FRS 102 Lease accounting 

Lease accounting under FRS 102 has been fundamentally reshaped as part of the Periodic Review 2024. Section 20 has been rewritten, introducing a model that brings most leases onto the balance sheet and aligns more closely with IFRS 16. The changes are effective for accounting periods beginning on or after 1 January 2026. This is more than a presentation change, as it affects how leases are identified, measured and understood.

The distinction between operating and finance leases for lessees has been removed. Most leases now require recognition of the following:

• a right‑of‑use asset
• a corresponding lease liability.

Leases move from disclosure to a core balance sheet driver, affecting assets, liabilities and key metrics. This is not just about bringing leases on balance sheet; it is about reflecting the economic reality of control over an asset. 

Identifying a lease is where FRS 102 complexity begins 

The focus has moved from legal form to economic reality. Determining whether a contract contains a lease, assessing the expected lease term and applying available exemptions all require judgement. As a result, lease accounting is no longer a 'set and forget' exercise but an area requiring ongoing monitoring and reassessment.

Not all contracts that look like leases are, and some that don’t look like leases might be. A contract is only in scope if it gives the customer the following:

• control over an identified asset
• for a period of time
• in exchange for consideration.

Key judgement areas include:

• whether an asset is truly identified (e.g., substitution rights)
• whether control sits with the customer
• whether embedded leases exist in wider contracts.

FRS 102 lease exemptions are useful but limited  

Reliefs exist for both short‑term leases (≤12 months) and low‑value assets; however, these are narrow. There is no fixed threshold for 'low value' and significant assets will almost always be in scope. 

The lease term is no longer a mechanical assessment  

The lease term now reflects expectations, not just contract wording. It includes: 

• extension periods expected to be exercised
• termination options unlikely to be taken. 

This introduces judgement based on: 

• business strategy 
• asset importance 
• past behaviour.

Lease measurement is where the real reporting impact sits 

Lease liabilities are based on future lease payments and a discount rate. 

The key challenges include the following:

• lease payments: distinguishing fixed, index-linked and variable elements
• discount rates: these are often judgemental and impactful
• remeasurement: which is required when assumptions or terms change. 

Ongoing lease accounting complexity is not a one-off exercise