What FRS102 Lease Accounting Changes Mean For The Property and Construction Sector
In March 2024, the Financial Reporting Council (FRC) concluded its second periodic review of the Financial Reporting Standards (FRS 102) and issued a number of amendments.
T he changes, that bring FRS 102 closer to international accounting standards, will apply to financial periods beginning on or after 1 January 2026 and include the introduction of a new lease accounting model. The impact of this change in particular could be significant for many businesses within the property and construction sector, as well as landlords – so an understanding of the implications is key.
The shift in lease accounting Currently, FRS 102 requires leases to be
The property and construction sector will feel these changes in several ways:
classified as either a finance lease (on balance sheet) or an operating lease (off balance sheet).
Balance sheets will expand . Most leases will now appear as assets and liabilities, increasing gearing ratios and potentially altering the perception of financial strength. Profit recognition will shift . Lease costs will be replaced by depreciation and interest charges, changing profit profiles across reporting periods. Cash flow and covenants may be affected . With higher reported debt levels and changes to profit measures, businesses may need to revisit loan covenants and distribution policies. Data collection will be more complex . Businesses will need detailed lease information, such as renewal terms, discount rates and fair values, to support the new calculations.
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Under the revised standard, this distinction is removed though. Instead, most leases will now be recognised on the balance sheet as a ‘right- of-use’ asset and a corresponding lease liability. This approach mirrors IFRS 16: Leases and is designed to improve transparency in financial reporting. However, it also means that many businesses – particularly those leasing property, vehicles or equipment – will see significant changes to their reported assets, liabilities and profits.
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