From 1 January 2026, the rules for accounting for leases changed under FRS 102.

These changes may sound technical but they could have a noticeable impact on your accounts, your reported profits and even whether or not you need an audit.

In this blog, we explain what has changed and what those changes mean in practical terms.

What is actually changing?

The key change is simple:

Most leases now need to appear on your balance sheet.

Instead of just recording lease payments as an expense, businesses will now need to show:

• an asset for the right to use the item (for example, a property or vehicle); and
• a liability for the future lease payments.

This is known as the “right of use” model and brings FRS 102 broadly in line with international accounting rules.

There are still a couple of exceptions:

• short leases (12 months or less); and
• leases for low-value items (for example, small office equipment).

Why this matters for your business

1. Your balance sheet will look bigger

Because leases are being brought onto the balance sheet, both your assets and liabilities will increase.

This does not mean your business is worse off, but it will change how your financial position looks to:

• banks
• investors
• other stakeholders

2. You could move into audit

This is an important point for many owner-managed businesses.

When leases are added to the balance sheet, your total gross assets increase. If your business is already close to the Companies Act size limits, this uplift could push you into a higher category, for example from small to medium.

In some cases, that may mean:

• you no longer qualify for audit exemption, and
• a statutory audit becomes required.

This tends to affect businesses with:

• leased property
• vehicle fleets
• significant equipment leases

It is worth reviewing your position early so there are no surprises.

3. Your profit figures will change

Previously, you simply recorded lease payments as an expense.

Under the new rules, that expense is split into:

• depreciation (spread over the life of the lease); and
• interest on the lease liability.

In practice, this usually means:

• higher costs in the early years of a lease
• slightly different profit patterns over time

4. Key metrics look different

Some headline figures may improve, even though nothing has changed commercially.

For example:

• EBITDA is likely to increase, because lease costs are no longer fully included as operating expenses

This can affect:

• bank covenants
• bonus calculations
• business valuations

 A simple view of how the new rules work

Behind the scenes, the accounting follows a structured process. In simple terms, businesses will need to:

1. Check whether a contract contains a lease.
2. Work out for how long the lease runs.
3. Decide if any exemptions apply.
4. Calculate the total future lease payments.
5. Record the asset and the liability.
6. Include the required disclosures in the accounts.

While that sounds straightforward, some areas involve judgement, particularly:

• how long you expect to keep a lease.
• which discount rate to use.

Practical issues to watch out for

Some service contracts may now count as leases

Contracts that previously felt like “services” may actually be treated as leases if you control how an asset is used.

This is common with:

• IT arrangements.
• outsourced equipment.
• certain property agreements.

You may need better records

Many businesses will need to:

• review all contracts.
• gather more detailed lease data.
• improve internal processes.

Larger lease portfolios may require system changes.

It can affect conversations with lenders

Because key figures such as debt and EBITDA are changing, it is sensible to:

• speak to lenders early.
• review existing loan agreements.

This is particularly important where covenants are tight.

When did the changes occur?

The new rules apply to accounting periods beginning on or after 1 January 2026.

You do not need to restate prior years. Instead, the adjustment is made in your opening balances when the new rules are first applied.

Final thoughts

While these changes are technical, the impact is very real.

For many businesses, they:

• change how the balance sheet looks
• alter key profit measures
• potentially affect audit requirements

The earlier you understand the impact, the easier the transition will be.

 How we can help

We can support you with:

• understanding your lease position
• modelling the impact on your accounts
• reviewing audit thresholds
• preparing for implementation

If you would like to discuss what this means for your business, please get in touch.