FRS 102 lease changes: December 2026 year ends are first in line

Companies with a 31 December year end will be the first to report under the new FRS 102 lease rules. These are among the most significant changes to UK accounting in years and with the 31 December 2026 year end only two months away, many businesses are now asking what this means for their accounts.

Here at Moore NHC, we are Chartered Accountants with offices in Goffs Oak and Stevenage, helping businesses across Hertfordshire and the Home Counties get ready for the change. Here is an overview of what is changing and why it matters.

What is changing?

In March 2024, the Financial Reporting Council (FRC) issued amendments to FRS 102 as part of its Periodic Review 2024. The amendments apply to accounting periods beginning on or after 1 January 2026.

The biggest change is to Section 20, Leases. Until now, most businesses kept operating leases, such as office rent or vehicle leases, off the balance sheet and simply charged the rent as an expense.

Under the new rules, lessees no longer split leases into operating and finance leases. Most leases will now appear on the balance sheet as:

a right-of-use asset, which is the right to use the leased item, and
a lease liability, which is the present value of the payments still due.

The model is based on IFRS 16, the international standard, with some simplifications for UK businesses. The FRC explains the new approach in its FRS 102 Factsheet 11: Lease accounting for lessees.

If you would like to understand how this affects your business, our accounts team can help.

Why December 2026 year ends are first

The rules start with accounting periods beginning on or after 1 January 2026, therefore businesses with a 31 December 2026 year end are first in line. The new rules already apply to their current financial year, even though the accounts will not be prepared until 2027.

Early adoption was allowed, but only if a business adopted all of the Periodic Review 2024 amendments together, including the new revenue rules.

Who is affected?

The changes apply to every business reporting under FRS 102. That includes small companies using the reduced disclosures in Section 1A. Section 1A cuts down what small companies must disclose, but it does not change how leases are recognised and measured.

Micro-entities using FRS 105 are not affected. The ICAEW have confirmed that FRS 105 keeps its existing lease treatment.

The scale is large. In its impact assessment, the FRC estimated that 396,519 UK entities with leases would be affected.

Common leases include:

office, shop, and warehouse premises
company cars and vans
plant, machinery, and equipment
leases embedded in service or supply contracts

Moore NHC can help you find out whether your business is affected.

What will look different in your accounts?

The new rules change how leases are presented, not the cash your business pays. The main effects are:

A bigger balance sheet - Both assets and liabilities increase.
A different profit and loss account - The rent expense is replaced by depreciation of the right-of-use asset and interest on the lease liability. The total charge is usually higher in the early years of a lease and lower in the later years.
Higher EBITDA - Depreciation and interest sit below EBITDA, so this measure usually rises.
A different cash flow statement - Lease payments are split between financing and other categories.

There are two optional exemptions. Short-term leases of 12 months or less, with no purchase option, can stay off the balance sheet. Leases of low-value assets, such as laptops and mobile phones, can also be excluded. Property and vehicles never count as low-value assets.

Knock-on effects worth knowing about

Bank covenants:

Many loan agreements include tests based on debt, EBITDA, or gearing. Bringing leases onto the balance sheet can change those figures even though the business itself has not changed.

Company size and audit:

Right-of-use assets increase a company's balance sheet total, which is one of the tests used to decide a company's size. The FRC estimated that about 3% of small companies with leases could exceed the small company limits as a result, using the thresholds in place at the time. A company that loses small status may need an audit. For financial years beginning on or after 6 April 2025, a small company must meet two of three tests: turnover of £15 million or less, a balance sheet total of £7.5 million or less, and 50 employees or fewer. GOV.UK explains how the size rules work. A company generally has to exceed the limits for two consecutive years before it changes size.

Corporation tax:

HMRC's Business Leasing Manual sets out how tax relief broadly follows the new accounting treatment. It also covers how the adjustments made on transition are spread for tax purposes.

Revenue:

The same amendments bring in a new five-step model for revenue recognition from the same date. Some businesses may see changes in when income is recognised.

Our audit and business tax teams can help you understand how these knock-on effects apply to you.

How does the transition work?

FRS 102 uses a simplified approach called the modified retrospective approach. Businesses do not restate the prior year figures. Instead, existing leases are brought onto the balance sheet at the start of the first year under the new rules. Any cumulative difference goes to opening retained earnings.

A range of practical expedients is available. The ICAEW's guidance on initial application gives more background.

Information that is useful to gather

Businesses moving to the new rules will typically need:

copies of all lease agreements, including any variations
details of break clauses, renewal options, and rent reviews
information on rent-free periods and other incentives
details of contracts that may contain a lease, such as some service agreements

Having this information ready makes year end accounts preparation much smoother, Moore NHC can work with you to gather this information and implement the changes.

How Moore NHC can help

As a member of the Moore UK network, Moore NHC combines local, partner-led service with the resources of a national and international network. From our offices in Goffs Oak and Stevenage, we can help with:

Accounts preparation: preparing FRS 102 and Section 1A accounts under the new lease rules
Audit and assurance: for companies that need an audit or may become audit-eligible
Business tax: corporation tax computations that reflect the new treatment
Management accounts: building the new lease entries into your monthly or quarterly reporting
Business advisory: helping you understand how the changes affect your key figures

Frequently asked questions

When do the FRS 102 lease changes start?

For accounting periods beginning on or after 1 January 2026. For a 31 December year end, the first year affected is the year ending 31 December 2026.

Do small companies have to apply the new lease rules?

Yes. Small companies using FRS 102 Section 1A must apply them. Micro-entities using FRS 105 are not affected.

Will my cash flow change?

No. The lease payments stay the same, the way the leases are presented in the accounts is all that changes.

Can short leases stay off the balance sheet?

Leases of 12 months or less with no purchase option, and leases of low-value assets, can be exempted and therefore remain off the balance sheet

Disclaimer: This article is for general information only and reflects our understanding of the rules at the date of publication. It does not constitute accounting, tax, legal, or other professional advice and should not be relied upon as such. Every business's circumstances are different, and you should seek specific professional advice before acting or refraining from acting on any matter covered in this article. Moore Northern Home Counties Limited accepts no responsibility for any loss arising from action taken or not taken as a result of this article.

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FRS 102 lease changes: December 2026 year ends are first in line