Big Changes to Lease Accounting from January 2026

What UK businesses need to know about the new FRS 102 lease rules

From 1 January 2026, the UK is rolling out one of the most significant updates to lessee accounting in years, bringing UK GAAP much closer to the international standard IFRS 16.

If your organisation reports under FRS 102, these changes will affect you. And for many businesses, the impact will be substantial.

When Do the New Rules Apply?

The amendments apply to accounting periods beginning on or after 1 January 2026, which means that for most companies the first set of accounts with the new treatment will be the year ended 31 December 2026. Therefore, it is important to begin storing all lease agreements in a location you can easily find them.

 What’s Actually Changing?

Operating vs Finance Leases

The biggest shift is the removal of the distinction between operating and finance leases for lessees.

Under the revised Section 20:

• Most leases must be recognised on the balance sheet
• Lessees record:
  • A right‑of‑use (ROU) asset
  • A lease liability equal to the present value of future lease payments
• Expense recognition changes from a straight‑line rental charge to:
  • Depreciation of the ROU asset
  • Interest on the lease liability

This mirrors IFRS 16 but includes some simplifications.

Exemptions

Two key exemptions remain:

• Short‑term leases (12 months or less)
• Low‑value assets

These can continue to be treated in the P&L.

New Requirements for Identifying Leases

Businesses must assess whether a contract is or contains a lease, which requires judgement.

This includes reviewing:

• Outsourcing agreements
• IT service contracts
• Transport and logistics arrangements

Some service contracts may now contain embedded leases.

What Does This Mean for Your Financial Statements?

Balance Sheet Impact

• Higher total assets (ROU assets)
• Higher liabilities (lease obligations)
• Higher gearing ratio

This may affect bank covenants, credit assessments, and investor perceptions.

Profit & Loss Impact

• Operating lease expenses disappear
• The lease expenses are replaced by depreciation + interest
• This typically front-loads expenses, meaning earlier years will show higher cost

EBITDA will increase, as lease expenses move below the EBITDA line.

Disclosure Requirements

The revised standard introduces more extensive qualitative and quantitative disclosures, including:

• Maturity analysis of lease liabilities
• Details of variable lease payments
• Judgements in determining lease terms

These aim to improve transparency for users of financial statements.

What Should Businesses Do Now?

Here’s a practical roadmap:

1. Identify all leases and potential embedded leases

Review contracts across the organisation—not just property leases.

2. Gather key data

You’ll need:

• Lease terms
• Payment schedules
• Renewal/termination options
• Discount rates

3. Assess systems and processes

Many organisations will need new processes or spreadsheets to track lease data.

4. Model the financial impact

Understand how the changes affect:

• Balance sheet
• EBITDA
• Profit profiles
• Loan covenants
• Dividend capacity

5. Communicate with stakeholders

Banks, investors, and boards will want to understand the impact.

Final Thoughts

The January 2026 lease accounting changes represent a fundamental shift for UK GAAP reporters. While the new rules increase transparency, they also introduce complexity around data gathering, judgement, and system readiness.

The sooner that businesses start preparing, the smoother the transition will be.

If you’d like any further guidance, please contact Alexander Myerson and we will be in touch shortly.