The balance sheet shock: the debt your accounts have never shown

Your business may be carrying six or seven figures of commitments that appear nowhere in your accounts.

Under the old UK GAAP rules an operating lease, which is to say the office, the warehouse and the fleet vehicles, lived off the balance sheet. Monthly rent, a profit and loss expense, done. The balance sheet looked clean.

That has changed. For accounting periods beginning on or after 1 January 2026, FRS 102 Section 20 puts almost every lease on the balance sheet. In practice:

1. At the commencement date the lessee recognises a right-of-use asset and a lease liability (paragraph 20.45).
2. The liability is the present value of the lease payments not yet paid, discounted at the rate implicit in the lease or, where that cannot be readily determined, the lessee's incremental or obtainable borrowing rate (paragraph 20.49).
3. The right-of-use asset starts from that liability, plus payments made at or before commencement and initial direct costs, less incentives received (paragraph 20.47).

The only leases left out are those a lessee elects to leave out: short-term leases of twelve months or less, and leases of low-value assets (paragraph 20.5).

For a company paying £15,000 a month across property and vehicle leases with ten years to run, that is well over £1m of liabilities appearing in the accounts without a single new contract being signed.

The purpose is not punitive. Lenders, investors and other readers of the accounts are meant to see the true scale of a company's commitments. The era of invisible lease obligations is over.

The next piece in this series covers why this shift can set off a chain reaction with bank covenants.