing specialist lease accounting software.
Beyond compliance, these changes often act as a catalyst for broader discussion about leasing strategy, asset ownership and financial management.
Careful reading of agreements is necessary as there needs to be a specific underlying asset for a lease to exist. This sounds obvious but in a lot of hire agreements the supplier has the right to substitute an asset through the term-if so there is no identified asset. In addition the lessor must, throughout the period of use, have the right to direct the use of the asset.
How can we help?
We have extensive experience advising on the adoption of new and revised accounting standards, including lease accounting under both IFRS 16 and FRS 102. At Moore South, we are already helping clients understand the impact of the revised standard we are providing clarity and direction by identifying how the changes affect them, highlighting accounting policy choices and advising on disclosure requirements. For many businesses this isn’t just an accounting change, it has real commercial consequences.