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How to navigate complexities in revised FRS 102 lease accounting adoption

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5 minute read 21 May 2025
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FRS 102's lease accounting revisions require entities to adopt a new model by 2026, posing complexities that demand early management planning.

In brief

  • The revised lease accounting criteria will be effective from 1 January 2026, with early adoption permitted.
  • Entities must identify the drivers of complexity when adopting the new lease accounting criteria to assess how impactful the new standard is to an entity.
  • Entities are encouraged to proactively plan for this significant accounting change by evaluating the necessary timing, making modifications to existing systems and processes, and determining the level of effort required to ensure successful implementation.

How EY can help

FRS 102 is subject to a periodic review every five years. On March 27, 2024, the Financial Reporting Council (FRC) published the Amendments to FRS 102, marking the completion of its second periodic review of this financial reporting standard.

 

Following the periodic review, the Lease Accounting section has undergone significant revisions with simplifications, to better align with International Financial Reporting Standards (IFRS). These revisions require entities to recognise most leases on their balance sheets as right-of-use assets and lease liabilities, using a single accounting model similar to traditional finance lessee accounting. This model is referred to as the “right of use” (ROU) model.

 

Effective date for application of the new Lease Accounting criteria is periods beginning on or after 1 January 2026, with early adoption permitted.

 

When implementing the new lease accounting model, organisations may face a range of complexities that can vary considerably between entities. Identifying the drivers of complexity during the implementation of the new standard is essential for assessing the potential impact of this significant accounting change on the entities. Drivers of complexity may include the current classification of leases (i.e., finance or operating leases), the terms of lease contracts, and the accessibility and availability of contract data, among others.

 

For example, the transition becomes more challenging for entities with lease contracts that contain complex terms, such as variable consideration, renewal options, purchase and termination options, as well as contracts that include both lease and non-lease components.

Steps to overcome challenges and complexities

  • Management should plan early for this transition. As a first step, they can develop an initial understanding of the new standard requirements.
  • Management should assess how the new lease accounting requirements will impact key performance indicators (KPIs) such as earnings before interest, taxes, depreciation, and amortisation (EBITDA). It is essential to understand these effects and communicate their implications to stakeholders, including lenders. 
  • Management should select an appropriate transition method and establish new accounting judgments, such as how to account for lease extensions and termination options.
  • Management needs to identify the necessary modifications to existing systems, procedures, and controls, or determine the need for new dedicated lease accounting software to ensure a robust and efficient solution.

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Summary

The new lease accounting model represents a significant shift from the old FRS 102 lease accounting. The change will require considerable effort, time, and commitment from management, especially for those with extensive portfolios of leases and complex contracts as existing systems may not have captured all the necessary data to apply the revised standard. Therefore, it is advisable for organisations and their entities to begin preparing for the changes as early as possible to ensure the successful implementation of the new standard requirements while effectively navigating the associated complexities and challenges.

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Authors

Related topics
Assurance
Financial accounting advisory services

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