Financial Reporting Standard changes to affect operating leases from 2026

The upcoming changes to Financial Reporting Standard 102, effective for accounting periods commencing on or after 1 January 2026, will require nearly all material operating leases to be brought onto balance sheets.

The amendments to lease accounting standards will impact all businesses when they come into force, introducing new complexities for property owners, leaseholders and lenders alike. 

In addition, businesses are being advised to prepare for changes which will raise the small company thresholds impacting statutory audit exemptions for companies.   

Under the new rules, leased properties will create both a “right-of-use” asset and a corresponding lease liability on the balance sheet. This contrasts with owning property outright, where only the asset is recorded without a matching liability. 

For businesses this means that net asset positions will take a hit, as the new lease liability could outstrip the right-of-use asset due to front-loaded finance costs. Businesses leasing high-value properties will need to weigh the benefits of leasing against the potential reputational impact of a weakened balance sheet.  

Diana Penny, head of audit at Henderson Loggie, said: “Businesses need to realise that this is not just a technical adjustment, it will fundamentally alter how financial stability is perceived by lenders and stakeholders. The introduction of lease liabilities will reduce net assets, potentially breaching loan covenants tied to this metric. Borrowers must proactively review loan agreements and discuss potential covenant breaches with lenders before the changes take effect.  

“Where ownership is a possibility, some leaseholders could consider buying properties to avoid these accounting impacts, though this could strain cash reserves or increase borrowing needs. For businesses relying on financing, these changes could complicate loan applications or renewals and could make it harder for some businesses to secure loans on favourable terms. Improved financial reporting and transparency will be key to demonstrating real performance and reassuring lenders.”

Under the new company size thresholds, likely to be introduced next year, companies meeting at least two of the following criteria may become exempt from statutory audits: those with annual turnover up to £15m (increased from £10.2m); those with total assets up to £7.5m (increased from £5.1m ) and those with 50 or fewer employees. Charities will remain unaffected by this change. 

Penny added: “To prepare for these sweeping accounting changes, business owners should take proactive steps now to minimise disruption and are strongly advised to consider the benefits of voluntary audits for internal control, growth planning, and potential business sales. Identifying leases and financial arrangements and implementing strong internal controls will be essential for a smooth transition to the new rules.”