Major Lease Accounting Changes Coming: What Business Owners Need to Know About the 2024 UK GAAP Amendments

Introduction: A New Era for Financial Reporting

As a business owner, keeping up with accounting standards may not be at the top of your priority list. However, with the updates to FRS 102 in 2024 coming into effect on 1 January 2026 it is essential to start planning for them now. 

A reminder these updates will introduce significant changes that impact how your company records, reports, and manages its assets - particularly when it comes to right of use assets and lease accounting. These changes will impact an estimated 3.4 million businesses across the UK and Ireland, with lease accounting undergoing the most significant transformation.

If your business rents property, equipment, or vehicles (as most do), these changes will affect how these arrangements show up in your financial reports. The good news is you have time to prepare and understanding what is coming will help you avoid headaches later.

What's Changing in How Businesses Report Their Leases?

The Main Changes to Lease Reporting

The FRC has changed the rules for how businesses report their leases. These changes make UK standards more similar to international standards. But what does this mean for your business?

In the past, there were two types of leases in accounting:

1. Finance leases (long-term leases where you basically own the item) and the asset is included on your balance sheet
2. Operating leases (shorter rentals) were treated as simple expenses and have no balance sheet impact.

Under the new rules, this distinction mostly disappears. Nearly all leases, regardless of type, will now appear on your balance sheet as:

1. An asset (representing your right to use the leased item)
2. A debt (representing your obligation to make lease payments)

This is a big change in how leases affect your financial reports.

How This Will Change Your Financial Reports

Let's say you run a business with five rented locations, all under 10-year leases. Previously, these rentals would have just been recorded as a profit and loss expense. Under the new rules, your balance sheet will show:

• Assets for your right to use each property
• Debts representing the future rent payments you owe discounted for net present values.

For many businesses, this change will significantly increase both the assets and debts shown on your balance sheet. 

How This Affects How Your Business Looks on Paper

This change will affect key financial measurements that banks, investors, and others use to evaluate your business:

• Your business may appear to have more debt
• Your return on assets may look lower (since you'll show more assets)
• Some performance measurements may actually improve

These changes might affect loan agreements, credit assessments, and how potential investors view your business. Understanding these effects now gives you time to explain the changes to important stakeholders.

When Do These Changes Take Effect?

The new rules start for accounting periods beginning on or after 1 January, 2026. This means:

• If your accounting year follows the calendar year, the first affected period will be the year ending 31 December, 2026.
• If your accounting year ends differently (e.g., 31 March), the first affected period will be the year ending 31 March, 2027.

You can choose to adopt the changes earlier if you want, but you must apply all the new FRS102 amendments at the same time, not just the lease changes.

What Business Owners Need to Do: Getting Ready for These Changes

1. Make a List of All Your Leases

First, create a complete list of everything your business leases:

• Properties (offices, shops, warehouses)
• Equipment
• Vehicles
• Hidden leases (rental agreements within service contracts)

For each lease, document important details:

• How long the lease runs
• How much you pay and when
• Any extension options
• Any variable payment components
• Early termination options

This process often reveals surprises. 

2. Check If Your Accounting Systems Can Handle These Changes

Your current accounting systems might not be set up for the new requirements. Consider:

• Do you need specialised software to track leases?
• Can your existing accounting system be updated to handle the new requirements?
• What additional information will you need to collect?
• Who in your company needs training on the new rules?

For smaller businesses with just a few simple leases, spreadsheets might be enough. Larger organisations with many complex leases will likely need more sophisticated solutions.

3. Calculate How These Changes Will Affect Your Financial Reports

Once you have your lease list, do some calculations to understand how your financial reports will change:

• Estimate the assets and debts you'll need to report for each significant lease
• Project the impact on important financial measurements
• Model the effect on your profit or loss over the lease terms

This analysis provides valuable insights for planning. 

4. Review Your Lease Arrangements

With a clear understanding of the impact, you might decide to change some of your leases:

• Consider shorter lease terms (though this impacts your security)
• Rethink whether to lease or buy certain items
• Review how your lease payments are structured (as payments based on usage or performance might be treated differently)

Remember that these decisions should be driven by business needs rather than accounting rules alone, but the accounting effects are now an additional factor to consider.

5. Talk to Important Stakeholders Early

Don't wait until 2026 to communicate these changes. Begin discussions now with:

• Banks and lenders regarding loan agreements
• Investors and shareholders about changes to key measurements
• Board members and management about strategic implications.

Proactive communication prevents surprises.

Exceptions to the Rules: Not All Leases Are Treated the Same

The new rules do include some exceptions that might make things easier:

Short-Term Lease Exception

Leases with terms of 12 months or less can be accounted for using the older, simpler method (as regular expenses, not as assets and debts). This might make short-term arrangements more attractive from an accounting perspective.

Low-Value Asset Exception

Leases of low-value items (typically things worth less than £5,000 when new) can also be exempted from the main rules. This might cover office equipment, small IT items, and other minor assets.

The Bright Side: Benefits Beyond Just Following Rules

While these changes might seem like extra work, they offer several potential benefits:

Better Transparency

With most leases on the balance sheet, your financial reports will provide a more complete picture of your financial obligations. This increased transparency can build trust with stakeholders.

Improved Lease Management

Many businesses implementing the new lease accounting discover they lack centralised control over leasing decisions. The improvements required for compliance often lead to better lease management and cost savings.

Rethinking How You Finance Assets

The new rules prompt a revaluation of how assets are financed. By considering all of your options carefully, rather than doing what you always have done, you could save your business some money.

Turning a Regulatory Change into a Business Opportunity

The changes to accounting standards, particularly those affecting leases, represent a significant shift in financial reporting. While the January 2026 start date might seem far away, the scale of the changes means preparation should begin now.

Forward-thinking business owners can use this transition period not just to ensure compliance, but to strategically reassess their approach to leasing and asset financing. By understanding how these changes will affect your financial reports, you can make informed decisions that strengthen your business for the long term.

By taking action now, you'll not only ensure a smooth transition to the new standards but potentially discover insights that benefit your business for years to come. If you need any support managing these changes please get in touch.