The Financial Reporting Council’s periodic review of FRS 102 represents one of the most significant sets of changes since the standard was introduced. While the amendments touch many areas of financial reporting, one change in particular will have a material impact on a large proportion of small companies: the revised accounting treatment for leased assets.
The revised standards apply to companies preparing accounts under FRS 102, including those that adopt the small entities regime in Section 1A. They do not apply to businesses preparing accounts under the FRS 105 (micro-entities) regime, or to unincorporated entities.
For many owner-managed businesses, leasing is a fundamental part of how they operate – whether that is property, vehicles, equipment or IT infrastructure. The new requirements will bring much of this activity onto the balance sheet for the first time, changing not only reported numbers but also how stakeholders interpret them.
So, what are the lease accounting changes, and what should small companies be thinking about now?
When do the changes apply, and how do they affect comparatives?
The amendments to FRS 102 take effect for accounting periods beginning on or after 1 January 2026, meaning that for most UK small companies, the changes will first be reflected in accounts for the year ending 31 December 2026 or 31 March 2027.
On adoption, companies must apply a modified retrospective approach.
Essentially, this simplifies transition. Companies will recognise the cumulative impact of bringing leases onto the balance sheet at the start of the year of adoption, rather than restating all prior periods.
The comparative figures presented in the first year under the revised standard are therefore not restated, but disclosures must explain the transition and the impact of the change.
How does this differ for companies preparing management accounts?
Companies that produce periodic management accounts for external stakeholders – such as banks, investors or external shareholders – should be considering adoption now.
If management information continues to be prepared on the old basis, there is a real risk that the first set of statutory accounts under the revised FRS 102 will require significant restatement of previously reported figures.
Adopting the new lease accounting treatment within management accounts ahead of the statutory effective date can help:
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avoid disruption,
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improve consistency between management and statutory reporting, and
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ensure that financial information used for decision‑making remains aligned with future reported results.
The challenge is not just applying the new rules – it is explaining sudden movements in financial position that do not reflect a change in the business itself.
A shift in thinking: The end of “off balance sheet” leasing
Under the current FRS 102 framework, leases are classified as either finance leases or operating leases. For many small companies, most leases fall into the operating lease category, meaning that the accounting is relatively simple: lease payments are expensed to profit and loss over the term of the lease, with limited balance sheet impact.
That distinction is being removed.
Under the revised FRS 102, lessees will be required to recognise:
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a right‑of‑use asset, representing the economic benefit of using the leased item; and
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a corresponding lease liability, representing the obligation to make future lease payments.
This approach broadly aligns with IFRS 16, albeit with some simplifications.
The practical consequence is clear: leases that previously sat “off balance sheet” will now be visible in the company’s statement of financial position.
Why this matters for small companies
For many, the impact will be far from cosmetic.
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Balance sheets will get ‘bigger’ as more leases appear
Many leases that were previously kept off balance sheet will now be recognised as both a right-of-use asset and a lease liability. This increases reported assets and liabilities, particularly for businesses with large property leases.
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Key ratios will change
Net assets, gearing and other commonly monitored metrics may move overnight, with no change in the underlying economics of the business. This could affect perceptions of financial strength and, in some cases, interactions with lenders.
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Profit profiles will change
Instead of a single lease expense, companies will recognise:
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depreciation on the right‑of‑use asset, and
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interest on the lease liability.
This typically results in a higher charge in the earlier years of a lease, altering profit trends over time. For owner-managed businesses accustomed to relatively stable rental expenses, this change may come as a surprise.
Optional exemptions – but not a free pass
The revised standard does provide some relief, particularly relevant to smaller entities.
There are exemptions for:
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short-term leases (generally those of 12 months or less); and
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low value assets, such as small items of office equipment.
However, these exemptions are unlikely to apply to the most material leases for small companies, such as property or vehicle fleets. As a result, many businesses that have historically paid little attention to the technical detail of leasing will need to engage with it for the first time.
