Preparing for 2026: How the New Lease Rules Could Impact Your Balance Sheet

Following on from Part 1 on revenue recognition, we’re now turning to another key update: how leases are treated in your accounts.

From January 2026, updates to FRS 102 will bring the treatment of leases closer to international accounting standards.

These changes affect accounting periods commencing after 1^st January 2026.

What may seem like a “technicality” managed by your accountant could, in reality, have very real consequences for how your business looks to lenders, investors, and other stakeholders.

What’s changing

Under the current rules, many leases (particularly property and vehicle leases) are treated as operating leases, with monthly rental costs simply shown as an expense in the profit and loss account.

Under the new rules, most leases will need to appear on the balance sheet as both an asset and a liability.

Here’s how it works:

• The total value of future lease payments is recognised as a right-of-use (ROU) asset on the balance sheet (discounted to present value).
• A corresponding lease liability is recorded, similar to a loan.
• Monthly lease payments reduce the liability, while interest and depreciation are charged to the profit and loss account, much like a hire purchase agreement.

Example: How the numbers work

Your business rents a van for £1,000 per month on a 3-year lease. Assume your borrowing rate would be 5% p.a

In practice:

• Old rules: £1,000 expensed each month in profit and loss.
• New rules: Record a £33,366 asset and liability on your balance sheet.
  • Depreciation: £11,122 per year
  • Interest: £1,428 in year 1 (declining each year)

Impact on your accounts:

• Assets increase by £33,366
• Liabilities increase by £33,366
• EBITDA rises, but reported profit in year 1 falls slightly due to interest and depreciation
• Borrowing ratios and audit thresholds may shift

What this means for you

While the new approach provides a more transparent picture of your financial commitments, it could also:

• Push you closer to the audit threshold due to larger reported assets
• Affect borrowing capacity or loan covenants due to higher liabilities
• Temporarily reduce profits in transition years

Following changes in revenue recognition, these lease updates are another key factor that could reshape your balance sheet and financial ratios — making early planning essential.

How to prepare

You don’t need to wait until 2026 to take action.

Early assessment can help you make informed decisions now, especially if you’re considering refinancing, new leasing arrangements, or selling your business in the next few years.

Practical steps include:

• Reviewing leases to understand how the new rules affect assets, liabilities, and P&L

• Forecasting reported profits and key ratios under the new standard

• Modelling scenarios for lender and investor discussions

• Exploring early adoption if it could benefit your business

Get in touch

These updates may seem like accounting changes on paper, but their impact reaches far beyond the finance team.

Understanding and planning now means fewer surprises later and more confidence in your business decisions.

Call us today on 01634 731390 to assess your leases, model the impact on your accounts, and plan for a smoother transition.

Get 2026 off to a strong start.

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The content in this blog is correct as at 20th November 2025. See terms and conditions.