Upcoming Changes to FRS 102 Lease Accounting – Effective 1 January 2026

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Background to the Changes

Following a periodic review of the Financial Reporting Standards (FRSs), the Financial Reporting Council (FRC) issued several amendments to FRS 102. These amendments intend to strengthen financial reporting practices and promote closer consistency with International Financial Reporting Standards (IFRS).

The revisions to lease accounting represent one of the most significant fundamental changes that will impact many businesses.​

Current Treatment of Leases

Under the existing FRS 102 requirements:​

• Leases are classified as either finance or operating leases
• Operating lease costs are expensed through the profit and loss account (P&L)
• Operating leases do not appear on the balance sheet
  

This approach has been in place for many years and is familiar to most businesses.​

New Treatment from 1 January 2026 Onwards

The revised standard introduces significant changes to lease accounting:

• Operating leases are required to be capitalised as a right-of use asset with a corresponding lease liability.
• The initial recognition will require: 
  
1. Net Present Value (NPV) calculation on 1 January 2026
2. Interest rate determination (Incremental vs Obtainable borrowing rate) 
• Exceptions to this rule include both low-value leases and short-term leases (leases with a term of 12 months or less)
• Subsequent measurement will require depreciation of the asset, accruing of interest on the liability and an unwinding of the liability in accordance with the payment schedule​
  

Treatment of Comparative Balances

The FRC has provided relief in the transition to these new requirements:

• No restatement of comparatives required
• No need to disclose the impact on prior periods

This simplified transition approach will reduce the administrative burden on businesses adopting the new standard.​

Impact on Your Business

These changes will affect:

• Your balance sheet presentation, increasing both assets and liabilities
• Key financial ratios and metrics that stakeholders may monitor
• Loan covenants that may reference balance sheet figures
• The complexity of your monthly accounting processes and systems​
  

Rödl & Partner Advisory Support

It is important to begin planning for these changes well in advance of the 1 January 2026 implementation date.

Given the significant nature of these changes, we recommend that you:

• Review your current lease portfolio to understand which leases will be affected
• Consider the impact on your financial statements and key performance indicators
• Assess whether any lease agreements should be renegotiated or restructured
• Update your accounting systems and processes to accommodate the new requirements

At Rödl & Partner, we offer comprehensive advisory support to ensure a seamless transition to the new lease accounting standards.

Our team can handle the entire implementation process including:

• Initial recognition (NPV Calculation) and conversion of leases onto your balance sheet
• On-going support with subsequent measurement
• We provide ready-to-post accounting journal entries to be input into your accounting systems
• Whether you need full implementation support or targeted assistance with specific lease portfolios, we'll work alongside your team to ensure compliance while minimising disruption to your operations.​