FRS 102 in 2026: What Your Auditor Will Look For

The revised FRS 102 Section 20 takes effect for accounting periods beginning on or after 1 January 2026. For most UK companies, that means the first set of financial statements under the new lease accounting rules will land on auditors' desks in early 2027. First-year adoption of any major standard always attracts heightened audit scrutiny, and this transition is no exception.

Your auditor is already planning what to focus on. They know where mistakes tend to happen because they have seen it before with IFRS 16, which introduced the same on-balance-sheet model several years ago. The lessons from those audits are now shaping the questions your auditor will ask about FRS 102.

Here is what to expect, and how to prepare so that your first audit under the revised standard goes as smoothly as possible.

Completeness of the Lease Register

The first thing auditors will test is whether you have captured all leases. A complete lease register is the foundation of correct lease accounting, and an incomplete one undermines everything that follows.

Auditors will not simply accept the list you provide. They will cross-check it against procurement records, property schedules, and nominal ledger accounts for rent, hire charges, and other lease-related payments. Any payments flowing through these accounts that do not tie back to a lease in your register will trigger further investigation.

The areas most likely to catch companies out include:

• Embedded leases in service contracts. An IT managed services agreement that provides dedicated servers, or a logistics contract with assigned vehicles, may contain a lease even though the contract is not titled as one.
• Verbal or informal agreements. Equipment provided by a supplier on an informal basis, or office space occupied under a handshake arrangement, still meets the definition of a lease if there is an identified asset and the right to control its use.
• Auto-renewal clauses. Leases that have rolled over without formal documentation may have been forgotten, but the obligation still exists.

Start by reconciling your register to your prior-year operating lease commitments note. Any gaps between the two will need a documented explanation.

Discount Rate Documentation

Under the revised FRS 102, lessees must discount lease liabilities using the rate obtainable on a similar borrowing, sometimes referred to as the obtainable borrowing rate (OBR). This is often the most material estimate in the entire lease calculation, and auditors will scrutinise it accordingly.

Your methodology must be documented and defensible. Auditors will challenge:

• Single rate vs portfolio approach. Are you using one rate across all leases, or differentiating by term, asset type, and currency? A single rate may be acceptable for a simple portfolio, but it needs justification.
• Collateral adjustments. The OBR assumes a secured borrowing. If you have derived your rate from unsecured debt, you need to adjust it downward, and document how you arrived at the adjustment.
• Reference rate and source. What base rate did you start with? Government bond yields, bank reference rates, and recent loan agreements are all valid starting points, but the choice must be documented.
• Subsidiary vs parent rates. If you are part of a group, auditors will check whether subsidiary rates appropriately reflect each entity's own credit standing rather than defaulting to the parent company rate.

For a detailed breakdown of how to build and document your discount rate, see our FRS 102 discount rates guide.

Opening Balance Accuracy

Transition calculations flow through everything. An error in your opening right-of-use (ROU) assets or lease liabilities will persist in every subsequent period unless corrected. Auditors understand this and will dedicate significant time to verifying the accuracy of your opening balances.

Key areas they will check include:

• Correct application of the simplified transition approach. FRS 102 provides specific transition methods, and auditors will verify that you have applied the chosen method correctly and consistently. See our transition guide for the available options.
• Practical expedient elections are documented consistently. If you elected practical expedients at transition, auditors will check that the elections were applied consistently across leases of a similar nature and that each election is documented.
• Reconciliation to prior period lease commitments. Your opening lease liabilities should reconcile, at least directionally, to the operating lease commitments disclosed in your last pre-transition financial statements. Any material differences require a clear explanation, such as discount-rate effects, lease-term reassessments, or scope differences.

Short-Term and Low-Value Exemptions

The revised FRS 102 allows entities to elect exemptions for short-term leases (12 months or less at commencement) and leases of low-value assets. These exemptions keep qualifying leases off the balance sheet, but they come with their own rules that auditors will verify.

• Consistent election by class. The short-term exemption must be applied consistently by class of underlying asset. You cannot exempt some office equipment leases but not others. Auditors will check for consistency.
• Lease-by-lease for low value. The low-value exemption, by contrast, is applied on a lease-by-lease basis. However, auditors will check that your threshold is reasonable and that assets are correctly classified.
• Vehicles excluded from low value. Vehicles are explicitly excluded from the low-value exemption regardless of their individual cost. This is a common error, particularly with low-cost pool cars or e-bikes.
• Disclosure still required. Even though exempt leases stay off the balance sheet, the expense recognised for short-term and low-value leases must be disclosed. Auditors will check that this disclosure is present and accurate.

Lease Term Judgements

Extension and termination options require a "reasonably certain" assessment, and this is inherently judgemental. Auditors will want to see that your assessments are documented, reasonable, and consistent.

For each lease with options, auditors will look for:

• A documented analysis. A brief memo or working paper explaining the factors considered and the conclusion reached. Simply ticking a box is not sufficient.
• Consistency across similar leases. If you have concluded that extension is reasonably certain for one branch property, auditors will question why it is not reasonably certain for a similar branch property in the same region with comparable terms.
• Evidence of reassessment when circumstances change. If you have installed significant leasehold improvements in a property with a break clause, the economic incentive to stay has changed. Auditors will ask whether you reassessed the lease term at that point.
• Consideration of all relevant factors. Penalties for termination, costs of obtaining a replacement asset, history of exercising options on similar leases, and the importance of the asset to operations should all be considered.

For a detailed look at what auditors typically flag on IFRS 16 (which shares the same on-balance-sheet model), see our article on common IFRS 16 audit findings.

First-Year Disclosure Requirements

The first year of adoption will face heightened disclosure scrutiny. Auditors know that disclosure notes are often the last item prepared and the most likely to contain gaps. Under the revised FRS 102, your lease disclosures need to cover several key areas.

• Depreciation of ROU assets by class. The revised standard requires depreciation to be disclosed by class of underlying asset (e.g. property, vehicles, equipment), not just as a single total.
• Interest expense on lease liabilities. This must be disclosed separately from the depreciation charge.
• Maturity analysis of undiscounted lease payments. This must show the timing of future cash outflows, typically broken into time bands, so that users can assess the entity's liquidity exposure from leasing commitments.
• Reconciliation of opening balances. For the transition year, you need to explain how you moved from the prior accounting treatment to the new on-balance-sheet model, including the impact on retained earnings.
• Expense for short-term and low-value leases. Even though these are off-balance-sheet items, the amounts must be disclosed separately.
• Description of leasing activities. A qualitative description of your leasing arrangements, including the nature of assets leased, typical terms, and any significant restrictions or covenants imposed by lease contracts.

For a complete checklist of required disclosures, see the disclosures section of our FRS 102 guide.

Prepare Now

Audit friction is almost always the result of gaps in documentation or inconsistencies in approach. The good news is that most common findings are preventable with advance preparation. Use the following checklist to get ahead of your auditor's requests:

• Complete your lease register and cross-check it against procurement records, property schedules, and expense accounts for rent and hire charges.
• Document your discount rate methodology, including the reference rate, credit spread adjustment, collateral adjustment, and any portfolio groupings.
• Prepare a transition bridge reconciling prior-year operating lease commitments to opening lease liabilities, with explanations for all material differences.
• Record all practical expedient elections and confirm they have been applied consistently across similar leases.
• Document lease term assessments for every lease with extension or termination options, including the factors considered and the conclusion reached.
• Review your exemption classifications to confirm vehicles are not treated as low-value and that short-term elections are consistent by asset class.
• Draft your disclosure notes early, using a checklist to ensure nothing is missing. Do not leave this until the last week of the audit.
• Run a dry-run reconciliation of your lease subledger to the general ledger before the auditors arrive.

Getting ahead of these areas does more than reduce audit friction. It reduces the risk of audit adjustments that could delay your filing, affect covenant compliance, or require restatement. The time you invest now in preparation will pay for itself many times over.