UK GAAP is moving closer to the IFRS 16 model for lessees. Under FRED 82 (the proposed amendments that have now informed the upcoming revisions to FRS 102), most leases will come on-balance sheet: companies will recognise a right-of-use (ROU) asset and a lease liability, with limited exemptions (e.g., short-term and certain low-value leases). The intent is greater transparency and comparability — especially around leverage, asset utilisation and cash-flow timing.
The headline changes (at a glance)
- Single lessee model: Recognise a lease liability for remaining lease payments (discounted, typically at the incremental borrowing rate) and a corresponding ROU asset.
- Measurement mechanics: Lease payments include fixed payments, index- or rate-linked amounts (using the index/rate at commencement), and expected amounts under residual value guarantees; variable payments based on usage remain expensed as incurred.
- Subsequent accounting: Interest on the liability (effective interest method) and depreciation of the ROU asset; remeasurements when terms or indices change, or when options are reassessed.
- Practical expedients & exemptions: Reliefs for short-term/low-value leases and portfolio approaches may be available; transition expedients are expected to reduce complexity at first adoption.
- Disclosures: Expanded, decision-useful disclosures around maturity, amounts recognised, and the effect of leases on performance, position and cash flows.
Effective date: The revised FRS 102 lease requirements are expected to apply for periods beginning on or after 1 January 2026, with early adoption typically permitted (subject to conditions). Because opening balance sheet and comparative information can be affected, planning ahead in 2025 is prudent.
Why this matters for finance teams
Moving leases on-balance sheet affects more than the fixed-asset register. You’ll see knock-on impacts in:
- KPIs & covenants: Leverage, EBITDA, interest cover and asset-turn metrics will shift.
- Budgets & forecasts: Depreciation and interest replace straight-line rental expense; timing effects become more pronounced.
- Cash-flow presentation: Classification changes can alter operating vs financing cash flows and visibility of lease outgoings.
- Controls & audit readiness: More estimates (discount rates, option assessments) and more frequent remeasurements demand robust evidence and governance.
What to put in place now
- Lease inventory & data model: Centralise contracts, key terms, options, indices, payment timing (advance/arrears), and escalation mechanics.
- Policy decisions: Define discount-rate approach, low-value thresholds, use of practical expedients, and remeasurement policies.
- Quantification engine: You’ll need tooling that can build schedules, discount correctly, and handle remeasurements — not just at transition, but every month.
- Process integration: Bake calculations into BAU close—journal generation, reconciliations, and disclosures—so that outputs are timely and repeatable.
- Change impact & communication: Update KPIs/covenants, educate stakeholders, and socialise the new pattern of expense recognition.
Why spreadsheets alone struggle
Traditional spreadsheets risk version drift, broken links and inconsistent discounting when contracts change (indexation, renewals, partial terminations). The new model requires repeatable period-end mechanics: timing-accurate PV, automated remeasurements, and reconciled journals that withstand audit — month after month.
A practical next step
If you need a lightweight, audit-ready route to compliance, our Excel/Power Query lease accounting engine automates measurement, remeasurement and the generation of ready-to-post journals under the updated FRS 102 (and IFRS 16). It turns structured lease inputs into governed outputs — fast, consistent, and period-end ready — so your team can focus on analysis rather than mechanics.
To see how it works with your data, explore our lease accounting tool and get started in minutes.
%20V3.png)
.jpg)
