FRS 102 lease changes from 1 January 2026, what UK SMBs need to know

FRS 102 has been amended to align with IFRS 16. From accounting periods starting on or after 1 January 2026, almost all leases come on balance sheet. Operating leases lose their off-balance-sheet treatment. The accounting case for picking operating lease over hire purchase largely disappears; commercial factors now drive the choice.

What changed

The Financial Reporting Council issued amendments to FRS 102 in March 2024, with mandatory effect for accounting periods beginning on or after 1 January 2026. Section 20 (Leases) is rewritten to broadly mirror IFRS 16.

For lessees the headline change is the elimination of the operating-lease off-balance-sheet treatment:

The lessee recognises a right-of-use asset on the balance sheet for the value of the leased item.
The lessee recognises a lease liability for the present value of remaining lease payments.
The income statement shows depreciation on the right-of-use asset plus interest on the lease liability.
Short-term leases (12 months or less) and low-value asset leases can stay off balance sheet by election.

Why it matters for UK SMB asset finance

For two decades, the choice between hire purchase, finance lease and operating lease has had a material accounting tail. Operating leases stayed off balance sheet, kept gearing ratios cleaner, and left covenants undisturbed.

From 1 January 2026 that distinction goes. All three structures sit on balance sheet. The choice now turns on:

Commercial monthly cost. Operating lease often still wins on rate because the lessor retains residual risk.
Who carries asset risk. Operating lease keeps residual risk with the lessor; HP and finance lease push it to the lessee.
End-of-term ownership. HP transfers title; finance lease and operating lease usually do not.
Capital allowances. The tax treatment is unaffected by FRS 102 and continues to follow legal-form analysis.
Flexibility on upgrades. Operating lease still wins on rolling fleet upgrades; HP locks in.

Worked example, £80,000 forklift over 5 years

A wholesale business takes a £80,000 forklift on a 5-year operating lease at £1,650 per month with no end-of-term purchase option.

Pre-2026 accounting: the £1,650 monthly is expensed straight-line. No asset on balance sheet. No liability on balance sheet.

Post-2026 accounting:

Right-of-use asset recognised at present value of remaining lease payments (using lessee's incremental borrowing rate, say 8%): approximately £79,500.
Lease liability recognised at the same amount.
Income statement: depreciation roughly £15,900 per year plus interest on the reducing liability.
Total lease cost over the 5-year term is unchanged; the timing pattern is front-loaded.

The cash position is identical. The reported net debt rises by the lease liability. EBITDA rises (because depreciation and interest are below the EBITDA line). Gearing ratios mechanically deteriorate even though the underlying business is unchanged.

What to do now

Talk to your accountant before the first post-transition reporting period.
Pull every operating lease contract. Map remaining term, payment schedule, any renewal options.
Check loan covenants. Most UK SMB lenders have updated their covenant calculations to neutralise FRS 102 transition.
Re-evaluate the HP-vs-lease decision on next renewal. The accounting case is gone; the commercial case may still favour either.
Use the short-term and low-value exemptions where they fit.

FAQs

What changed in FRS 102 from 1 January 2026?

The Financial Reporting Council's 2024 amendments to FRS 102 align Section 20 (Leases) with IFRS 16. From accounting periods beginning on or after 1 January 2026, lessees recognise a right-of-use asset and a lease liability on the balance sheet for almost all leases, removing the historic operating lease off-balance-sheet treatment.

Does this affect hire purchase?

No. Hire purchase has always been balance-sheet because title transfers at the end of the term. The FRS 102 change does not affect HP accounting. The change affects what was previously called operating leases.

Does this affect existing operating leases or only new ones?

It affects both, on transition. Existing operating leases at 1 January 2026 must be recognised on balance sheet from that date. FRS 102 offers a modified retrospective approach where the right-of-use asset equals the liability at the transition date with no restatement of prior years.

Will this affect my borrowing covenants?

It can. Covenants based on balance-sheet metrics (debt-to-equity, gearing, EBITDA-to-net-debt) are mechanically affected. UK lenders are aware of the change and most have updated covenant calculations to neutralise the FRS 102 transition impact, but check the specific facility agreement.

Does this make hire purchase more attractive than operating lease?

On accounting treatment, the gap closes: both are balance-sheet under the new rules. The choice now sits on commercial factors: monthly cost, residual value, who carries asset risk, capital allowances treatment. The accounting tail no longer wags the commercial dog.

How is the lease liability calculated?

Present value of remaining lease payments, discounted at the rate implicit in the lease if determinable, otherwise the lessee's incremental borrowing rate. The right-of-use asset starts at the same value, adjusted for any prepaid or accrued lease payments, and depreciates over the lease term.

What about short-term and low-value lease exemptions?

Leases of 12 months or less, with no purchase option, can stay off-balance-sheet on a per-asset election. Leases of low-value assets (under approximately £5,000 new) can also stay off. Most material asset finance leases sit above the threshold.

Should I restructure existing leases before 1 January 2026?

Restructuring purely to dodge the accounting change is rarely worth it. The substance of the lease is unchanged; only the accounting moves. If a restructure makes commercial sense, do it on the commercial case. If the only argument is accounting, leave it.

Run the matcher

Tell us the asset, the ticket size and your preference on end-of-term ownership. We surface the HP, finance lease and operating lease options on the FundBiz panel and flag any covenant considerations under the new FRS 102 rules.

Open asset finance matcher →

By Oliver Mackman. Last reviewed 10 May 2026.