Are you ready for the FRS 102 shake-up?

The forthcoming amendments to FRS 102 represent one of the most significant changes to lease accounting in years.

Effective from January 2026, these updates will bring leases onto the balance sheet, aligning UK GAAP more closely with international standards such as IFRS 16. For businesses reporting under FRS 102, the changes are more than a compliance exercise.

It’s an opportunity to re-evaluate financial strategies and ensure reporting practices meet modern expectations for transparency and consistency.

Balancing Complexity with Simplicity 

At the heart of the changes is the shift to an on-balance sheet model. Under the revised standards, leases will no longer sit off the balance sheet and instead will be recognised as right-of-use assets with corresponding lease liabilities. While this approach mirrors IFRS 16, the Financial Reporting Council (FRC) has introduced some practical measures to ease the transition for entities preparing for FRS 102.

Key features include exemptions for short term leases (less than 12 months) and low-value assets-reliefs also available under IFRS 16. In addition, FRS 102 provides options for more accessible discount rates, such as the Incremental Borrowing Rate (IBR) or an Obtainable Borrowing Rate (OBR), which can simplify calculations for smaller entities without access to precise borrowing rate data.

The amendments also incorporate expedients for contracts containing multiple lease components. These allow entities to treat such contracts as a single lease, reducing the administrative complexity associated with disaggregating lease and non-lease components. Similarly, a more straightforward approach to sale and leaseback transactions aligns with existing FRS 102 practices, reflecting the FRC’s aim to balance alignment with international standards while considering the needs of smaller businesses.

These measures collectively ensure that the compliance burden remains proportionate, especially for SMEs, while maintaining the broader goals of transparency and consistency in financial reporting.

The new model is not without its challenges, however.

For many businesses, the implications will extend far beyond accounting teams. Financial metrics, such as EBITDA and gearing ratios, will inevitably be affected, potentially influencing investor perceptions, borrowing arrangements, and even executive remuneration schemes.

Industries that rely heavily on leasing as part of its operation model – manufacturing (reliance on plant and machinery); healthcare (medical equipment); construction (heavy machinery); transportation and logistics (fleet and equipment); agriculture (machinery); retail and hospitality (property) – are among those likely to feel the greatest impact.

Lessons from IFRS 16

When IFRS 16 was introduced, many organisations faced teething problems, particularly around data collation and system readiness.

These experiences offer valuable insights for businesses now preparing for FRS 102. One of the clearest lessons is the importance of starting early. Transitioning to a new accounting standard requires more than technical adjustments and demands a strategic approach to process redesign, governance, and stakeholder communication.

Data quality also emerged as a critical factor under IFRS 16. Accurate, comprehensive lease data is essential for ensuring compliance and maintaining audit trails.

However, the process of identifying embedded leases within broader contracts remains one of the most complex aspects of the transition. Businesses that relied on manual processes, such as spreadsheets, often found these tools inadequate for managing the volume and complexity of lease information.

A Pragmatic Approach to Compliance

 As the 2026 deadline approaches, businesses must begin to assess their readiness. Early actions might include reviewing existing lease agreements to identify gaps in data, engaging with auditors to clarify transition approaches, and investing in technology solutions capable of managing the new requirements.

The shift from off-balance sheet to on-balance sheet accounting is a fundamental one, but it also presents opportunities to improve operational efficiencies and enhance financial governance.

Technology will play a pivotal role in this transition. Purpose-built lease accounting solutions can automate calculations, ensure accurate reporting, and provide the flexibility needed to manage lease modifications over time.

For businesses with limited resources, choosing the right software is critical—it must not only meet compliance requirements but also integrate seamlessly with existing systems.

Navigating the Path Ahead

The FRS 102 amendments reflect a broader trend in financial reporting: a move towards greater transparency and alignment with international standards. While the changes may initially appear daunting, they also represent an opportunity to modernise processes and strengthen financial oversight.

For accountants, the challenge lies in balancing compliance with strategic value. By leveraging insights from IFRS 16, engaging with stakeholders early, and investing in the right tools, businesses can navigate the transition with confidence.

The question is not just whether organisations are ready for the FRS 102 shake-up, but how they can use it as a catalyst for broader improvements.

For more information on how you can prepare your organisation for the upcoming amendments to FRS 102 lease accounting and making compliance more efficient, access the ‘Lease Accounting: A Guide to FRS 102’ insight guide.