Lease accounting in the UK just crossed its watershed: for periods beginning on or after 1 January 2026, FRS 102 puts lessees' leases on the balance sheet — the office, the vehicle fleet, the warehouse all become right-of-use assets with matching liabilities, and the tidy old world where an operating lease was simply a rent expense is over for UK GAAP, seven years after IFRS made the same move. For most private UK companies this is the single biggest accounting change of the decade, and it lands in the accounts currently being prepared.
The new FRS 102 model
The operating/finance distinction is abolished for lessees: any lease beyond the exemptions goes on balance sheet as a right-of-use asset (depreciated over the lease term) and a lease liability (the discounted future payments, unwinding with an interest charge). The profit and loss consequence is subtle but real — a flat rent expense becomes depreciation plus front-loaded interest, so early-years profit dips slightly while EBITDA rises (rent leaves operating costs entirely). Lessor accounting is unchanged, and FRS 105 micro-entities are exempt — one more reason the framework choice matters at the margins.
Two exemptions keep the noise out: short-term leases (twelve months or less, no purchase option) and low-value assets — judged on the asset when new, with no monetary threshold in FRS 102: laptops, phones and modest furniture stay off balance sheet; vehicles and property never qualify however cheap the deal. Companies should expect the exemption boundary, not the principle, to be where auditors spend their questions.
The mercies: discount rates and no restatement
The FRC built two genuine simplifications into the UK version. On discount rates, where the rate implicit in the lease is not readily determinable — it rarely is — lessees can use their incremental borrowing rate or the simpler "obtainable borrowing rate": broadly, the rate the business could get on a similar-term loan, a figure a finance manager can actually evidence from bank offers rather than construct theoretically. And transition is modified retrospective only: liabilities are measured at the initial application date with an opening-balance adjustment, and comparatives are not restated — no re-opening of last year's accounts, unlike the full-retrospective gymnastics IFRS adopters endured in 2019.
The practical project, for a typical SME group, is a term's worth of homework rather than a crisis: inventory every lease (the contracts, plus the embedded ones hiding in service agreements), extract terms and options, pick and document discount rates, and compute the day-one balances. The businesses that struggled under IFRS 16 struggled because the lease register did not exist; that lesson transfers directly.
Who feels it beyond the accounts team
The balance-sheet gross-up has an audience. Lenders: gearing and interest-cover covenants written against old-GAAP numbers can breach mechanically on adoption — most facility agreements have frozen-GAAP clauses, but "most" is not "yours", and the conversation belongs before the accounts are signed. Earn-outs and bonuses keyed to EBITDA just inflated without anyone performing better. Company size tests: the balance-sheet total grows, occasionally pushing entities across audit and size thresholds. And tax broadly follows the accounts — relief moves from rent to depreciation-plus-interest, usually netting to a similar answer over the lease but with timing differences (and the interest component newly inside the corporate interest restriction arithmetic for bigger groups); HMRC has been updating its leasing guidance for the transition, and the computations need the accounting change reflected rather than ignored.
One model, three GAAPs, small print differs
For groups reporting across frameworks: IFRS 16 has run this model since 2019 (with its ~$5,000 low-value custom and fuller machinery for variable payments and sale-and-leaseback); new FRS 102 is deliberately a simplified cousin — aligned in principle, lighter in mechanics — so consolidation adjustments shrink but do not vanish; and US GAAP puts operating leases on balance sheet too while keeping a single straight-line expense, which is why a US parent's numbers will never quite tie to the UK subsidiary's. Group reporting packs deserve a mapping note before the first 2026 consolidation, not during it.
Acumon is running FRS 102 lease transitions now — registers, discount rates, opening adjustments, covenant impact packs and the audit file — through our FRS 102 and financial reporting teams; the wider 2026 changes are covered in our FRS 102 transition guide. If your December 2026 year end will be your first under the new rules and the lease register is still a filing cabinet, this quarter is the right time to open it.