FRS 102 Section 20 Leases undergoes major updates from the 2024 Periodic Review, effective 1 January 2026, requiring UK and Irish entities to recognize most leases on the balance sheet as right-of-use (ROU) assets and lease liabilities, aligning with IFRS 16 principles. This shift ends the operating vs. finance lease split for lessees, increasing reported assets and liabilities while front-loading expenses via depreciation and interest essential knowledge for accountants, SMEs, and financial directors preparing financial statements. What does FRS 102 lease accounting mean for your business in 2026? Read on for step-by-step compliance.
What Are the Key FRS 102 Lease Accounting Changes for 2026?
Revised Section 20 mandates on-balance-sheet treatment for lessees, capturing nearly all leases unlike prior rules that kept operating leases off-balance-sheet. Expect higher assets (ROU) and liabilities (future payments discounted), impacting ratios like gearing and EBITDA preparers must review contracts early to avoid surprises. Lessors retain the finance/operating distinction, but lessees face uniform recognition; applies to all FRS 102 users, including Section 1A small entities.
- Effective Date: Annual periods beginning on or after 1 January 2026; early adoption allowed with full Periodic Review changes.
- Transition: Retrospective with cumulative effect in opening equity; no restatement of comparatives.
- Tax Implications: HMRC may allow spreading of adjustment debits/credits over years.
Recognition Exemptions: Short-Term and Low-Value Leases
Lessees can elect exemptions to skip balance sheet recognition for simplicity answer: yes, but only for specific cases, applied consistently by asset class.
Disclosures still apply to exempted leases; portfolio approach permitted for similar leases.
How to Identify a Lease Under FRS 102 (2026 Rules)
A lease exists when a contract conveys the right to control an identified asset for a period in exchange for consideration control means directing use and capturing economic benefits. Common question: Is my service contract a lease? Check for explicit/implicit asset specification without supplier substitution rights.
- Identified Asset: Named (e.g., specific vehicle) or implicit (e.g., delivered rail stock); no substantive substitution (practical + economic benefit to supplier).
- Portions: Physically distinct (e.g., building floor) qualifies; capacity shares only if substantially all.
- Separate Components: Allocate by standalone prices (lease vs. maintenance); optional expedient combines by asset class.
- Intra-Group Tip: Enforceability matters-no contract, no lease.
Example: Leasing two lorries with services? Split CU32k total: CU11.2k each lorry, CU9.6k non-lease.
Determining Lease Term: Extensions, Breaks, and Rolling Leases
Lease term = non-cancellable period + reasonably certain extensions – reasonably certain non-exercises of terminations. Factors: asset importance, fit-outs, past practice, economics.
- Reassessment Triggers: Lessee-controlled changes (e.g., new info on options).
- Rolling Leases: Assess enforceability/penalties for non-cancellability; may qualify as short-term.
- LTA 1954: Statutory renewals impact post-expiry occupation.
Example: 10-year lease + 5-year extension option? If fit-outs and history suggest certainty, term = 15 years.
Lease Liability Measurement: Step-by-Step Calculation
Step 1: Identify payments fixed/in-substance fixed, index/rate variables (at commencement), residuals, certain purchases/penalties.
Step 2: Discount using implicit rate (if known), else incremental borrowing rate (funds for similar asset/term/security) or obtainable rate (undiscounted payments). Portfolio OK for similars.
Example (5-year CU10k p.a. arrears, 7% rate): PV = CU41,002 liability. Unwinds with interest (total expense = cash).
Remeasurements:
- Term/purchase: Revised rate.
- Index change: Unchanged rate (when effective).
- Modifications: Separate if scope/consideration proportional; else revise ROU proportionately.
Right-of-Use Asset: Initial and Ongoing Measurement
ROU = liability + prepayments – incentives + initial costs + dismantlings/grants, then depreciate (cost model standard; revaluation/investment property options). Adjust for liability remeasurements (min zero).
FAQ: Common FRS 102 2026 Lease Questions
Does FRS 102 2026 affect tax? Balance sheet changes may trigger spreading relief.
Impact on covenants? Higher liabilities strain ratios—model now.
Software needed? Yes for PV calcs (PV/NPV/XNPV functions).
Small entities? Full compliance under 1A.
Next Steps for FRS 102 Compliance in 2026
- Inventory contracts (including non-legal leases).
- Collect data: terms, rates, options.
- Test exemptions and portfolios.
- Update policies/systems; train staff.
- Engage advisors for transitions/tax.
Stay compliant FRS 102 changes reshape reporting.
For tailored advice, consult MAH Chartered Accountants.