FRS 102 and points to note for commercial tenants

UK businesses leasing premises need to be live to the recent changes to FRS 102  which are mandatory for accounting periods commencing on or after 1 January 2026.

The FRS 102 is the Financial Reporting Standard applicable in the UK and Republic of Ireland, and is the main accounting standard for small and medium-sized enterprises (SMEs) that do not use International Financial Reporting Standards (IFRS).

The Financial Reporting Council estimates that some 3.4 million business will be affected by the changes.

What is changing?

The  changes to FRS 102 will particularly affect the accounting treatment of leases for UK businesses, where the majority of leases will need to be recognised on the balance sheet (certain low rental leases and leases of 12 months or less are exempt – it is important to note that a short term lease that contains a purchase option is not considered a short term lease for the accounting treatment under the FRS 102).

The key difference for leases is that there will no longer be a requirement to differentiate between an operating lease and a finance lease.  Leases will be shown as a new liability showing the present value of future lease payments.

Potential impact

In addition to the potential impact on financial covenants under any existing security arrangements, UK businesses leasing premises need to consider the impact of the FRS 102 when considering  new lease transactions.  The term length and amount of rent payable will need to be reviewed when considering new leases; lease renewals; re-gears and possible reversionary lease transaction structures in light of the new rules under the FRS 102, taking  specialist accountancy advice before heads of terms are agreed.

If you have any questions, our Real Estate team would be happy to help.