A major change is coming in how businesses account for leases. If your company leases.
Snapshot Summary
Under new FRS 102 rules, operating leases must be reported as both a liability and a right-of-use asset. The transition requires identifying leases, collecting data, applying discount rates, and creating new disclosures. Short-term and low-value leases are exempt, and FRS 105 (micro-accounts) clients are unaffected.
If your company leases vehicles, property, or other assets, the way they appear in your financial statements will look very different from 2026.
What’s changing?
For accounting periods commencing on or after 1 January 2026, FRS 102 introduces new lease accounting rules. Almost all leases previously treated as “off balance sheet” must now be recognised as a liability, with a corresponding right-of-use asset.
This affects:
- Property: Warehouses, offices, retail space, etc.
- Vehicles: Contract hire vans, delivery fleets, cars, etc
- Equipment and machinery: Production machinery, IT hardware, forklifts, etc
- Other assets: Material to operations and not low-value or short-term.
Short-term and low-value leases may be exempt, and FRS 105 (micro-entities) clients are not impacted.
What does this mean for business owners?
Implementing the change isn’t just a line in the accounts, it’s a process of:
- Collating information contained within lease contract agreements
- Accounting for renewals, CPI/RPI uplifts, and options
- Calculating discounted liabilities
- Recording transition adjustments
- Preparing new disclosures and policy notes
The introduction of FRS 102 operating lease reform will create new tasks for businesses as they approach their year-end reporting. One of the most immediate challenges will be the transition process, which requires companies to create in-depth lease registers and establish accurate opening balances.
Businesses will also need to implement processes to manage reconciliations and ensure that the required disclosures are consistently met. This will demand careful attention to detail and regular monitoring throughout the year, not just at the reporting stage.
In addition, the reforms are likely to require staff training so that finance teams fully understand the new requirements. Many organisations may also need to review their existing systems to ensure they are ready to handle the increased complexity, prompting investment in new software tools to support compliance.
Transition choices
When adopting the new lease accounting rules, businesses need to bring all existing leases onto the balance sheet. FRS 102 provides two main options for handling leases in place before 1 January 2026:
- Full retrospective approach
- Provides full year-on-year comparability, but requires detailed historical data and recalculations of previous balances.
- Adjustments are recorded in the opening balances of the earliest period presented.
- Modified retrospective approach (commonly used by SMEs)
- Does not restate prior years.
- Recognises lease liabilities and right-of-use assets at the start of the first reporting period under FRS 102.
- Any difference between the lease liability and the right-of-use asset is adjusted against reserves (usually retained earnings).
- Simpler and faster to implement, but prior-year comparability is limited.
Key considerations:
- Your opening balance sheet will change, potentially affecting ratios, covenants, and borrowing capacity.
- The choice impacts the transition effort: full retrospective is more work-intensive, modified retrospective is simpler.
- Most SMEs opt for the modified approach to reduce disruption and costs, while ensuring compliance.
What this means for you
If your company has multiple leases, such as property, vehicles, or equipment, the transition could mean a significant one-off cost and more ongoing administration. Acting early ensures you won’t be caught off guard. It’s also important to brief lenders, boards, and other stakeholders, since the new accounting may affect reported financial health even though the underlying business hasn’t changed.
How can Oldfield help you?
If you’d like help understanding how these changes could impact your business or book a call with one of our team, please reach out using the form below, and we’ll be in touch to guide you through the updates and ensure you remain fully compliant.
Frequently Asked Questions
Q:
A:
Q:
A:
Q:
A:
Q:
A:
Q:
A:
Please note: This article is for general information purposes only and was correct as at the time of writing (06/10/25) and does not constitute financial advice. Tax rules and legislation are subject to change, and their application depends on your individual circumstances. We recommend seeking advice from a suitably qualified tax adviser, and where relevant, an FCA-authorised financial planner. Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance. No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.
Share Article
You give us 30 minutes of your time. We'll give you growth and a plan
It's easy to book an initial consultation - just provide some brief details, and your preferred date and time, and we'll reply by email to confirm your appointment.
Contact us
