Most accounting standard changes are a matter for the accountant and nobody else. This one is not.
The revised FRS 102 does something with a genuine commercial consequence: it puts your leases on your balance sheet. And your balance sheet is one of the three numbers that determines whether you are legally required to have an audit.
What is changing?
The periodic review of FRS 102 brings two significant changes, both applying to accounting periods beginning on or after 1 January 2026:
Lease accounting. The old distinction between operating leases (kept off balance sheet, with the rental simply charged to profit) and finance leases largely disappears for lessees. Most leases now produce a right-of-use asset and a corresponding lease liability on the balance sheet — broadly following the approach already used under IFRS 16.
Revenue recognition. A new five-step model, aligned with IFRS 15, changes when and how much revenue is recognised. For businesses with bundled goods and services, long contracts, or variable consideration, the timing of revenue can shift.
Why this matters commercially
Your balance sheet gets bigger. Property leases in particular can add substantial assets and liabilities. A retailer, a care provider, a manufacturer with leased premises and plant — all could see a material increase.
That has three knock-on effects that have nothing to do with accounting:
1. Your size classification can change. Balance sheet total is one of the three tests (alongside turnover and employees) that determines whether you are micro, small, medium or large — and therefore what you file and whether you need an audit. A company comfortably below the £7.5 million balance sheet threshold could exceed it once leases are recognised, fail two of three tests, and fall back into mandatory audit.
2. Your covenants may be affected. Gearing, net asset and interest cover covenants are all calculated from the balance sheet and the P&L. Recognising lease liabilities as debt can breach a covenant that was never in danger — even though the business has not changed at all. Talk to your lender before the accounts are filed, not after.
3. Your reported profit shape changes. A single rental charge in operating costs becomes depreciation plus interest — which flatters EBITDA. If your business is valued or benchmarked on EBITDA, that number is no longer comparable to prior years.
Who should be worried?
Anyone near a size threshold. If your balance sheet total is within touching distance of £7.5 million, model this before your year end, not after.
Anyone with banking covenants. Especially gearing or net asset covenants. A technical breach is still a breach, and it can make a facility repayable on demand.
Anyone with significant property or plant leases. Retail, hospitality, care, manufacturing, logistics.
Anyone being valued, sold, or benchmarked on EBITDA. Your comparatives will not be like-for-like.
Charities should note that revised FRS 102 flows through into Charities SORP 2026 as well — so the same lease changes land in charity accounts, alongside the new reporting tiers.
What should you do?
Model it now. Pull together every lease — property, vehicles, plant, equipment, photocopiers — and quantify the effect on the balance sheet. Most businesses have more leases than they think.
Check the thresholds. Compare the revised balance sheet total against the audit and size limits. If it crosses one, you need to know before the year end, when you still have options.
Speak to your lender early. A covenant breach explained in advance is a conversation. One discovered in the filed accounts is a problem.
Review revenue contracts. Bundled arrangements, long-term contracts and variable pricing are where the five-step model bites.
None of this is difficult. All of it is significantly easier before the year end than after it.
Frequently asked questions
When do the FRS 102 lease changes apply?
To accounting periods beginning on or after 1 January 2026. Most leases that previously sat off balance sheet as operating leases now produce a right-of-use asset and a lease liability, broadly following the IFRS 16 approach.
Could recognising leases push my company into an audit?
Yes. Balance sheet total is one of the three size tests, alongside turnover and employees. Bringing leases onto the balance sheet increases it — so a company below the £7.5 million threshold today could exceed it, fail two of three tests, and fall back into mandatory audit, despite no change to the underlying business.
Will the lease changes breach my bank covenants?
They can. Gearing, net asset and interest cover covenants are calculated from the accounts, and recognising lease liabilities as debt can breach a covenant that was never in danger. The business has not changed, but the numbers have. Speak to your lender before the accounts are filed, not after.
Do the changes affect charity accounts?
Yes. Revised FRS 102 flows through into Charities SORP 2026, so the same lease and revenue changes land in charity accounts — alongside the new three-tier reporting structure and the threshold changes taking effect on 30 September 2026. It is worth planning all of it together.