New Lease Accounting Rules (from 2026)
What This Means For Your Business
From 2026, there will be an important change to how leases are shown in your accounts under FRS 102. While the way you pay for leases won’t change, the way they appear in your financial statements will. Here’s a simple overview of what you need to know.
What's Changing?
In the past, many leases (like property or equipment rentals) were treated as regular expenses and stayed on the balance sheet. From 2026, this will change. Most leases will now need to be recorded as:
- An asset (your right to use something, like a building or vehicle)
- A liability (your obligation to make lease payments)
What Does This Mean In Practice?
Instead of showing lease hire as a single monthly cost, your accounts will now include:
- Depreciation (spreading the cost of the asset over time)
- Interest (on the lease payments)
So your accounts may look different, even though your cash payments stay the same.
Will This Affect My Business?
Yes - if you rent things like:
- Offices or shops
- Vehicles
- Equipment
These leases will now appear on your balance sheet.
This applies to most businesses using FRS 102, including small companies. Are There Any Exceptions?
Some simpler leases are excluded:
- Short-term leases (12 months or less)
- Low-value items (e.g., laptops, small office equipment)
These can still be treated as normal expenses.
What Will Change In My Accounts?
You may notice:
- Higher assets and liabilities on your balance sheet
- Higher EBITDA (profit before interest and depreciation)
- Higher reported debt, which could affect ratios
This doesn’t mean your business is doing worse - it just reflects the new accounting treatment.
Why Does This Matter?
These changes could affect:
- How banks and lenders view your accounts
- Loan agreements and financial covenants
- Decisions about whether to lease or buy assets
What Should You Do Now?
To prepare, you should:
- Make a list of all your leases.
- Review key terms (length, payments, renewal options)
- Speak to your accountant about the impact.
Final Thoughts
This change is about making your financial commitments more visible. While your day-to-day business won’t change, your accounts will look different – so it’s important to understand the impact early and plan ahead.
At Phinch, our accountants for FRS 102 can help you navigate the complexities of the new rules and answer any questions you may have.
