The 2026 amendments
FRS 102 lease accounting changes: 2026
From accounting periods beginning on or after 1 January 2026, lessees reporting under FRS 102 bring almost every lease onto the balance sheet: a right-of-use asset and a lease liability replace the old operating lease expense. Here is what changed, who it affects, and the five steps of a clean transition.
What changed
- Lessees recognise a right-of-use asset and lease liability for almost all leases (FRS 102.20.9); the operating versus finance lease split disappears for lessees.
- Rent expense is replaced by depreciation plus interest, so EBITDA rises and expense is front-loaded over each lease's life.
- A new discount-rate option, the obtainable borrowing rate (FRS 102.20.51-20.52), simplifies rate-setting for entities that are not financial institutions.
- New disclosures: right-of-use assets by class, interest on lease liabilities, and a maturity analysis of lease liabilities.
What stayed the same
- Lessor accounting: lessors still classify leases as finance or operating (FRS 102.20.21 onwards).
- Short-term (12 months or less) and low-value asset leases can stay off balance sheet by election, expensed straight-line.
- Micro-entities under FRS 105 are unaffected and continue to expense lease payments.
- The cash you pay your landlord: the change is accounting presentation, not the lease economics.
The transition in five steps
The modified retrospective approach, as most UK and Irish SMEs apply it.
Build the lease inventory
List every lease and licence arrangement: property, vehicles, equipment, and embedded leases inside service contracts. Note commencement dates, terms, payments, break clauses and options.
Apply the exemptions
Sort out what stays off balance sheet: short-term leases (12 months or less, elected by asset class), low-value assets (lease by lease), and any peppercorn arrangements.
Set discount rates at the transition date
For the leases going on balance sheet, determine the rate: usually the obtainable borrowing rate for SMEs, evidenced from a bank facility or a reference-rate base plus spread, documented per lease.
Calculate opening balances
Under the modified retrospective approach, measure the lease liability at the present value of remaining payments at the date of initial application, with no restatement of comparatives, and recognise the right-of-use asset per the transition provisions.
Post the transition journal and disclose
Recognise the opening right-of-use assets and lease liabilities, adjust retained earnings where required, and prepare the transition disclosures your auditor will ask for.
Lease102 automates steps 3 to 5: transition-date discount rates, opening balance calculations across the portfolio in one run, the transition journal, and a per-lease auditor memo. If you would rather hand the whole thing over, the fixed-fee transition service does it with you.
2026 changes: frequently asked questions
What changed in FRS 102 lease accounting in 2026?
For accounting periods beginning on or after 1 January 2026, amended FRS 102 Section 20 requires lessees to bring almost all leases onto the balance sheet as a right-of-use asset and a lease liability. The previous model, where operating leases were simply expensed and disclosed as commitments, no longer applies to lessees. The change is part of the FRC's periodic review amendments, aligning FRS 102 more closely with IFRS 16 while keeping simplifications for smaller entities.
Who is affected by the FRS 102 lease changes?
Every UK and Irish entity reporting under FRS 102 that leases anything material: offices, warehouses, retail units, vehicles, plant or equipment. Companies using the small entities regime in Section 1A of FRS 102 apply the same recognition and measurement requirements, so being small does not avoid the change. Micro-entities reporting under FRS 105 are outside its scope and keep expensing leases.
When do the FRS 102 lease changes take effect?
For accounting periods beginning on or after 1 January 2026. A company with a 31 December year end applies the new rules from its year beginning 1 January 2026; a company with a 31 March year end from its year beginning 1 April 2026. Early application was permitted, so some entities have already adopted.
What is the modified retrospective approach?
The transition method most entities use. Instead of restating prior-year comparatives, the entity measures each lease liability at the present value of the remaining lease payments at the date of initial application and recognises the corresponding right-of-use asset under the transition provisions. Comparative figures stay as previously reported, and any difference is adjusted in opening retained earnings.
Do existing leases signed before 2026 come on balance sheet?
Yes, if they are still running at the date of initial application and no exemption applies. The requirement is not limited to new leases: a ten-year office lease signed in 2020 with five years left comes on balance sheet at transition, measured from the remaining payments. Leases ending within 12 months of the transition date can typically be left off under the short-term exemption.
How does the change affect EBITDA and profit?
The straight-line rent expense is replaced by depreciation of the right-of-use asset plus interest on the lease liability. EBITDA typically increases because rent leaves operating costs, while interest makes total expense front-loaded in the earlier years of each lease. Balance sheet gearing also rises because the lease liability is recognised as debt-like. Lenders and covenant terms may need conversations before the first affected year end.
Keep going
FRS 102 Section 20, explained
The full lease accounting model: recognition, exemptions, measurement and disclosures.
Learn moreFree FRS 102 lease calculator
Estimate the balance sheet and P&L impact of your leases in minutes.
Learn moreTransition, step by step
Docs: transition date, opening balances, bulk calculation and the journal.
Learn moreFixed-fee transition service
We read the leases, evidence the rates and build the opening balances. You approve.
Learn more