A quick note: this article is general information, not personal advice. Tax and accounting rules change and everyone's situation is different, so please don't act on anything here without checking how it applies to you. We'd be happy to help — get in touch before making any decisions.
The biggest accounting shake-up for UK private companies in years landed on 1 January 2026, and leases are right at the centre of it. The FRS 102 periodic review has rewritten how companies account for leases, and for most businesses the upshot is simple: leases that used to sit quietly in the notes now turn up on the balance sheet. This is what has changed, and what it means for your accounts.
When does this apply?
The amended FRS 102 is mandatory for accounting periods beginning on or after 1 January 2026. Early adoption was allowed, but for most companies the first affected set of accounts will be those for periods starting in 2026. So if you have a 31 December year end, your 2026 accounts are the first ones caught.
The old way: operating leases off balance sheet
Under the old rules, lessees split leases into two camps. A finance lease, where you took on the risks and rewards of ownership, went on the balance sheet. An operating lease did not, and that covered most property, vehicle and equipment rentals. You charged the rent to the profit and loss account, usually on a straight-line basis, and disclosed the future commitments in the notes.
The practical result? A company could be tied into years of office or equipment rent with no asset or liability showing on its balance sheet at all.
The new way: most leases come on balance sheet
The revised FRS 102 introduces a single, on-balance-sheet model for lessees, closely modelled on the international standard IFRS 16. For each lease in scope, you now recognise:
- A right-of-use asset, representing your right to use the leased item over the lease term; and
- A lease liability, the present value of the future lease payments you've signed up to.
For lessees, the old operating-versus-finance distinction simply goes away. Put plainly: if you rent your premises, your vehicles or major equipment, those leases will now show up as both an asset and a liability in your accounts.
What changes in the profit and loss account
The balance sheet isn't the only thing that moves. That single rent expense you're used to seeing gets replaced by two separate charges:
- Depreciation of the right-of-use asset, typically straight-line over the lease term; and
- Interest on the lease liability, which runs higher in the early years and tails off as the liability reduces.
The total cost over the life of the lease doesn't change, but it is front-loaded, so you recognise more expense early on and less later. It also shifts cost out of operating expenses, which is why this change tends to push up reported EBITDA.
The exemptions worth knowing
Not every lease has to come on balance sheet. To keep things proportionate, you can choose to leave two categories off it and carry on expensing the payments as before:
- Short-term leases, meaning those with a term of 12 months or less; and
- Leases of low-value assets, the small items such as laptops, office furniture or printers.
For a lot of smaller businesses these two exemptions strip out most of the admin, leaving only the larger property and vehicle leases to bring on balance sheet.
What about lessors?
If your business grants leases rather than takes them, there's good news. Lessor accounting is largely unchanged. You still classify leases as finance or operating and account for them broadly as you did before. The heavy lifting in this reform falls squarely on the lessee side.
Why it matters beyond the accounts
Bringing leases on balance sheet doesn't touch your underlying cash flows, but it does change how your business reads on paper, and that has knock-on effects:
- Gearing and net assets: adding lease liabilities increases reported debt, which can colour how lenders and investors view the business.
- Bank covenants: loan agreements that reference gearing, net assets or interest cover may be affected, so it pays to speak to your lender early.
- Profit profile: those front-loaded costs can dent profit in the first year or two of a new lease.
- Distributable reserves: changes to reported profit and reserves can feed through to how much you can pay out in dividends.
How to prepare
The sensible first step is to gather a complete list of your leases, covering property, vehicles, plant and equipment, along with their terms, payments and renewal options. From there we can work out which leases are in scope, calculate the right-of-use assets and lease liabilities, and model the effect on your profit, balance sheet and any covenants before the figures land in your statutory accounts.
In our experience this is one of those changes that is far less painful handled in good time than at the year-end deadline. If you'd like us to review how the new lease rules affect your accounts, we're happy to help.