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In March 2024, the Financial Reporting Council (FRC) concluded its second periodic review of the Financial Reporting Standards (FRS 102) and issued a number of amendments.
The changes, that bring FRS 102 closer to international accounting standards, will apply to financial periods beginning on or after 1 January 2026 and include the introduction of a new lease accounting model.
The impact of this change in particular could be significant for many businesses within the property and construction sector, as well as landlords – so an understanding of the implications is key.
The shift in lease accounting
Currently, FRS 102 requires leases to be classified as either a finance lease (on balance sheet) or an operating lease (off balance sheet).
Under the revised standard, this distinction is removed though. Instead, most leases will now be recognised on the balance sheet as a ‘right-of-use’ asset and a corresponding lease liability.
This approach mirrors IFRS 16: Leases and is designed to improve transparency in financial reporting. However, it also means that many businesses – particularly those leasing property, vehicles or equipment – will see significant changes to their reported assets, liabilities and profits.
The property and construction sector will feel these changes in several ways:
- Balance sheets will expand. Most leases will now appear as assets and liabilities, increasing gearing ratios and potentially altering the perception of financial strength.
- Profit recognition will shift. Lease costs will be replaced by depreciation and interest charges, changing profit profiles across reporting periods.
- Cash flow and covenants may be affected. With higher reported debt levels and changes to profit measures, businesses may need to revisit loan covenants and distribution policies.
- Data collection will be more complex. Businesses will need detailed lease information, such as renewal terms, discount rates and fair values, to support the new calculations.
The landlord perspective
For landlords, accounting treatment under FRS 102 will remain largely unchanged, with most leases continuing to be treated as operating leases. However, where a lease qualifies as a finance lease, the revised recognition and measurement rules will apply.
Landlords should also be aware that their tenants may also need more information under the new model, such as unguaranteed residual values and fair value data, to support their own accounting. This could increase administrative and data-sharing requirements between landlords and lessees.
Preparing for 2026
January 2026 is not far away, so key things to consider now include:
- Finance team readiness: making sure that your teams understand both the accounting and disclosure requirements of the revised FRS 102.
- Systems and data: reviewing whether your existing accounting systems can capture and report the necessary lease data and whether the chart of accounts needs to be updated.
- Covenants and tax: modelling how the changes will affect net debt, profits and tax payments, and discussing these with lenders and stakeholders early.
- Wider business implications: considering any impact on remuneration policies, performance-related pay or corporate transactions where financial metrics are a factor.
These changes to lease accounting under FRS 102 represent a fundamental shift in how businesses in the property and construction sector report their financial position. Understanding the impact now will help ensure a smooth transition and avoid unexpected issues later.
For further information on how we can support you through these changes, get in contact with one of the team by calling 0330 058 6559 or by emailing hello@scruttonbland.co.uk
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