The recent amendments to FRS 102 (as part of the Periodic Review 2024) significantly change how lessees (the party leasing an asset) account for leases. These changes are mandatory for accounting periods beginning on or after 1 January 2026.

Here’s a summary of the key changes:

  • Single Accounting Model: The previous distinction between “operating leases” (off-balance sheet) and “finance leases” (on-balance sheet) for lessees is largely abolished. Most leases will now be accounted for using a single “right-of-use” (ROU) model.
  • On-Balance Sheet Recognition: Lessees will be required to recognise a Right-of-Use (ROU) asset (representing their right to use the leased asset) and a corresponding lease liability (representing their obligation to make lease payments) on their balance sheet.
  • Income Statement Impact: Instead of a simple rental expense, the income statement will now show depreciation on the ROU asset and a finance charge (interest expense) on the lease liability. This often “front-loads” expenses, with higher charges in the earlier years of the lease.
  • Exceptions: There are limited exemptions for short-term leases (12 months or less) and leases of low-value assets, which can still be expensed off-balance sheet.
  • Alignment with IFRS 16: The new FRS 102 lease accounting model is substantially aligned with IFRS 16 Leases, aiming for greater comparability, but includes simplifications to be proportionate for private entities.
  • Financial Impact: These changes will generally lead to an increase in reported assets and liabilities on the balance sheet and can impact key financial metrics like EBITDA (typically increasing it) and various financial ratios (e.g., leverage ratios).

The new FRS 102 requires a more comprehensive recognition of lease obligations on the balance sheet, providing a clearer picture of a company’s financial commitments.

If you have leases and are unsure as to how to account for them or want to voluntarily bring them into your next financial statements reporting cycle please contact us in advance of your year end so that we have adequate time to prepare the necessary adjustments.