“Most leases that were previously operating leases now move onto the balance sheet.”
Sebastian Suchodolski
FRS 102 Section 20: what the revised lease accounting rules change
The amended FRS 102 brings operating leases onto the balance sheet for the first time. A guide to the scope, the exemptions, the impact on your numbers, the disclosures, and the December 2026 deadline.
If your company reports under FRS 102 and has leases for offices, vehicles, equipment, IT hardware or other business assets, the accounting is changing.
The revised lease accounting requirements in FRS 102 Section 20 apply for accounting periods beginning on or after 1 January 2026. Most leases that were previously treated as operating leases will now be recognised on the balance sheet. Instead of a single lease expense passing through the profit and loss account, the lessee recognises a right-of-use asset and a corresponding lease liability.
That affects more than the accounting entries. Total assets increase. Liabilities increase. EBITDA may change. Net debt and gearing may change. Covenant calculations may need to be revisited. The supporting documentation needs to be stronger too, because lease accounting becomes a balance sheet exercise rather than a note disclosure exercise.
This guide covers what the revised Section 20 changes, who it applies to, how the exemptions work, how leases are measured, what you have to disclose, and when it first hits your year end.
This is Part 1 of a three-part series. Part 2 is the step-by-step transition guide. Part 3 describes what a well-run FRS 102 lease process looks like.
What FRS 102 Section 20 changes
Under the previous FRS 102 model, operating leases were generally expensed on a straight-line basis over the lease term. The lease did not appear as an asset and liability on the balance sheet. Instead, future lease commitments were disclosed in the notes.
The revised Section 20 moves lessee accounting closer to the IFRS 16 approach. The FRC describes the revised Section 20 as an on-balance-sheet lease accounting model, based on IFRS 16 but with simplifications and modifications for FRS 102 preparers.
In practice, lessees will usually need to:
- recognise a right-of-use asset for the right to use the leased asset
- recognise a lease liability for future lease payments
- depreciate the right-of-use asset over the lease term
- unwind interest on the lease liability using an appropriate discount rate
- present lease costs differently, with depreciation and interest replacing the single operating lease expense line
The total cost over the lease term does not change simply because the accounting model changes. What changes is the timing and presentation of that cost.
For many entities, the most visible effect will be that operating lease rental expenses move out of operating expenses and are replaced by depreciation and finance costs. EBITDA often increases, while lease liabilities increase at the same time. Where lease liabilities are included in debt measures, net debt and gearing may also increase.
When it applies to your year end
The revised requirements apply for accounting periods beginning on or after 1 January 2026. That wording catches people out, because the first affected year end depends on your reporting date, not on the calendar.
| Your year end | First period under revised Section 20 | First affected reporting date |
|---|---|---|
| 31 December | 1 Jan 2026 to 31 Dec 2026 | 31 December 2026 |
| 31 March | 1 Apr 2026 to 31 Mar 2027 | 31 March 2027 |
| 30 June | 1 Jul 2026 to 30 Jun 2027 | 30 June 2027 |
| 30 September | 1 Oct 2026 to 30 Sep 2027 | 30 September 2027 |
One practical consequence follows. If you are a calendar-year reporter, the effective date has already passed. Leases should be on the balance sheet from 1 January 2026, and if you report internally on a monthly or quarterly basis, those entries should already be running. Companies that have not started are not preparing for a future change; they are catching up on a current one.
Who is affected
The changes affect UK and Irish entities reporting under FRS 102 that have leases as a lessee. In practical terms, this includes many SMEs, LLPs, charities and other entities with:
- office or warehouse leases
- vehicle leases
- plant and machinery leases
- IT and office equipment leases
- embedded leases within wider service contracts
That last category is the one most often missed, because an embedded lease sits inside a contract that is not called a lease. Part 2 covers how to find them.
How the exemptions work
There are exemptions, but they need to be applied carefully.
Short-term leases. Leases with a term of 12 months or less may remain off balance sheet where the exemption is applied.
Low-value leases. There is also an exemption for leases of low-value underlying assets. The low-value assessment is based on the value and nature of the underlying asset, not the size of the monthly payment.
That distinction matters. Revised FRS 102 gives examples of assets that would not be considered low value, including cars, vans, trucks, forklifts, land and buildings, aircraft, railway rolling stock and production line equipment. Many common leases still come into scope even where the monthly payment is not large. A low-cost van, forklift or small office lease is not automatically a low-value lease for FRS 102 purposes.
The practical message is simple: do not screen leases only by monthly rent. Start with the contract and the underlying asset, then decide whether an exemption is available.
What this means for your numbers
The balance sheet impact can be immediate and material.
| Metric | Before revised Section 20 | After revised Section 20 |
|---|---|---|
| Total assets | No operating lease asset | Right-of-use asset recognised |
| Total liabilities | No operating lease liability | Lease liability recognised |
| EBITDA | Reduced by operating lease expense | Often increases, because depreciation and interest replace lease expense |
| Net debt | Usually excludes operating leases | May include lease liabilities, depending on covenant definitions |
| Gearing | Lower | Often higher |
| Interest cover | No lease interest expense | Lease interest expense recognised |
For companies with bank covenants, the accounting impact should be assessed before the year-end process starts. The issue is not only whether the statutory accounts are correct. It is whether loan agreements, management reporting and lender conversations still work once lease liabilities are included.
A covenant that was comfortable under the old operating lease model may look different once office leases, vehicles and equipment leases are recognised as liabilities. That is a conversation worth having with lenders before the accounts are finalised rather than after.
What you have to disclose
The revised model requires more structured information about lease arrangements than the old note disclosure. Finance teams should expect to prepare:
- right-of-use asset information by class of underlying asset, with movement schedules
- lease liability movement schedules
- a maturity analysis of lease liabilities
- interest expense on lease liabilities
- depreciation expense on right-of-use assets
- expenses for short-term and low-value leases, where those exemptions are applied
- variable lease payments not included in the measurement of lease liabilities
- total cash outflow for leases
- accounting policy notes and transition explanations
The quantitative items all derive from the same underlying lease data, so the disclosure burden is largely a function of how well organised that data is. Portfolios maintained in spreadsheets tend to produce disclosure tables that do not reconcile to the general ledger, which is where year-end time disappears.
Common misconceptions
“Our leases are all operating leases, so nothing changes.” The opposite. Operating leases are precisely the population that moves onto the balance sheet.
“The rent is small, so it is low value.” The low-value test looks at the underlying asset, not the payment.
“We can deal with it at the year end.” For a 31 December 2026 year end the model applies from 1 January 2026. Waiting until December means reconstructing a year of entries under audit pressure.
“It is just a disclosure change.” It changes recognised assets, recognised liabilities, EBITDA, and potentially covenant compliance.
“Total cost goes up.” Total cost over the lease term is unchanged. What changes is the timing and presentation of that cost.
Frequently asked questions
When does FRS 102 Section 20 take effect? For accounting periods beginning on or after 1 January 2026. For a 31 December year end, the first affected reporting date is 31 December 2026.
Is FRS 102 Section 20 the same as IFRS 16? No. The FRC describes the revised Section 20 as an on-balance-sheet model based on IFRS 16, but with simplifications and modifications for FRS 102 preparers. The direction of travel is the same, the detail differs.
Do short-term leases have to go on the balance sheet? Not where the lease term is 12 months or less and the exemption is applied.
What discount rate should we use? Either an incremental borrowing rate or the obtainable borrowing rate introduced by the revised Section 20. Whichever you choose, the methodology needs to be documented and applied consistently. Part 2 covers this in detail.
Where to next
The change is more than a calculation update. It is a process change that affects how the finance team captures lease data, how it documents the discount rate, and how it supports the numbers at audit.
Part 2 walks through the step-by-step transition guide, from identifying the lease population through to year-end disclosures, with a practical timeline for 31 December 2026 year ends.
Part 3 covers what a well-run FRS 102 lease process looks like, with the judgement calls explained.
Further reading
Continue to Part 2: FRS 102 transition guide.
This guide is general information about the revised FRS 102 Section 20, not accounting advice for your specific circumstances. Final accounting judgements remain the responsibility of the reporting entity.