Future lease accounting changes Irish businesses need to prepare for
Irish entities that prepare financial statements under FRS 102 – The Financial Reporting Standard applicable in the UK and Republic of Ireland will face significant changes in how leases are accounted for, effective for accounting periods beginning on or after 1 January 2026.
These amendments are the result of the Financial Reporting Council’s 2024 periodic review of FRS 102, which aligns lease accounting more closely with international principles while retaining elements suited to Irish and UK GAAP.
Below, we outline the principal changes, the financial and Irish tax impact, and the steps businesses should take to prepare.
What are the key lease accounting changes in FRS 102?
Under the revised Section 20 – Leases, Irish companies must recognise most leases on the balance sheet, using a single model similar in principle to IFRS 16 Leases used in international standards.
Under the revised standard, all significant leases must be recognised on the balance sheet. This removes the current distinction between finance and operating leases. Most leases will now be brought onto the balance sheet, with only two key exemptions
- Short-term leases – those with a lease term of 12 months or less.
- Leases of low-value assets – items of negligible value where a business chooses not to recognise ROU assets and liabilities.
Under these exemptions, lease payments can still be expensed in profit or loss.
Financial reporting impact
These changes will have a direct effect on reported results and financial performance measures:
- EBITDA will increase, as operating lease costs are no longer deducted from earnings. Instead, businesses will recognise depreciation of the right-of-use asset and interest on the lease liability.
- While the total profit impact over the life of the lease remains the same, costs will be front-loaded – higher in the early years, lower towards the end.
- On the balance sheet, both an asset and liability will be recognised, making it difficult to estimate the impact on debt calculations.
- Businesses are likely to see an initial reduction in net assets, which will unwind over the lease term.
These changes could affect banking covenants, performance-related bonus schemes, and other contractual arrangements. They will also require clear communication with stakeholders who rely on EBITDA and debt metrics.
Peppercorn leases
In Ireland, certain leases involve nominal consideration (often €1 per year) to satisfy legal contract requirements. These are commonly referred to as peppercorn leases.
Irish accounting practice treats such arrangements consistent with the principles of FRS 102:
- Peppercorn leases that have only nominal consideration may not meet the typical commercial lease definition for ROU treatment;
- Where peppercorn leases do not convey substantive rights and obligations in the economic sense, they are often treated as non-exchange transactions under FRS 102’s guidance on accounting for transactions with no / nominal consideration rather than typical lease liabilities.
It’s important to consider substance over form when determining lease accounting treatment in these cases, particularly where rents are not reflective of fair value.
Tax impact
The amendments also create important tax considerations:
- The timing of tax cash flows may be impacted by the accounting changes if finance costs are front-loaded.
- Whilst the tax legislation broadly returns companies to the same tax position they would have been in had accounting rules not changed, the introduction of similar rules under IFRS 16 highlighted complex and sometimes unexpected outcomes, particularly around deferred tax.
- For capitalised operating leases (not classed as long funding leases), deductions will typically be available for depreciation and lease finance costs, but the timing of relief may differ from actual lease payments.
- Some depreciation charges may relate to non-deductible expenses (e.g. lease premiums, stamp duty, property restoration costs), requiring careful review.
Early engagement with tax advisors is essential to assess both the initial and ongoing impact and ensure compliance.
How should Irish businesses prepare?
Companies should take a proactive approach to implementing the new lease accounting model:
- Engaging stakeholders early – lenders, investors, and management teams will need clear explanations of the impacts.
- Identifying affected contracts and leases – this may be a significant project depending on the volume and nature of leases.
- Assessing accounting impacts – including the effect on P&L, balance sheet, EBITDA, and covenants.
- Reviewing tax consequences – working with advisers to model adjustments and timing differences.
- Considering systems and processes – some businesses may require new software to handle lease accounting efficiently.
We’re here to help
Our specialist team can guide your business through the upcoming lease accounting changes under Irish GAAP and help optimise your transition to the revised FRS 102 model. If you would like to discuss how these changes may affect your business, please get in touch with us using the form below.
