FRS 102 lease accounting changes: What you need to know and how to prepare

Over the coming weeks, we will be highlighting some of the key changes to consider for 2026 reporting under UK GAAP, following the  amendments to FRS 102 announced by the Financial Reporting Council (FRC) in September 2024.

These changes are mandatory for accounting periods beginning on or after 1 January 2026, meaning if you haven’t already early adopted, now is the time to start assessing how the amendments will affect your business reporting.

A Significant Change for Lessees

One of the most impactful updates to FRS 102 in recent years relates to lease accounting, and it will have a major effect on lessees’ balance sheets.

Here’s what’s changing:

1. On-Balance Sheet for Most Leases

Under the revised model, lessees will recognise nearly all leases on the balance sheet, recording both a right-of-use asset and a lease liability. This update removes the long-standing distinction between operating and finance leases for lessees.

2. Front-Loaded Expense Profile

Lease expenses will now be split between depreciation of the asset and interest on the liability, creating a higher total expense in the earlier years of a lease compared to the straight-line approach used under the previous model.

3. Enhanced Disclosure Requirements

The new standard introduces greater disclosure obligations, providing users with improved visibility into the nature, timing, and uncertainty of lease-related cash flows.

4. Closer Alignment with IFRS

These amendments bring FRS 102 closer to IFRS 16, improving comparability across financial statements prepared under different frameworks, though they also introduce greater complexity for UK GAAP preparers.

Preparing for the 2026 Transition

While 2026 may seem a while away, the impact of these changes on reported assets, liabilities, and profit patterns could be substantial, particularly for businesses with large lease portfolios.

Now is the time to:

• Review all existing lease agreements and ensure data completeness

• Assess the impact on key financial ratios and loan covenants

• Update internal systems and processes to capture new reporting data

• Engage early with stakeholders, from finance teams to lenders and investors

Final Thoughts

The revised FRS 102 lease model represents a major step towards improved transparency and comparability in financial reporting. However, successful adoption will depend on proactive planning and clear communication across your organisation.

If you would like to discuss how these changes may affect your business or need support preparing for the transition, the Ballards team can help you plan ahead with confidence.  

Disclaimer. This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.