Lease accounting is undergoing a major change. From 1 January 2026, businesses reporting under FRS 102 (excluding those using the micro-entities regime) will need to bring most operating leases onto the balance sheet. This shift represents one of the most significant updates to accounting standards in recent years, and it will have wide-ranging implications for how companies present their financial position.
What is changing?
Under the current rules, many operating leases are kept “off balance sheet”, with payments simply expensed through profit and loss. This will no longer be the case. Instead, companies will recognise a right-of-use asset and a matching lease liability, reflecting the future payments due under the lease.
There are limited exemptions. Leases for low-value assets, such as small office equipment or mobile phones, and short-term leases of less than twelve months can continue to be treated as expenses. For most other arrangements, businesses must calculate the present value of their future lease commitments and bring them onto the balance sheet.
How to prepare
The new model requires a more detailed and structured approach to lease accounting. Businesses should begin preparation well ahead of 2026 to ensure a smooth transition. The first step is to review all existing lease agreements. This includes assessing options to extend or vary leases, as these can alter the overall liability.
The wider implications
The new standard does not just change how leases are recorded; it will also have a direct effect on key financial metrics. Debt ratios, EBITDA, and other performance measures may all shift as a result of bringing operating leases onto the balance sheet.
This can influence how lenders and investors view a business, particularly if debt covenants are linked to these ratios. In some cases, the changes may even impact thresholds for statutory audit requirements. Businesses with bonus schemes tied to EBITDA should also consider whether current arrangements remain appropriate.
Another important factor is the increased element of judgement. Deciding what qualifies as a low-value asset or documenting the reasoning for excluding certain leases will require careful consideration and evidence. Businesses operating as part of a group that reports under IFRS may also wish to think about early adoption or alignment to avoid complications at consolidation stage.
When does it take effect?
The changes are effective for accounting periods beginning on or after 1 January 2026. While that may seem some distance away, the process of identifying leases, modelling the impact, and updating systems can be time-consuming. Starting now gives businesses time to plan properly, avoid surprises, and engage with stakeholders such as auditors, lenders and boards in advance.
At BK Plus, we are helping clients prepare for the transition by carrying out lease audits, modelling the balance sheet impact, and advising on system updates. By addressing the changes early, businesses can manage the process with confidence and avoid last-minute disruption.