FRS 102 lease accounting from 2026

Revised FRS 102 brings most leases onto the lessee’s balance sheet for accounting periods beginning on or after 1 January 2026. Preparing reliable right-of-use lease workings means identifying the contracts, supporting the assumptions, calculating both balances and keeping the schedules reconciled to the accounts.

This guide takes you from the lease register to transition entries, a repayment schedule and the year-end review. It is written for business owners, finance teams and accounts preparers, whether you are starting the transition, checking an existing spreadsheet or accounting for a new lease.

The main changes under FRS 102

A right-of-use asset, often shortened to ROU asset, represents the right to use the leased property or equipment. The lease liability represents the discounted value of the relevant unpaid lease payments. For leases brought onto the balance sheet, depreciation and interest generally replace the previous rental expense. Contractual cash payments continue under the agreed terms. The FRC’s explanation for financial statement users summarises the effect.

The revised recognition requirements also apply to small entities using FRS 102 Section 1A. Confirm the reporting framework first: different requirements apply under IFRS, the FRS 105 micro-entities regime and for lessors. This guide focuses on ordinary lessee arrangements. Investment property, sale and leaseback, subleases and concessionary arrangements may need additional analysis.

When the new lease rules apply

The date of initial application is the beginning of the period in which the entity first applies these amendments. This differs from the Section 35 date of transition for a first-time adopter of FRS 102. For twelve-month periods without early adoption:

For a new lease after transition, recognition normally starts when the underlying asset is available for use, which may precede the first rent payment. Keep that commencement date separate from the signature date and the date of initial application. See FRC Factsheet 9 and Factsheet 11.

Start with a complete lease register

Collect signed agreements, amendments and payment schedules. Compare them with rent and hire expenditure, supplier payments and existing commitments. Ask the people responsible for premises, vehicles and equipment about new arrangements and changes. We would usually begin the review with the entity named on the agreement, the date the asset became available and the clauses that change future payments.

For contracts already in place, paragraph 1.45 permits an election to retain previous assessments of whether they contain leases. If taken, it applies to all those contracts and must be disclosed. At initial application, the identification test below applies to existing contracts only where that expedient is not used; new contracts require assessment when entered into. Keep the register complete under the selected approach; later changes to contractual terms still need review. See FRC Factsheet 9 on initial application.

A contract can contain a lease even if it is described as a service agreement. Consider whether there is an identified asset and whether the business controls its use, including obtaining substantially all the economic benefits and directing how it is used. Separate service components unless the permitted election to combine them with the lease component is adopted by asset class. See FRS 102 Section 20 on identifying leases and separating components.

Information to record for each arrangement

• Contract identity: legal entity, lessor, asset, location, agreement reference and link to the supporting documents.
• Dates and options: commencement, expiry, payment dates, rent-free periods, break clauses, renewals and purchase options.
• Payment terms: fixed rents, contractual increases, index or market rent reviews, incentives, service charges and relevant guarantees.
• Accounting assessment: lease identification, exemptions, lease term, discount-rate evidence and transition approach.
• Existing balances: lease accruals, prepayments, incentive balances, finance lease assets and liabilities, with ledger references.

Give each lease a consistent reference across the register, calculation and journals. Record who prepared and reviewed the assessment and when the next contractual review or break decision is due.

Check the available recognition exemptions

The short-term exemption concerns leases of 12 months or less at commencement, without a purchase option; the election is by asset class. The low-value asset exemption is assessed lease by lease. Assess the underlying asset: land, buildings and vehicles fall outside the low-value category, regardless of a modest rental payment. There is no universal sterling threshold in the standard. Document the reason for each exemption and continue to account for the associated expense. See FRS 102 Section 20 on scope and recognition exemptions.

Set the assumptions before calculating the liability

Determine the lease term

Start with the enforceable, non-cancellable period, including rent-free periods. Include optional extension periods where exercise is reasonably certain, and periods after a break where non-exercise is reasonably certain. Record the business reasons and evidence. For rolling tenancies, assess the enforceable term separately from the payment frequency. See FRC Factsheet 11 on lease terms.

Keep the contractual end date and the accounting lease term in separate fields. We would expect the assessment to explain the intended use of the premises or equipment and the commercial reasons for including or excluding an option.

Build the payment schedule

Relevant payments include fixed and in-substance fixed amounts after incentives, payments linked to an index or rate, expected payments under residual value guarantees, and purchase or termination amounts where the assessed options require them. At commencement, use the current contractual index or rate rather than forecasting future inflation. Pure turnover-based rentals are generally excluded from the initial liability and recognised as incurred. See FRS 102 Section 20 on initial measurement and FRS 102 Section 20 on subsequent measurement.

Use actual payment dates and identify payments in advance or arrears. Retain zero-payment periods where relevant. Identify VAT and service charges separately and document their treatment rather than silently treating every invoice total as rent.

Support the discount rate

For new leases, use the rate implicit in the lease if readily determinable; otherwise FRS 102 permits a choice, lease by lease, between an incremental borrowing rate and an obtainable borrowing rate. The usual operating-lease transition calculation uses a borrowing rate at the date of initial application. A public benefit entity has a further deposit-rate fallback only where the specified other rates cannot readily be determined. See FRS 102, paragraphs 1.51 and 20.49–20.50.

The working should explain the rate selected, with its source and assessment date. A rate used by another company may be a useful reference, but its relevance depends on the entity, currency, amount, term and other features required by the chosen rate definition. The calculation also needs a rate consistent with the payment frequency, distinguishing annual effective rates from nominal quoted rates.

Calculate transition balances and new leases correctly

Existing operating leases at transition

Under the usual transition approach, discount the remaining lease payments at the date of initial application. Start the ROU asset at that liability, adjusted for existing prepaid or accrued lease payments, and assess impairment. Other applicable transition adjustments may be needed. Existing finance leases generally carry forward their asset and liability balances. See FRC Factsheet 9 on initial application.

Reconcile every adjustment to the ledger so old accruals or prepayments are not left alongside balances that already incorporate them. Show the proposed opening journal and explain any equity movement. Where the asset and liability entries are equal and there are no other adjustments, the opening journal has no net effect on reserves.

Record practical expedients explicitly. These include, subject to their conditions, using previous lease-identification assessments, a single rate for similar leases, hindsight, previous onerous-lease assessments and relief for leases ending within 12 months of the date of initial application. They have different application requirements. FRC Factsheet 9 explains the choices.

New leases after transition

At commencement, discount the relevant unpaid payments. Build the ROU asset from that liability, adding payments made at or before commencement, deducting incentives received, and including qualifying initial direct costs and relevant restoration obligations. See FRS 102 Section 20 on initial measurement. The initial-application rules above provide a separate measurement basis for existing leases.

Using an existing IFRS 16 model

An existing model may be a useful starting point. Check its inputs, formulae and treatment of FRS 102 choices. There is a specific option in paragraph 1.48 to use qualifying IFRS 16 carrying amounts prepared for inclusion in IFRS consolidated financial statements. If elected, it applies to all the entity’s leases and must be disclosed; subsequent accounting follows Section 20. Eligibility depends on the purpose for which those IFRS 16 balances were prepared. See FRC Factsheet 9 on initial application.

Comparatives in the first year

Lease comparatives are not restated under paragraph 1.47, whatever the year end. For first mandatory application, that means leaving 2025 comparatives unchanged for a December year end, and the year ended 31 March 2026 comparatives unchanged for a March year end. Opening calculations use the date of initial application shown above. Explain the resulting difference through the applicable transition disclosures. See FRC Factsheet 9.

A worked example from calculation to journals

Assume an existing operating lease has four years remaining at 1 January 2026, with £30,000 payable each 31 December. Use an illustrative annual effective discount rate of 5%, straight-line depreciation over the remaining term, and no prepayments, accruals, incentives, impairment or other adjustments. Tax effects are excluded. Replace the example rate with one supported by the entity’s circumstances.

Opening liability: £30,000 ÷ 1.05 + £30,000 ÷ 1.05² + £30,000 ÷ 1.05³ + £30,000 ÷ 1.05⁴ = £106,378.52. The opening ROU asset is the same in this example.

For these equal annual payments in arrears, Excel’s =PV(5%,4,-30000,0,0) gives the same result. The final zero specifies payments at period ends. A different payment pattern needs a suitable calculation; see Microsoft’s PV guidance.

Each closing liability equals opening liability plus interest less payment. Annual depreciation is £26,594.63, leaving an ROU asset of £79,783.89 at 31 December 2026. Calculations use unrounded amounts; independently rounded figures can differ by £1.

These are simplified annual entries. If rent payments have already been posted to expense, reconcile and reclassify those postings rather than recording the cash payment twice. Combined 2026 depreciation and interest are approximately £31,914, while the contractual cash payment remains £30,000.

Make the working file easy to review and maintain

Separate contractual inputs, judgements, calculations and outputs. A reviewer should be able to trace one lease from the agreement through the register to the accounts without reconstructing the model.

1. Inputs and evidence. Link each material assumption to its source. Keep the approved version and a record of later changes.
2. Liability schedule. Show payment dates, opening balance, interest, payments, changes and closing balance. Retain enough detail for monthly or quarterly reporting.
3. Asset schedule. Reconcile cost, adjustments, depreciation, impairment and closing carrying value separately from the liability.
4. Journals and reporting. Map balances to ledger codes, separate amounts due within and after one year, and capture the information needed for the notes.
5. Review controls. Agree payments to records, recalculate a sample independently and investigate a residual liability at the expected end date. Explain every difference between the model and ledger.

In reviewing the spreadsheet, we would pay particular attention to advance versus arrears settings, partial periods, rent-free months, duplicated payments and formulae copied across leases with different terms. For example, a 5% annual effective rate converts to approximately 0.4074% per month using (1.05^(1/12))-1. Dividing by 12 answers a different rate-conversion question; confirm the basis of the source rate.

Keep the asset and liability separate

Under the cost model, the asset is reduced by depreciation and impairment and adjusted for relevant remeasurements; the liability accrues interest and reduces as payments are made. Their closing balances will usually differ. See FRS 102 Section 20 on subsequent measurement. Depreciation generally runs to the earlier of the end of the ROU asset’s useful life and the lease term; ownership transfers or purchase options can change that period. See paragraph 20.58.

Review changes when they happen

Track renewals, break decisions, rent reviews, new space, concessions and terminations. Revised lease terms can require a new discount rate. Index-linked payment changes generally retain the existing rate, while floating interest-rate changes are different. Modifications need their own assessment, including whether they form a separate lease. Rates are reviewed when the relevant reassessment or modification requirements apply, with a record linking the revised schedule to the original. See paragraphs 20.65–20.73.

Complete the accounts and explain the effect

Use the reconciled schedules to support presentation, accounting policies, significant judgements and the applicable lease and transition disclosures. Build a disclosure checklist for the entity’s reporting regime; small-entity requirements need their own assessment. An IFRS 16 disclosure note will need adapting to the applicable FRS 102 requirements. See Section 20 and Section 1A.

Explain the effect on profit, EBITDA, gearing and cash flow presentation. Assess borrowing covenant compliance using the definitions in the signed agreement. For related preparation, see Accendo’s guide to borrowing covenant evidence. Include a separate review of tax and deferred tax.

Charities and independent schools

For charities preparing FRS 102 accounts, Charities SORP 2026, Module 10B addresses lessee accounting for periods beginning on or after 1 January 2026. This includes independent schools constituted as charities. Review premises, minibus and equipment arrangements together. We recommend explaining the effect to trustees or governors and checking how reserves policies, lender measures and funder reports treat the new balances. Map charges to the relevant activities and funds. Leases at significantly below-market rents that include a donation element, and peppercorn arrangements, need their own assessment under the SORP and FRS 102 paragraph 20.35. For public benefit entities, a non-exchange contribution is included in the ROU asset’s cost. Where payments are so low that they are not substantive, a peppercorn arrangement may fall outside the lease definition.

Practical questions about ROU workings

Using Excel for lease workings

Excel can work well where the calculation suits the payment pattern and the file can be maintained and reviewed. A large or frequently changing lease portfolio may justify a dedicated system. Whichever tool is used, retain the contract evidence and reconcile its outputs to the ledger.

Using rent expense to identify leases

Last year’s rent expense is a useful completeness check. The liability calculation needs the outstanding payments, their timing and an appropriate discount rate. Build the liability from the assessed contract terms and measurement date.

Rent free periods and recognition

Recognition of a new lease normally begins when the asset is available for use, even during a rent-free period. Keep the availability date and the cash-payment timetable separate, so rent-free months are not omitted from the working.

Discuss your lease reporting with Accendo

Whether you are planning the transition, building ROU lease workings or checking an existing model, start with your reporting framework, year end, lease register and agreements. Accendo can help you assess the reporting approach, review calculations and identify the information needed for the accounts. Explore our accounts and financial reporting services or contact Accendo to discuss your requirements.

Technical guidance as at 6 November 2026. This is general guidance; the treatment depends on the reporting framework, contract terms and circumstances. The worked example is illustrative.