Lease Accounting Changes (From 2026)

If your business prepares accounts under FRS 102 and leases office space, vehicles or equipment, there's an important accounting change coming into effect from 2026.

For many businesses, leases that currently sit "off the balance sheet" will now need to be recognised as both an asset and a liability.

For most of our clients, this won't change the amount you pay under your lease, but it will change how your financial statements look and may affect the financial metrics reported to lenders and investors.

📋 At a glance

Who does this affect?

• Businesses preparing accounts under FRS 102 that lease office space, commercial property, vehicles or equipment.

When does it apply?

• Accounting periods beginning on or after 1 January 2026.

Who isn't affected?

• Businesses preparing accounts under FRS 105 (the micro-entities regime).

What should I do?

• Review your lease agreements well before your first affected year end so there's plenty of time to assess the impact.

💻 Will this affect my tech company?

For many AI, software and technology businesses, the answer is probably yes.

The biggest impact is usually for businesses that lease:

• an office or company headquarters
• studio, laboratory or workshop space
• company vehicles
• specialist equipment

On the other hand, many of the assets tech businesses lease every day, such as laptops and mobile phones, will usually qualify for the low-value exemption and won't need to be recognised on the balance sheet.

If you're fully remote and don't lease any property or significant equipment, these changes may have little or no impact.

🏢 What actually changes?

Under the current FRS 102 rules, many leases are treated as operating leases. This means the lease payments are simply recorded as an expense each month.

From 2026, most leases will instead appear on your balance sheet.

You'll normally recognise:

• a right-of-use asset, representing your right to use the leased asset
• a lease liability, representing the remaining lease payments

Instead of recording one rental expense each month, your accounts will include:

• depreciation on the right-of-use asset
• interest on the lease liability

Your cash payments don't change. This is purely an accounting change.

Although the timing of the expenses changes, the overall cost recognised over the life of the lease is broadly the same.

🏢 Common examples for tech companies

Leasing an office

Many of our clients lease office space while operating a hybrid workforce.

Whether employees come into the office five days a week or once a week generally doesn't affect the accounting treatment.

If your company has a lease over office premises that is over 12 months long, it's likely that lease will need to appear on the balance sheet.

Using a serviced office or coworking space

Many startups use providers such as Fora, WeWork or Runway East.

Whether these arrangements fall within the new rules depends on the contract.

Some agreements are genuine leases, while others are primarily contracts for services.

We'll usually need to review the agreement before confirming the correct treatment.

Company laptops and IT equipment

Most businesses lease or finance laptops, monitors and phones.

These assets will often qualify as low-value assets, meaning they can continue to be treated as an expense rather than appearing on the balance sheet.

✅ Which leases are exempt?

There are two main exemptions.

Short-term leases

If the lease term is 12 months or less, you can usually continue treating the lease payments as an expense.

This exemption doesn't apply if the agreement contains an option to purchase the asset.

Low-value assets

Leases of low-value assets don't normally need to be recognised on the balance sheet. The definition of low value hasn't yet been defined, so some judgement will be required.

Typical examples include:

• laptops
• desktop computers
• mobile phones
• tablets
• small office furniture

Commercial property, offices, vehicles and similar assets won't qualify for this exemption.

📊 How could this affect my accounts?

For many businesses you'll see:

• higher assets
• higher liabilities
• lower operating expenses
• higher depreciation
• higher finance costs

This doesn't necessarily make the business better or worse financially, but it does change how the numbers are presented.

Some key performance indicators may also change, including:

• EBITDA
• operating profit
• net assets
• gearing
• debt-to-equity ratios

If you report financial information to investors or lenders, it's worth understanding these changes before your first affected year end.

💰 Could this affect fundraising or borrowing?

Potentially.

Many banks and lenders use financial ratios when assessing lending or monitoring loan covenants.

Similarly, investors often monitor metrics such as EBITDA and net debt.

Although these accounting changes don't alter the underlying economics of your business, they can affect the figures being reported.

If you're:

• raising investment
• applying for debt finance
• negotiating banking facilities
• preparing for an acquisition

it's sensible to understand the impact early.

📅 How is the lease term decided?

The lease term isn't always just the period stated on the front page of the agreement.

You'll also need to consider:

• renewal options you're reasonably certain to exercise
• break clauses you're reasonably certain not to use
• the commercial reality of the arrangement

For example, if relocating your office would be expensive and disruptive, it's possible that an optional renewal period should be included when measuring the lease.

Equally, if either party can terminate the agreement without significant cost, the lease term may be shorter.

This is often one of the areas requiring the most judgement.

🔄 What about rolling or informal leases?

Some businesses occupy premises under:

• rolling monthly agreements
• arrangements with founders or directors
• leases between companies in the same group

These can be more complicated than they first appear.

Even where there's no formal long-term contract, the accounting rules may require a longer lease term if, in reality, both parties expect the arrangement to continue for many years.

If your business occupies property owned by a founder, director or another group company, it's worth discussing the arrangement with us.

📝 How do the new rules work in practice?

When you first apply the new rules, you'll calculate the present value of the remaining lease payments using an appropriate borrowing rate.

That amount becomes the lease liability.

A matching right-of-use asset is then recognised, subject to certain adjustments such as prepaid or accrued rent.

One helpful simplification is that you don't need to restate prior year accounts.

Instead, the adjustment is made to the opening balances when you first adopt the new rules.

✅ What should I do now?

If your business has lease agreements, we'd recommend reviewing them before your first accounting period beginning on or after 1 January 2026.

A good starting point is to:

• make a list of all current lease agreements
• identify any short-term leases
• identify any low-value asset leases
• review renewal and break clauses
• tell us about any serviced office arrangements
• let us know about any leases with founders, directors or group companies
• consider whether bank covenants or investor reporting could be affected

Preparing early makes the transition much easier.

❓Frequently asked questions

Will this increase my lease payments?

No.

The amount you pay under your lease doesn't change. Only the accounting treatment changes.

Does this change my corporation tax bill?

Not directly.

These are accounting changes rather than changes to the lease itself. The tax position will depend on your individual circumstances, but for most businesses the main impact is on financial reporting.

We're fully remote. Do we need to worry?

Possibly not.

If you don't lease any office space, vehicles or other significant assets, these changes may have little impact.

We only lease laptops and phones.

These assets will often qualify for the low-value exemption, meaning they can usually continue to be treated as an expense.

We're moving office soon. Should we wait?

No.

It's still worth reviewing both your current and future lease arrangements so you're prepared when the new rules apply.

💬 How we can help

We'll work with you to make the transition as straightforward as possible.

We can help you:

• identify which contracts are leases
• determine which exemptions apply
• calculate your opening lease liability
• prepare the transition journals
• explain the impact on your financial statements
• assess any implications for lenders, investors or financial covenants

If you'd like us to review your lease agreements before your next year end, just get in touch.