Lease Accounting Under FRS 102 is Changing: Are You Ready?
Most of us are now well aware that From 1 January 2026, significant updates to FRS 102 will require most leases to be brought on balance sheet, marking a huge shift in UK GAAP. These revisions bring FRS 102 closer to IFRS 16—and that means big implications for both preparers and auditors alike.
If your clients lease assets, this change will affect them as well as your audit approach.
The Essentials in Brief
Under the revised standard, lessees will generally need to adopt the right-of-use model, recognising both:
a lease liability (based on future payments), and
a right-of-use asset (initially based on that same liability, with some adjustments).
Gone is the neat split between operating and finance leases. For most arrangements, it’s now recognise it or explain why not.
But, there are still two key exemptions:
Short-term leases (12 months or less), and
Low-value assets (although there’s no set £ threshold—judgement is key).
Impacts for Your Clients
This isn't just an accounting exercise—it has real-world knock-ons for clients:
Financial statements: Assets and liabilities will rise.
P&L impact: Lease charges will be replaced by depreciation and interest.
KPIs like EBITDA: Expect a bump, as lease costs move below the line.
Loan covenants: Changes in net assets or EBITDA could trigger lender conversations.
Audit Complications Ahead
With new accounting comes new audit complexity. Here’s where we expect audit teams to feel the pinch:
Judgements & estimates: Discount rates, lease terms, renewal assumptions—all in focus.
Disclosures: More of them.
Controls: Clients need clear processes to identify leases and handle modifications.
And yes, transition comes with its quirks too:
No full retrospective option.
Comparative figures won’t be restated—raising questions about how to communicate that in the audit report.
The Conveyor Belt Conundrum
One real-life example we explored in our recent webinar involved an entity leasing a conveyor unit for 5 years. The directors argued it was a low-value lease because they were only using 50% of the asset’s useful life, and the total cost came in under £15k.
Reasonable? Risky? Or just wrong?
We walk through this and other tricky areas in our on-demand webinar.
Want to Dive Deeper?
We recently ran a live, practical webinar on “FRS 102: Navigating Lease Revisions and Their Audit Impact”, covering:
Practical examples and decision trees
The grey areas of short-term and low-value leases
Audit planning tips for 2025 and 2026
Transition pitfalls and how to communicate them
🔗 Click here to purchase the on-demand webinar
It’s ideal for audit teams who want to get ahead—and avoid surprises in the next review cycle.