Lease accounting changes: What they mean for EBITDA and borrowing
From 1 January 2026, the UK Generally Accepted Accounting Practice (GAAP) standards will introduce significant changes to lease accounting under Financial Reporting Standard (FRS) 102. Any entities reporting under FRS 102 will need to prepare for 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.
We’re here to help
Our specialist Debt Advisory team is on hand to help you prepare for these changes and navigate their impact on EBITDA, funding, borrowing, and banking covenants. If you’d like to discuss what the new lease accounting rules could mean for your business, please get in touch via the form below.
