Lease accounting used to be easy to ignore. Operating leases stayed off the balance sheet. Rent appeared as a single charge. That ends for periods beginning on or after 1 January 2026.

Revised Section 20 of FRS 102 brings most leases onto the balance sheet. For many SMEs, that means new data, new calculations and new audit questions.

What Changed Under Revised Section 20

The new model draws on IFRS 16. Lessees no longer split leases into finance and operating. Most leases now create a right-of-use asset and a lease liability.

The liability is the present value of future lease payments. The asset starts at that value, adjusted for prepayments, incentives and direct costs. Depreciation and interest then appear separately in the profit and loss account.

Exemptions remain for short-term leases and low-value assets. Apply them consistently by class of asset.

Start With a Full Lease Inventory

You cannot account for leases you have not found. Build one register. Check these sources:

• Property agreements for offices, warehouses and storage
• Vehicle and equipment hire
• IT hardware and printers
• Supply contracts with embedded leases, such as dedicated capacity
• Service agreements that give control of an identified asset

Test each contract. Is there an identified asset? Do you control its use? Do you get substantially all the economic benefits? If yes, it is a lease.

Capture Lease Data in One Place

Poor data causes most lease errors. For each lease, record the commencement date, term, payment schedule, break clauses, renewal options, rent review terms, incentives and deposits. Note the discount rate and where it came from.

Many teams now use FRS 102 lease accounting software to hold these fields and generate schedules automatically. Link each signed agreement to its record. Auditors will ask for evidence.

Get the Discount Rate Right

Use the rate implicit in the lease when you can determine it. Most SMEs cannot. Use your incremental borrowing rate instead. Document how you built it. Consider your credit profile, the lease term and the security involved.

Higher rates reduce present value. Review the method annually. A small rate change moves the liability noticeably on long property leases.

Judge the Lease Term Carefully

Term drives value. Include periods covered by options you are reasonably certain to exercise. Include periods after a break option if you are reasonably certain not to use it. Reassess when something significant changes, such as a store closure or relocation. Write down your reasoning.

Plan for Modifications and Remeasurement

Leases change. Rent reviews, extensions and scope changes trigger remeasurement. Index-linked payments need an update when the index moves. Each event needs a new calculation and a journal. Spreadsheets struggle here. One broken formula flows through every later period.

Choose Tools That Match Your Scale

Spreadsheets can handle a few simple leases. Beyond that, risk grows. Version control fails. Journals get rekeyed. Audit trails are thin.

Before buying a system, check that it can:

• Calculate liabilities and right-of-use assets under FRS 102
• Handle modifications, indexation and remeasurement
• Produce journals and disclosure reports
• Keep a full audit trail of changes
• Export to your accounting platform

Run a test on three real leases before committing.

Assign Clear Ownership

Name one person responsible for the lease register. Procurement and property teams must tell finance when they sign or amend an agreement. Add a lease check to your contract approval workflow. Without this step, new leases appear late and distort the year-end numbers.

Build a Repeatable Close Process

Set a monthly routine. Run the schedules. Post depreciation and interest. Reconcile the lease liability to the ledger. Review new contracts for lease content.

Set an annual routine too. Review exemptions, discount rates and term judgements. Prepare disclosures such as maturity analysis, depreciation by class and expense on exempt leases.

Prepare for Transition and Wider Impact

Read the standard itself. The Financial Reporting Council publishes FRS 102 and its amendments on its official FRS 102 page. Early adoption is allowed if you apply all periodic review amendments together. Decide early how you will transition. Test opening balances against your lease register.

Check the effect on loan covenants. Lease liabilities increase reported debt. Earnings measures may also shift. Speak to your lender early. Review deferred tax too. Brief your board on the numbers before year-end.

FAQs

When do the new FRS 102 lease rules actually take effect?

The new rules apply to accounting periods starting on or after January 1, 2026. However, because you need a complete inventory of all your contracts, it is highly recommended to start gathering your lease data well before your transition date.

Do absolutely all leases have to go on the balance sheet now?

Most will, but there are two helpful exemptions. You can keep leases off the balance sheet if they are strictly short-term (usually under 12 months) or if the underlying asset is considered low value, such as standard office printers or laptops.

How do I figure out the right discount rate to use?

If the interest rate isn’t explicitly written into your lease agreement (which is common), use your company’s incremental borrowing rate. This is simply the interest rate your business would be charged by a bank to borrow the money needed to buy that specific asset.

Can I still just use spreadsheets for my lease accounting?

If you only have two or three very simple property leases, spreadsheets might work. However, if your leases have rent reviews, extensions, or break clauses, spreadsheets easily break or cause errors. For most growing businesses, moving to dedicated software is the safest route for a clean audit.

Will moving leases to the balance sheet affect my current bank loans?

It might. Because the new rules classify your lease liabilities as debt, your company’s overall reported debt will instantly increase. This can shift your financial ratios and potentially trigger loan covenant breaches, so you should discuss this change with your lender early on.