How FRS 102 lease accounting is changing from January 2026

The Financial Reporting Council (FRC) has announced major revisions to FRS 102, which apply to accounting periods starting on or after 1 January 2026.

How FRS 102 lease accounting is changing from January 2026

The Financial Reporting Council (FRC) has announced major revisions to FRS 102, which apply to accounting periods starting on or after 1 January 2026. These changes represent the most substantial revision since FRS 102 was published in 2013 and aim to align Irish and UK Generally Accepted Accounting Principles (GAAP) more closely with IFRS 16: Leases.

For businesses across Ireland and the UK, this shift will fundamentally alter how leases are accounted for, impacting financial statements, key performance metrics, and covenant compliance.

From off balance Sheet to on balance sheet

Under the revised standard, lessees will now move away from the traditional split between operating and finance leases. Instead, most leases will now appear on the balance sheet with, the exception of a few instances, requiring recognition of the following:

A right of use (RoU) asset
This is an asset on a company's balance sheet that represents the lessee's right to use a leased asset for the lease term. This includes assets such as buildings, vehicles, or machinery, and it is typically recorded alongside a corresponding lease liability
A corresponding lease liability, measured at the present value of future lease payments

Previously, operating leases were expensed through profit or loss. Under the new model, these will be replaced by depreciation of the RoU asset and interest on the lease liability. This change will significantly affect EBITDA, because it reclassifies operating lease expenses as depreciation and interest expenses, and gearing ratios, which may have knock-on effects for banking covenants and investor reporting.

Core principles of this new approach

The revised FRS 102 introduces several key features:

Discounting of lease payments: Lease liabilities will be discounted using the interest rate implicit in the lease or, if not readily determinable, the lessee’s incremental borrowing rate.
Exemptions: Short term leases (12 months or less) and leases of low value assets ( ie laptops, tablets and small office furniture) will remain off balance sheet.
Enhanced disclosures: Businesses will need to provide more detailed quantitative and qualitative information about lease arrangements, including maturity analysis and commitments.

These changes aim to improve transparency and comparability, but they also increase complexity for finance teams.

Implications for Irish and UK businesses

For companies with significant property, vehicle or equipment leases, the impact will be considerable. Bringing leases onto the balance sheet will increase reported assets and liabilities, potentially altering company size thresholds under Irish and UK company law. It will also change the profile of expenses in the income statement, moving from straight line lease costs to a more front-loaded pattern of depreciation and interest. These changes could significantly influence performance metrics, tax calculations, and even dividend policy.

Transition reliefs and the practical challenges

The FRC has provided transition reliefs to ease implementation:

Comparatives not restated: Unlike IFRS 16, prior-year comparatives will not need to be restated. Adjustments will be recorded directly in equity at the date of transition.
Optional expedients: Businesses can apply the updated lease definition prospectively and use hindsight when assessing lease terms at transition.

Despite these simplifications, challenges remain. Companies will need to review all contracts to identify leases, calculate discount rates, and update systems to handle the new requirements. Training your finance teams and engaging auditors early will be essential to ensure compliance.

Steps that business should take now

With the revised lease accounting requirements under FRS 102 now in force for current accounting periods, the focus has shifted from preparation to practical application and validation.

Businesses should use this first year of adoption to:

Validate lease calculations - Confirm that right of use assets, lease liabilities and discount rates have been calculated correctly and consistently across all lease arrangements.
Review judgements and assumptions - Ensure that key judgements - such as lease term, renewal options and the incremental borrowing rate - are well documented and defensible ahead of audit review.
Assess the impact on key metrics - Understand how bringing leases onto the balance sheet is affecting EBITDA, net debt, gearing and covenant calculations, particularly where these metrics are referenced in financing agreements.
Engage early with lenders and stakeholders - Where covenants or affordability assessments rely on EBITDA or leverage ratios, early dialogue can help avoid surprises once accounts are finalised.
Check systems and processes - Confirm that accounting systems, models and workflows are fit for purpose, especially if lease data is being maintained outside the core finance system.

Taking time now to review how the new requirements are working in practice can help reduce audit risk, support covenant compliance and provide greater confidence in the numbers presented to lenders, investors and other stakeholders.