We are recommending that our clients take time to understand the potential impact to their financial accounting processes ahead of the implementation date for the changes to FRS102.
Amendments to The Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS) become effective for periods beginning on or after the 1 January 2026. These changes are being made in order to align the UK accounting standards in line with the International Financial Reporting Standards (IFRS), particularly in regards to:
Leases: bringing operating leases onto the balance sheet for lessees (exemptions permitting).
Summary of significant changes
Leases
The concept of operating and finance leases are no longer applicable.
Contracts that meet the definition of a lease will be recognised on the balance sheet via reporting of a right of use asset and a lease liability.
Depreciation and interest charges will be accounted for and have the potential to impact some reporting measures commonly used to assess business performance and compliance with covenants.
Impact on your business/operations
The above amendments could impact key performance measures in a company including profit. Consideration and early planning should be given to:
- Any remuneration tied to financial performance;
- Financing covenants tied to debt on a company’s balance sheet; and Impact on a company’s distributable reserves and dividend planning activities.
What should a finance team be doing before the commencement date?
To prepare for the upcoming changes to lease accounting under FRS102 finance teams should begin by identifying all existing lease contracts, including property, equipment, vehicles, and any embedded leases within service agreements. Once a list of leases has been established, teams should assess the financial impact of bringing these leases onto the balance sheet, modelling how key metrics such as EBITDA, gearing ratios, and interest cover might be affected.
Updating accounting systems and processes to capture and track lease data is essential, and for businesses with high volumes of leases (i.e. companies who have a high volume of fleet vehicles), dedicated lease management software may be needed to be sourced.
Finance teams should also review and update accounting policies and internal controls to ensure compliance with the new requirements.
It’s equally important to communicate potential changes to key stakeholders, including the boards, lenders, and investors, and to ensure finance staff are adequately trained on the revised standard.
Starting early will reduce the risk of disruption and support a smooth transition to the new rules.
What we offer to help
At Randall & Payne we make success your priority, and in the coming months will be supporting clients through the transition process, via impact assessments and training resources. Keep an eye on our social media channels for more information on how we can support you with the changes coming.
For any queries or comments in the meantime, please reach out to Ryan Moore or one of our audit team on 01242 776000 or email ryan.moore@randall-payne.co.uk.
