FRS 102 lease changes in 2026 and what they mean for your practice

General information for practice owners, accurate as at 31 August 2026. It describes the amendments to FRS 102 issued by the Financial Reporting Council in March 2024 following its periodic review, and the Companies Act size limits that applied from 6 April 2025. All figures in the illustrations are invented for the purpose of showing the mechanics. Standards and legislation change — take your own advice before acting.

The FRC issued the periodic review amendments in March 2024, and they apply to accounting periods beginning on or after 1 January 2026. The changes take effect from the first day of that period, so for every client with a 31 December year end the transition date was 1 January this year. For every client with a 31 March year end, it was 1 April. Both dates have passed. The opening balances you will need in the spring depend on the lease contracts in force on those dates, and those contracts need collecting from clients now.

Your software vendor and your institute publish guidance on how to account for a lease. For a practice, the change raises four further questions: how much work it brings, who pays for it, which clients will see their figures move, and how a buyer would judge the way the firm handled it.

What changed in FRS 102

The periodic review touched a lot of FRS 102. Two changes account for most of the practical work in a general practice.

Section 20, Leases, has been replaced with a model based on IFRS 16. For lessees, the distinction between operating and finance leases is gone. Instead, a lessee recognises a right-of-use asset and a lease liability for substantially every lease. The rent charge in the profit and loss account disappears and is replaced by depreciation of the asset plus interest on the liability.

Section 23, Revenue, has been replaced with a five-step model based on IFRS 15: identify the contract, identify the performance obligations, determine the transaction price, allocate it, and recognise revenue as each obligation is satisfied. For a straightforward trading client this changes nothing you can see. For clients with bundled deliverables, staged contracts, long-term service arrangements or upfront fees, it can move revenue between periods.

There are also changes to Section 2 on concepts and a new section dealing with fair value measurement. Both need reviewing, though they take less time per file than the lease changes.

FRS 105 is untouched by the lease changes. A micro-entity carries on exactly as before. In a typical general practice that takes a large part of the client list out of scope, and the filter takes minutes to run.

The transition date

Transition uses a modified retrospective approach. Comparatives are not restated. Instead, the right-of-use asset and lease liability are recognised at the date of initial application — the first day of the first affected period — with any difference taken to opening retained earnings. That is easier than a full restatement. It does mean the balances depend on the position at a date that, for the two most common UK year ends, is already in the past.

A lease contract can still be read after the event, so the information is available. The job is to reconstruct the position: pulling contracts, confirming break clauses and renewal options, and deciding lease terms retrospectively. Those decisions need a partner or senior manager's judgement, and they need time set aside well before the filing deadline.

Which clients are in scope

Before doing any technical work, sort the client list using this table.

Both exemptions are narrow. Short-term means a term of twelve months or less at inception with no purchase option, and the election is made for each class of underlying asset. Low-value is judged on the absolute value of the asset when new, whatever its materiality to the company, and FRS 102 rules out vehicles, construction equipment, aircraft, land and buildings, and production equipment. A client that leases premises or vans is in scope.

How the numbers change for a trading client

Leases and the audit exemption size test

The Companies Act size test uses the balance sheet total — the aggregate of amounts shown as assets. Capitalising leases increases it, sometimes materially, and that can change whether a client needs an audit.

Since periods beginning on or after 6 April 2025 the small company limits have been turnover of £15m, balance sheet total of £7.5m and 50 employees, with a company needing to meet two of the three. A client sitting at, say, £7.1m of gross assets with turnover above £15m has been comfortably small on the strength of its balance sheet. Add £700,000 of right-of-use assets and it now fails two tests. A company generally has to fail for two consecutive years before it loses small status, so the audit does not arrive immediately. Raise it with the client now, before the engagement letter needs rewriting.

The same inflation can affect other gross-asset gateways. Enterprise Investment Scheme eligibility runs off a £15m gross assets limit and the Seed Enterprise Investment Scheme off £200,000, so a company planning a raise needs the position modelled before the raise.

Tax treatment of leases

Broadly, tax follows the accounts. Depreciation of the right-of-use asset and the finance charge on the liability are both deductible, mirroring how finance leases are relieved today. Over the whole life of a lease the relief is the same as the old rental deduction. The timing changes. Because interest is calculated on a reducing liability, relief is front-loaded, and the later years of the lease carry less relief than the client is used to.

The transitional adjustment is treated differently again. The lessee spreads it across the mean average length of the affected leases. And where a right-of-use asset carries a capital element — SDLT is the usual example — depreciation on that element stays non-deductible, so identify it and track it from the first year.

The calculations are straightforward. They do add lines to a tax computation that used to show one rent figure, on every affected client, every year, for the life of the lease.

What it costs your firm

The 179 hours matter more than the £17,000. They come out of the same capacity that MTD, identity verification and everything else has already claimed — the pattern we set out in the 2026 capacity crunch. To recover the cost, agree the fee with the client before the work starts. Our guide to pricing and packaging advisory work covers how to explain the fee to clients.

What to do in the next 60 days

1. Sort the client list. Take FRS 105 clients out and keep Section 1A and full FRS 102 clients in. In the illustration above, that left 55 of 180 files needing real work.
2. Ask for the contracts now. Every lease agreement, plus break clauses, renewal options and any incentive arrangements. This step takes longest because it depends on clients responding.
3. Fix your discount rate policy. Decide how the firm will evidence an obtainable borrowing rate, and write it down. One consistent policy is quicker to apply and easier to defend than forty separate judgements.
4. Run the size test on gross assets. List any client within roughly £1m of the £7.5m balance sheet limit and model the lease uplift before the year end closes.
5. Warn the covenant clients. Anyone with bank ratios, earn-outs or profit-linked bonuses needs to hear about the EBITDA and net debt movement from you, before their lender spots it.
6. Check your software. Confirm your accounts production package handles Section 20 transition and disclosure in the version you will be running next spring.
7. Price it. Decide now whether it is a one-off transition fee, a fee uplift, or absorbed. If you absorb it, record that as a decision for each client.

How a buyer views the way you handle the change

When we assess a practice, we look at how it handles a change like this. A firm that can sort its own client list in an afternoon, knows which files carry leases, and has a written policy for a judgement it will apply forty times has working systems. Where that information sits in one partner's head, the firm depends on its owner, and that lowers a valuation — the pattern we describe in what reduces the value of your practice.

The fee decision matters to a buyer as well. A firm that absorbs every new obligation without repricing keeps a stable gross recurring fee while its margin falls. Due diligence picks that up from time records before it shows in the accounts. How the work is run has a large effect on what a practice is worth, alongside the volume of fees.