Understanding the impact of lease accounting changes on EBITDA

From 1 January 2026, the Irish Generally Accepted Accounting Practice (GAAP) standards introduce significant changes to lease accounting under Financial Reporting Standard (FRS) 102.

Understanding the impact of lease accounting changes on EBITDA

From 1 January 2026, the Irish Generally Accepted Accounting Practice (GAAP) standards introduce significant changes to lease accounting under Financial Reporting Standard (FRS) 102. Any entities reporting under FRS 102 will need to understand these changes and adapt their reporting accordingly.

The revisions will remove the distinction between finance and operating leases, raising the question of: how will the new rules affect a business’s Earnings before Interest, Taxes, Depreciation and Amortisation (EBITDA), borrowing capacity, and banking covenants?

The impact explained

The new approach will bring most leases onto the balance sheet. As a result:

Rental payments that previously reduced EBITDA will no longer be treated as operating expenses.
Businesses will instead recognise depreciation on a right-of-use asset and interest on the corresponding lease liability.

This shift will increase EBITDA for many businesses, but also alter balance sheet ratios and debt metrics. Key areas likely to be affected include:

Loan and covenant compliance
Accounting and audit exemption thresholds
Distributable profits
Bonus and earn-out calculations

From a borrowing perspective, lenders will need to reflect higher reported debt and debt-servicing obligations in their affordability assessments. This could lead to tighter underwriting standards, more rigorous stress testing, and potentially reduced access to funding.

How can businesses manage the impact?

While some lenders may have already begun adjusting their policies in response to these changes, others may not have done so yet however, it is highly likely they will do so. Businesses seeking external funding should start planning now to strengthen their affordability profile and debt servicing cover ratios.

As a result of the changes, we recommend:

Early engagement with lenders – especially if you have covenants linked to EBITDA, debt service coverage (DSC), leverage or interest cover.
Strategic advisory support – to align funding with business growth plans and ensure reliefs (e.g. capital allowances) are maximised where borrowed funds are used.
Scenario analysis – to model the impact on profit & loss (P&L) and balance sheet positions under the new rules.
Covenant planning – to assess your future ability to meet obligations once testing reflects the new standards.