UK accounting standards are undergoing one of the biggest shake-ups in years. If your business leases vehicles, equipment, land or buildings (or any operating leases), it’s about to affect your balance sheet. As part of its periodic review of FRS 102, The Financial Reporting Council has introduced significant new requirements for how leases are accounted for. The impact of the changes can be substantial in some cases and in this article we focus on one of those changes; accounting for leases.
For accounting periods beginning on or after 1 January 2026, operating leases will be accounted for “on-balance-sheet”, in practice this will mean most leases held by a business for vehicles, plant and equipment or land and buildings will be recognised on the balance sheet as an asset and a corresponding lease liability will be recognised.
A motor vehicle lease with four years remaining as at 1 January 2026 at £800 per month using a 7% borrowing rate would add £25,202 to gross assets on the balance sheet at December 2026 and £26,060 of lease commitment liabilities to the balance sheet. In the first year there would be a small impact on the profit or loss with depreciation and interest being charged of £10,458 compared to £9.600 of rental expenses under the previous accounting standards. EBITDA in this instance therefore would increase by £858 however net profit before tax would fall by the same value.
| Lease term remaining at 1 January 2026 | 4 years | ||
| Monthly payment | £800 | ||
| Borrowing rate | 7% | ||
| Measure | Before changes | After changes | Impact / difference |
| Gross assets impact Dec-26 | £100,000 | £125,202 | £25,202 |
| Gross liabilities impact Dec-26 | -£80,000 | -£106,060 | -£26,060 |
| P&L charge (rental charge v depreciation and interest) | £9,600 | £10,458 | £858 |
| EBITDA | £6,000 | £6,858 | £858 |
| Profit before tax | £4,000 | £3,142 | -£858 |
A property lease with nine years remaining as at 1 January 2026 at £8,333 per month using a 7% borrowing rate would add £595,750 to gross assets on the balance sheet at December 2026 and £614,795 of lease commitment liabilities to the balance sheet. In the first year there would be a £119,045 of depreciation and interest being charged compared to £100,000 under the previous accounting standards. EBITDA in this instance would therefore increase by £19,045 however net profit before tax would fall by the same value.
| Lease term remaining at 1 January 2026 | 9 years | ||
| Monthly payment | £8,333 | ||
| Borrowing rate | 7% | ||
| Measure | Before changes | After changes | Impact / difference |
| Gross assets impact Dec-26 | £1,500,000 | £2,095,750 | £595,750 |
| Gross liabilities impact Dec-26 | -£1,000,000 | -£1,614,795 | -£614,795 |
| P&L charge (rental charge v depreciation and interest) | £100,000 | £119,045 | £19,045 |
| EBITDA | £60,000 | £79,045 | £19,045 |
| Profit before tax | £50,000 | £30,955 | -£19,045 |
At Kirk Newsholme we can help companies understand the impact of the changes to FRS 102 for lease accounting. With our existing client base we have been working in advance of December 2026 year ends to identity what the impact may be on companies and have provided an impact calculator as well as practical advice as to how finance teams can deal with the changes in their accounting systems.
Whether you are an existing client, a contact or just wanting to understand more about the changes, please don’t hesitate to get in touch if there is anything you would like to discuss further.
Written by Tom Upton, Senior Audit Manager, Thomas.upton@kirknewsholme.co.uk, DD 01132044220
Financial Reporting Council: https://www.frc.org.uk/library/standards-codes-policy/accounting-and-reporting/uk-accounting-standards/frs-102/
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