Lease Accounting is Changing: What UK Companies Need to Know Ahead of 2026

published on 16 July 2025 | reading time approx. 2 minutes

Major changes to lease accounting are coming for UK entities applying FRS 102. Following a comprehensive periodic review, the Financial Reporting Council (FRC) has confirmed that companies will need to bring most leases onto the balance sheet – moving closer in approach to IFRS 16. The new requirements become mandatory for periods beginning on or after 1 January 2026, with early adoption permitted. For businesses that rely on leased assets – whether property, vehicles, or equipment – this change represents a significant shift in financial reporting and key performance metrics.

What's Changing?

Under the current version of FRS 102, leases are classified as either finance or operating leases. Operating leases – typically for office space or equipment – are kept off the balance sheet, with rental payments spread over the lease term through the profit and loss account. From 2026, that distinction is being removed for lessees. Instead, most lease arrangements will need to be capitalised, with companies recognising:

A right-of-use asset, and
A lease liability for the present value of future lease payments.

This brings UK GAAP reporters more in line with IFRS 16, which introduced similar requirements for international reporters several years ago.

Why the Change?

The FRC's aim is to improve transparency and consistency across financial statements. Many stakeholders – such as lenders, investors, and regulators – have long argued that off-balance sheet lease obligations obscure a company's true financial position. By requiring recognition of lease assets and liabilities, the revised FRS 102 will provide a more complete picture of a business's financial commitments.

Who Is Affected?

These changes apply to entities reporting under FRS 102, which covers a wide range of medium-sized companies, LLPs, charities, and not-for-profits in the UK and Ireland.

FRS 101 reporters are already applying IFRS 16, so will not see a change.
FRS 105 (micro-entity regime) is unaffected.

What Does This Mean for Businesses?

The upcoming changes will:

Inflate balance sheets, as lease-related assets and liabilities are capitalised.
Alter profit recognition, with a shift from straight-line rental expense to interest and depreciation – often front-loaded.
Affect key metrics, such as EBITDA, gearing ratios, and covenant calculations.
Increase disclosure requirements, with additional information about lease terms, assumptions, and maturity analysis.

When and How to Prepare?

The revised standard becomes mandatory from 1 January 2026, but early adoption is allowed. Transition reliefs will be available, including a modified retrospective approach with no need to restate comparatives. Now is the time for businesses to begin planning. This should include: