From financial years starting on or after 1 January 2026, the lease rules in FRS 102 are changing. These updates mean that most leases will now appear on the balance sheet — a big shift from the current approach.
The Old Rules (up to 2025)
Under the existing model, leases fall into two categories:
- Operating leases – kept off the balance sheet, with payments shown simply as rent.
- Finance leases – shown on the balance sheet as an asset and a liability.
The New Rules (from 2026)
The distinction between operating and finance leases largely disappears.
Instead, most leases will now be recognised on the balance sheet as:
- a right‑of‑use asset – your right to use the leased item
- a lease liability – your obligation to make the lease payments
This brings FRS 102 closer to the IFRS 16 approach, but with some simplifications for smaller entities.
What is a Right‑of‑Use Asset?
Think of it as:
The value of being able to use something you don’t own.
If you lease an office, a van, or equipment, you gain the right to use it for a set period. That right is now treated as an asset on your balance sheet.
What is a Lease Liability?
This represents:
Your commitment to make future lease payments.
It’s shown like a loan — a liability that reduces as you make payments over time.
How the Balance Sheet Will Change
You’ll see more assets
Right‑of‑use assets will appear for most leased items (property, vehicles, equipment, etc.).
You’ll see more liabilities
Lease liabilities will reflect the present value of future lease payments.
Net assets may not change much, but:
- Total assets will increase
- Total liabilities will increase
- Ratios such as gearing may look different
In simple terms:
Your business may look larger — and more indebted — on paper, even though nothing has changed commercially.
What Happens in the Profit & Loss Account?
Under the new model, rent is no longer shown as a single expense.
Instead, you’ll see:
- Depreciation on the right‑of‑use asset
- Interest on the lease liability
The total cost over the life of the lease is similar — it’s just presented differently.
Do All Leases Go on the Balance Sheet?
Not every lease is captured. There are some practical exemptions:
- Short‑term leases – very short leases may still be expensed as you go
- Low‑value items – small, inexpensive assets (like some office equipment) may qualify for simplified treatment
What Should You Do Now?
- List all your leases:
Include offices, warehouses, vehicles, equipment, IT kit — anything you pay to use. - Expect your balance sheet to grow:
This is an accounting change, not a sign of increased debt. - Speak to lenders early:
Because liabilities will rise on paper, it’s worth making sure banks understand the new rules so they don’t misinterpret your gearing. - Plan for the transition:
There may be extra work in the first year to gather lease information and calculate the new figures. We can help you prepare so everything runs smoothly.
Speak to an accountant
Book a meeting at a time that suites you and we can give you a no obligation quote.