Changes to lease accounting under FRS 102: Is your business prepared?

The Financial Reporting Council (FRC) has issued significant amendments to FRS 102, so a new lease accounting model applies for periods beginning on or after 1 January 2026. The revised standard better aligns FRS 102 with IFRS 16, introducing a single on-balance sheet model for most leases.

What’s changing with lease accounting?

Until now, finance leases were shown on a company’s balance sheet as both an asset (the leased item) and a liability (the obligation for future lease payments). Operating leases, in contrast, were kept off-balance sheet, with payments recorded as an expense in the income statement over time.

Under the revised Section 20 Leases of FRS 102, that distinction has been removed. Most leases are now recognised on-balance sheet, with a right-of-use asset and a corresponding lease liability. The change provides a more faithful and transparent view of leasing commitments, but it also reshapes key financial metrics and ratios for many businesses.

More pertinently, the amendments could trigger a sharp increase in reported debt, a drop in return on capital employed, and even breached loan covenants if ratios aren’t recalculated. The shift also inflates EBITDA, since lease costs move below the operating profit line. This change can distort performance trends year on year.

Bitesize briefing

• Presentation of lease expenses will change. Costs are now split between depreciation and interest rather than shown as a single operating lease expense.
• Practical exemptions may apply. Typically, for short-term leases under 12 months and low-value leases (but not buildings, vehicles or large plant equipment). The lessee may choose not to capitalise these.
• Companies can use a simplified approach for calculating borrowing rates, and there are modified requirements for sale and leaseback transactions.

What it means

Transparency? Yes. Simplicity? Less so. The FRS 102 amendments bring greater clarity to leasing commitments, but also demand more detailed, disciplined record-keeping. Businesses will need accurate data on lease terms, payment schedules, discount rates and incentives to avoid inconsistencies and forecasting errors.

• EBITDA will typically increase as an operating cost, i.e. "rent" is replaced by depreciation and interest.
• Net debt rises, since lease liabilities are recognised alongside other borrowings.
• Return on capital employed can fall, with new assets appearing on the balance sheet but no corresponding uptick in operating profit.

As a result, businesses will need to implement more detailed, disciplined record-keeping where lease terms, payment schedules, discount rates and lease incentives are concerned. Weak or incomplete data can rapidly unravel into fog-bound forecasting and errors that could have been avoided.

Additional risks and actions

The updated FRS 102 may have a knock-on effect for financing arrangements. Consequently, businesses must pay careful attention to how the amendments interact with existing debt agreements.

• Review loan covenants: Without calibration, the increase in reported debt could inadvertently trigger covenant breaches.
• Consider “frozen GAAP” clauses: Some agreements allow covenants to be tested under the accounting standards that applied when the loan was signed. Applying this concept of “frozen GAAP” can smooth the transition in the short term, but may add undue cost and complexity in the long term.
• Identify high-risk sectors or portfolios: Businesses with large property, vehicle or equipment lease portfolios, particularly retailers, logistics and manufacturing, should anticipate the biggest movements in reported liabilities.
• Factor in transition workload: There’s work to be done! The shift to new standards requires extensive data-gathering, revised discount-rate calculations, and updated disclosures.

What you should do now

Businesses have a considerable number of tasks to accomplish, with very little time remaining to do so. Priority should be given to addressing the following challenges:

• Review current leasing arrangements
• Establish whether any leases may qualify for exemption from on-balance sheet lease accounting (e.g. short-term leases or leases of assets of low value)
• Identify which leases will need to be recorded on the balance sheet
• Identify and understand the approach that will need to be taken to identify the value for the leases and relevant transactions
• Consider what record-keeping would be helpful to implement now to assist with the future preparation of financial statements
• Consider whether the change in asset position will impact any financial arrangements (e.g. debt covenants)
• Consider whether any potential changes in the total asset value will result in the business needing to have an audit

How we can help

To help your business apply the updated FRS 102 lease requirements in practice, we’ve prepared a detailed guidance note covering key judgements, examples and transition considerations.

Download our FRS 102 Lease Accounting Guidance pdf

As far as longer-term professional support is concerned, Crowe is uniquely positioned to assist your business with the transition to the new framework following FRS 102 updates. We have 85 years of experience in advisory and accounting services in Ireland, and an expert team with a plan for the future. Engage now with our professional advisors to complete any last-minute preparations for the new requirements. Contact us today to make sure you and your business are fully prepared.