If you’re preparing for the 2026 changes to FRS 102, lease accounting needs to be at the top of your list. In this blog, we break down key considerations for FRS 102 lease accounting. One area where these changes will be especially visible – and often overlooked – is the cash flow statement.
This update aligns the UK standard more closely with IFRS 16, requiring most leases to be capitalised. While that improves transparency, it also brings major changes to reporting, budgeting, and stakeholder communication. We have recently uploaded a blog going into depth into the FRS 102 lease accounting changes. You can read more about it here.
1. Most FRS 102 Leases Will Now Be On-Balance Sheet
Under the revised FRS 102, lessees will need to recognise a right-of-use asset and a lease liability for most leases. This marks the end of the straightforward “rent expense” treatment currently applied to operating leases.
Instead, the lease liability is measured as the present value of future lease payments, and the asset is depreciated over the lease term. This is a significant shift for organisations with large property, equipment, or vehicle leases.
While there are exemptions for short-term leases (under 12 months) and low-value assets, most agreements will now require more disclosure, more estimates, and more system support. Lease accounting is no longer just a line item in the expense report – it’s now a balance sheet and financing issue.
2. How FRS 102 Lease Payments Affect Your Cash Flow Statement
Currently, lease payments under operating leases appear in operating cash flows – easy, predictable, and fully expensed. Under the new model, that’s changing.
When you capitalise leases, you split payments into:
- Principal repayment of the lease liability → Financing Activities
- Interest portion → Operating Activities (or optionally Financing)
So even though you’re still paying the same cash out the door, it shows up differently in your accounts:
| Category | Current (FRS 102 Section 20) | Post-change (New FRS 102) |
| Lease Payments | Operating cash outflows | Split: Principal (Financing), Interest (Operating) |
| EBITDA impact | Lower | Higher (no lease cost deduction) |
| Operating cash flow | Lower | Higher |
| Financing cash flow | Not impacted | Lease repayment outflows increase |
This change can make your operating performance look stronger, even if your overall cash doesn’t change. This can either enhance transparency or cause confusion – depending on how effectively it’s communicated to stakeholders.
3. Estimating Lease Terms and Discount Rates Under FRS 102
There are two key lease calculation inputs that will affect your cash flow statement significantly and these inputs require some accounting judgement to determine the right outcome.
First, you’ll need to discount future lease payments – typically using your obtainable borrowing rate – and apply it consistently across your lease portfolio. This will affect both the interest expense recognised and the initial value of the right-of-use asset, which will be depreciated over the lease term.
Secondly, you’ll also need to assess the lease term, including whether you’re reasonably certain to extend or terminate. For more practical tips on how to determine the appropriate lease term, see our guide here. Small changes in assumptions (like a one-year extension) can significantly change reported figures, such as the interest expense and the lease liability balance.
For many organisations, this will involve:
- More cross-department collaboration (legal, estates, procurement or treasury)
- Centralised lease data tracking
- Justification of assumptions for audit and internal reporting
It’s a more judgement-based process than previous lease accounting – so documentation, consistency, and clarity matter more than ever.
4. Transition Options for FRS 102 Leases: What to Consider
Your transition approach doesn’t just impact your balance sheet setup – it directly affects how lease-related cash flows appear across your reporting periods.
The updated FRS 102 lease model requires retrospective application from the start of the earliest period presented – but thankfully, it allows for some practical reliefs to make the transition easier.
In practice, this means you have a choice:
- You can go with a full retrospective approach, where you restate prior periods (similar to IFRS 16’s full retrospective method); or
- You can apply the simplified approach allowed under FRS 102, which avoids restating comparatives – similar in spirit to IFRS 16’s modified retrospective method.
Most organisations are expected to favour the simplified route. It’s quicker, less complex, and doesn’t involve reworking historical financials. The trade-off? You lose a bit of comparability across periods, which may affect how stakeholders interpret trends year-on-year.
When deciding how to transition, you’ll also need to think about:
- Whether to reassess all your existing lease contracts or keep your current classifications;
- How to handle the opening balances for right-of-use assets and lease liabilities; and
- What disclosures are required in your first year of applying the new rules.
Whichever route you take, the decisions you make now will shape how smoothly the change lands with your board, governors, auditors, and other stakeholders. A bit of early planning can make a big difference.
5. FRS 102 Lease Accounting Will Change Your Metrics and Cash Flow
With lease liabilities moving onto the balance sheet and repayments now classified under financing activities, your reported cash flow profile is going to change – even if your actual cash outflows stay the same.
Here’s what you can expect:
- Operating cash flow will increase, since lease payments (previously shown as rent expenses) no longer hit operating activities in full.
- Financing outflows will increase, as repayments of the lease liability now appear under financing activities.
- EBITDA will improve, because lease costs are replaced by depreciation and interest – both of which are excluded from this metric.
These accounting changes may not affect your liquidity, but they will impact how performance is presented – and potentially how it’s interpreted.
This shift can influence:
- Loan covenants based on EBITDA or net debt metrics
- Budget vs. actual variance analysis, especially in cash-based environments
- Internal performance dashboards, which may need updated definitions
In short: the numbers haven’t changed, but how they appear has. If your board, lenders, or funders aren’t expecting the shift, it can lead to confusion or misinterpretation. Preparing stakeholders early – and adjusting how you present your numbers – is a critical part of a smooth transition.
Prepare Early for FRS 102 changes with Rubli
The 2026 updates to FRS 102 represent more than a compliance hurdle – they’re a real opportunity to elevate the way businesses manage and report on leases. For many companies, the changes will shine a brighter light on lease commitments, alter reported cash flows, and shift key financial metrics. But for those who prepare early, it can also be a chance to modernise systems, strengthen internal reporting, and make more informed decisions.
The cash flow statement is an area that often flies under the radar – but it’s where some of the most meaningful impacts will land. Getting ahead of this now, means fewer surprises later.
At Rubli, we specialise in helping organisations navigate their lease accounting changes under FRS 102.
Ready to get ahead of the 2026 deadline? Contact us today for a free consultation and see how we can support your FRS 102 lease transition – and help you simplify compliance every step of the way.
