FRS 102 Is Live: The Lease Changes Landing in Your Next Accounts

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.

Most technical changes announce themselves. This one didn't. The FRC issued the periodic review amendments in March 2024, the profession filed them under "2026 problem", and the trade press moved on. But the effective date — accounting periods beginning on or after 1 January 2026 — is a start date, not an end date. Which means that 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 have gone. The opening balances you will need in the spring are being determined by contracts that were sitting in a filing cabinet while nobody was looking at them.

This is not a piece about how to account for a lease. Your software vendor and your institute will handle that. It is about what the change does to a practice: how much work it drags in, who pays for it, which clients get an unpleasant surprise, and what it says about your firm when someone eventually looks at how you handled it.

What actually changed — and what didn't

The periodic review touched a lot of FRS 102, but two changes carry almost all of the practical weight.

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. Those matter, but they will not eat your March.

What didn't change is just as important. FRS 105 is untouched by the lease changes. A micro-entity carries on exactly as before. That single fact will take a large slice of a typical general practice's client list out of scope in about ten minutes of filtering.

The date that has already passed

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, but it has an awkward consequence: the balances depend on the position at a date that, for the two most common UK year ends, is already in the past.

Nothing is lost, because a lease contract is a document and can be read after the event. But it does mean the job is archaeology rather than bookkeeping: pulling contracts, confirming break clauses and renewal options, and deciding lease terms retrospectively. That is partner-grade judgement work, not something to hand to a junior in the last week of a filing deadline.

Which clients are actually in scope

Before doing any technical work, run the filter. It is far shorter than the panic suggests.

The exemptions are narrower than clients hope. Short-term means a term of twelve months or less at inception with no purchase option, and it is elected by class of underlying asset rather than lease by lease. Low-value is judged on the absolute value of the asset when new, not on whether it is material to that particular company — and FRS 102 rules out vehicles, construction equipment, aircraft, land and buildings, and production equipment. In practice, if a client leases premises or vans, they are in.

What the numbers actually do

The audit exemption trap

This is the one that turns a technical change into a client relationship problem. The Companies Act size test uses the balance sheet total — the aggregate of amounts shown as assets. Capitalising leases increases it, sometimes materially.

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 — but the conversation has to happen now, not when 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, not after.

The tax consequences clients will ask about

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 profile is what changes: because interest is calculated on a reducing liability, relief is front-loaded, and the back end of the lease is leaner than the client is used to.

The transitional adjustment is treated differently again. Rather than a one-off deduction, 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 it needs identifying and tracking from day one rather than reconstructing in year four.

None of this is difficult. All of it is another line in a tax computation that used to be one number, on every affected client, every year, for the life of the lease.

What it costs your firm

The £17,000 is not the real problem. The 179 hours are. 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. A change like this is only absorbable if it is priced, and pricing it means having the conversation before the work starts rather than apologising for an overrun afterwards. Our guide to pricing and packaging advisory work covers how to frame that without it sounding like a surcharge.

What to do in the next 60 days

1. Segment the client list. FRS 105 out. Section 1A and full FRS 102 in. You will almost certainly find the in-scope population is half what you feared.
2. Ask for the contracts now. Every lease agreement, plus break clauses, renewal options and any incentive arrangements. This is the long pole and 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. Doing it consistently once is far cheaper than defending forty different judgements later.
4. Run the size test on gross assets. Flag 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 the software actually does it. Confirm your accounts production package handles Section 20 transition and disclosure in the version you will be running next spring, not the one on the roadmap.
7. Price it. Decide now whether it is a one-off transition fee, a fee uplift, or absorbed — and if absorbed, say so deliberately rather than by default.

Why a buyer reads this too

We look at a lot of practices, and the technical changes are rarely what we are assessing. What a change like this reveals is process. A firm that can segment 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 is a firm with systems. A firm where that information lives in one partner's head is carrying the exact owner-dependency that discounts a valuation — the pattern we describe in what reduces the value of your practice.

The same goes for the fee decision. Firms that absorb every new obligation without repricing end up with a gross recurring fee that looks stable while the margin behind it erodes. That shows up in diligence long before it shows up in the accounts, and it is why what a practice is worth depends so much more on how the work is run than on how much of it there is.

Frequently asked questions

When do the new FRS 102 lease rules first apply?

The amendments from the FRC's 2024 periodic review apply to accounting periods beginning on or after 1 January 2026, with early adoption permitted. That means the first affected accounts are 31 December 2026 year ends, followed by the much larger 31 March 2027 population. The date that matters operationally is the transition date — the first day of that first affected period. For a December year end that was 1 January 2026, and for a March year end it was 1 April 2026. Both have already passed, so the lease information needed to build opening balances has to be reconstructed from contracts rather than captured as you go.

Do small companies and micro-entities have to apply the new lease model?

Small companies reporting under Section 1A of FRS 102 do have to apply the new lease model. Section 1A relaxes disclosure, not recognition and measurement, so a small company with an office lease and a few vehicles will be putting right-of-use assets and lease liabilities on its balance sheet like everybody else. Micro-entities reporting under FRS 105 are not affected by the lease changes at all. For most general practices that split is the single most useful filter to run across the client list, because it separates the files that need real work from the ones that carry on unchanged.

Which leases can stay off the balance sheet?

Two exemptions survive. Short-term leases, meaning those with a term of twelve months or less and no purchase option, can be expensed on a straight-line basis; the choice is made by class of asset. Leases of low-value assets can also be kept off balance sheet, assessed on the absolute value of the asset when new rather than on materiality to the entity. FRS 102 sets no monetary threshold but is explicit that vehicles, construction equipment, aircraft, land and buildings, and production equipment are never low-value. Tablets, laptops, telephones and small items of office furniture are the sort of thing intended.

How are right-of-use assets and lease liabilities taxed?

Broadly, tax follows the accounts. Depreciation of the right-of-use asset and the finance cost on the lease liability are both deductible, in the same way finance leases are relieved now. The total relief over the life of a lease is unchanged, but the profile shifts: interest is highest at the start and falls away, so relief is front-loaded and the later years are leaner. The transitional adjustment on first adoption is not relieved in one go — for the lessee it is spread across the mean average length of the affected leases. Capital elements sitting inside a right-of-use asset, such as SDLT, remain non-deductible.

Could the new lease rules push a client into audit?

Yes, and this is the trap worth checking early. Recognising right-of-use assets increases the balance sheet total used in the Companies Act size test. Since periods beginning on or after 6 April 2025 the small company limits are turnover of £15m, balance sheet total of £7.5m and 50 employees, and a company must meet two of the three. A client comfortably under £7.5m on gross assets today could cross it once leases are capitalised, and if it already exceeds one other limit it stops qualifying as small. A company must generally fail for two consecutive years before losing small status, which buys time but does not remove the problem.