FRS 102 Lease Compliance in the UK: What’s Changed, What It Means, and How It Ripples Through the Economy

The changes to FRS 102 lease accounting represent the most significant revision the standard has experienced in many years. These changes coincide with rising cost pressures, tighter credit policies, and increased scrutiny of financial stability in the UK, creating a perfect storm of challenges for UK companies. The Financial Reporting Council (FRC) has introduced several amendments to the treatment of leases for lessees under FRS 102, moving the standard significantly closer to the “on-balance-sheet” approach associated with IFRS 16.

Lease accounting is not a minor technical footnote, as it is sometimes perceived to be. Instead, it directly influences how lenders and investors view businesses, how covenants are structured, how management plans for future growth, and how risk is assessed. As a result, lease compliance under FRS 102 constitutes a significant business issue for UK firms and for anyone seeking to understand how the UK economy operates at the company level.

What Lease Compliance Means Under FRS 102

Lease compliance means identifying which contracts contain leases, measuring them accurately, recording them consistently, and providing all required disclosures on a timely basis for every reporting period, not just at initial adoption. Under the legacy approach in FRS 102 Section 20, many operating leases were kept off balance sheet and recognised through a straight-line rental expense in the profit and loss account, while finance leases were recognised on balance sheet.

The Periodic Review amendments significantly alter this landscape for lessees. The direction of travel is clear: more lease obligations will appear on the balance sheet, and ongoing measurement will become a finance-and-systems issue rather than a one-time accounting exercise at year-end.

The Big Shift: On-Balance-Sheet Lease Accounting From 2026

A key point for firms to note is that the new lessee model applies to accounting periods beginning on or after 1 January 2026, with early adoption permitted.

Under the revised FRS 102, most leases will now be recognised on the balance sheet. Specifically, lessees will record:

• a lease liability, measured as the present value of remaining lease payments; and
• a corresponding right-of-use asset, reflecting the lessee’s right to use the underlying asset.

This approach is consistent with the core principles of IFRS 16, which has been applied for several years by IFRS reporters, while incorporating UK GAAP simplifications designed to keep the model proportionate for private entities.

The Compliance Burden: Why Systems and Process Maturity Become Economic Issues

Many businesses are investing in finance transformation due to the increased need for quality data and continual remeasurement resulting from changes in accounting. Improving procurement controls, creating central contract repositories and automating various business functions are just some examples of this investment.

While this is a cost for organisations concerned with business operations, it also represents an overall change in the way companies allocate time and resources at the macroeconomic level: away from production and consumption, and towards governance, systems and audit-readiness. When viewed from a broader perspective, these representations of cost contribute to the "implementation friction" that standard-setters consider when weighing the benefits of transparency against these costs.

This is why the marketplace for FRS 102 lease compliance software beginning to grow: while the software won't eliminate judgement, it will assist in automating calculations, tracking remeasurements and providing repeatable disclosure outputs, particularly for organisations with multiple leases at numerous locations.

Why the FRC Made the Change

The policy rationale underlying IFRS 16 reflects the economic reality that operating leases function as a form of debt. When companies financed similar assets through different leasing structures, comparability across firms was reduced. The introduction of IFRS 16 improves comparability by allowing users of financial statements to more easily compare companies with similar asset-financing arrangements.

The Financial Reporting Council (FRC) has published additional supporting materials, including updated factsheets, to assist users in applying the new accounting requirements. Successful compliance depends on the consistent application of the standard in the context of real-world complexity, including contract uncertainty, renewals, rent reviews, break clauses, and diverse property portfolios.

What Actually Changes in Your Numbers

Even though lease accounting does not change cash payments, it can alter how a business appears financially—particularly for firms that lease property, vehicles, equipment, or other large “big-ticket” assets.

Common mechanical effects include:

• higher reported assets and liabilities (a balance-sheet “gross-up”);
• a shift in the income statement profile, as lease costs are reflected through depreciation (right-of-use assets) and interest (lease liabilities) rather than a straight-line rental expense; and
• changes to commonly used metrics such as EBITDA and leverage ratios, which may move due to classification and presentation effects rather than changes in underlying risk.

For business owners, the practical implication is that reported gearing and performance measures may change, influencing how external stakeholders interpret the firm’s financial position.

A Practical Compliance Checklist for UK Businesses

Lease compliance under the newly revised FRS 102 usually follows a well-known pattern regarding transition. Typically, organisations that are able to make a smooth transition will have established the following foundations early on, and will continue to keep these foundations active once they have adopted FRS 102:

• Completeness of lease population (including all leases and embedded leases) that captures all department leases
• Quality of lease data (including lease terms, payment schedules, rent reviews, options to terminate, incentives, and services included)
• Discipline with respect to judgement (e.g., consistency in definition of "lease term": whether or not it includes options to terminate)
• Governance of discount rates that establishes a formal methodology for applying a supportable discount rate (including documentation).
• Change management systems that provide for the tracking of modifications, renewals, and re-measurements as business as usual (BAU) processes.
• Candid disclosure readiness for producing maturity analyses and narrative notes, without a 11th hour scramble.

These foundations create what is the operational heart of compliance and also represent where the economic ripple effects begin.

Why This Matters for the UK Economy (Not Just Your Accounts)

While it may be tempting to claim that accounting has no impact on the “real” economy, the truth is that financial reporting affects economic behaviour in many ways that include the types of decisions made, contracts created and how risk pricing is determined. When considering how changes to lease accounting under FRS 102 will affect the broader economy within the UK, there are three areas of impact:

1. Lending Decisions and Covenant Dynamics – The introduction of lease liabilities will increase the amount of debt-like liabilities reported on the balance sheet. Even if lenders are aware of the existence of leases, covenants are typically included within loan agreements based upon definitions that have not yet been revised to provide clarity regarding the timing of anticipated breaches. Consequently, UK advisors have publicly stated that changes to the lease accounting model can have an effect on covenant compliance and may spur additional discussion regarding the need for covenant resets for businesses at or near the mid-market level. As lenders’ perceptions about lenders change, so do their appetites for lending and pricing — particularly with respect to lease-heavy industries such as retail, logistics, hospitality, healthcare and multi-site service operations.
2. Choices for Investments and Expansion – Businesses whose growth strategy requires leasing locations (i.e., retail stores, medical clinics, distribution centres, office space) will begin to see the effect of lease costs being reflected more prominently on their financial statements, in the form of increased leverage. The awareness of this cost and its effect on financial ratios will influence the manner in which businesses make decisions regarding the length of lease agreements, whether to include breakout options and/or to choose between purchasing vs. leasing assets. This is the very behaviour channel that has been discussed in the analysis of the impact of IFRS 16. As more transparency exists, the manner in which the market prices commitments and the manner in which companies structure those commitments can change.
3. Improved Comparability through Increased Confidence – A common focus in discussions surrounding IFRS is comparability. By bringing lease commitments onto the entity’s balance sheet, the “hidden leverage” phenomenon is effectively eliminated, thus improving the reliability of the information available to investors and analysts for making investment decisions. In a broader sense, the improved reliability of information provides confidence in the appropriateness of capital allocation (i.e., directing funds to those firms that are capable of supporting the related commitments).

The “IFRS 16 Effect” as a Preview of What UK GAAP Businesses May Feel

Both public companies and companies using IFRS have had to deal with some of the same changes as a result of utilising lease liabilities, increasing disclosure of lease liabilities, increased provisions for payment defaults, etc., under the new standard. All major research and professional analysis indicate statistically significant changes in asset values and liabilities, as well as in EBITDA and key ratios, following the implementation of IFRS 16.

While FRS 102 is not exactly the same as IFRS 16, they do share a similar approach; therefore, from an experience perspective, IFRS should give an indication of what FRS 102 will look like for UK private companies and mid-sized companies in the UK. So, there is a high probability that most of the private companies and those companies in the mid-sized sector will be encountering the same types of questions that the public companies were dealing with, when the public companies adopted IFRS 16: How will this affect our covenants? How do we explain this change to all our stakeholders? Do we need to implement new and improved systems to manage our disclosures?

Tax, Policy, and the “Downstream” Implications

The changes to accounting standards that govern leasing also connect to other areas, such as tax and government policy, and although the changes won't directly affect the business's cash flow, they will change how businesses prepare and report their financial statements to HMRC (the regulatory authority).

The Business Leasing Manual will be updated to reflect the transition to FRS 102 (2024 amendments), and that is a clear indicator that governments and regulators will be focusing on the impact of accounting treatment on how a business computes, documents, and reports its results.

Sector-Level Effects: Where the UK Will Feel It Most

The changes will not be experienced equally among all businesses, as the greatest visible impact on reporting will be seen in sectors that use a significant number of operating leases.

The retail and hospitality industries are examples of sectors that lease their properties, as well as logistics (warehousing and transportation) and healthcare (medical premises and medical equipment). Any business that provides services and has multiple physical service locations also fits this profile. The literature and guidance for IFRS 16 indicate that more significant operating leases lead to a greater impact on the balance sheet and on market metrics of key performance indicators.

The implication of this change at the macroeconomic level is that when many mid-sized companies have an increased number of operating leases, this increase may cause lenders and analysts to modify their investment considerations, so the economy will evolve in response to this fact.

Selling the Story to Stakeholders: Investors, Banks, and Boards

Much of what comprises "lease compliance" involves communication with stakeholders. When your numbers change, you must support your stakeholders in understanding why those changes occurred.

Typically, strong businesses achieve this by providing a clear connection between the "old" and "new" presentation of the lease, demonstrating that cash flows have not suddenly deteriorated, explaining any covenant resets or definitional changes at the earliest opportunity, and demonstrating governance or how lease data will be managed in the future.

With regard to the larger economy, this transparency is critical in helping to create more certainty and therefore may potentially contribute to lowering the "risk premium" that investors and lenders place on your industry.

What Business Owners Should Do Now

As the new standard will not become effective until 2026, most organisations will benefit from preparing in advance. For organisations with multiple leases or complex property arrangements, it will be smart to use 2025 as their preparation year.

Examples of practical steps that pay off quickly Construct a complete and accurate lease inventory (including all embedded leases), including procurement and legal verification. Decide on and document your approach to discount rates. Model the impact of the adoption of this standard on covenants and KPIs, and consider reaching out to lenders as necessary for early communication. Evaluate whether spreadsheets will serve your organisation or whether a system will be required. Consider how to communicate this change to the owners, boards, and funders of the organisation.

Conclusion: A Technical Standard With Real Economic Weight

Understanding FRS 102 lease compliance is more than being a specialised accounting area; it can also be viewed as part of the general UK financial system, as when there is a change in the reporting laws (i.e., reporting rules), there is always a change in the way businesses report risk and performance. This, in turn, affects the way businesses lend money and invest in other businesses, and how much trust they have in those businesses.

Business owners should not fear the change; rather, they should see this as an opportunity to take advantage of the improved quality of lease data and governance through increased transparency into long-term commitments and better communication with stakeholders. By adapting successfully to the change in reporting, businesses will be able to operate within an environment where the pricing of risk is more accurate and capital is allocated more efficiently—two very important elements in creating long-term growth in any economy.