Lessons from IFRS 16 for FRS 102 Preparers

IFRS 16 has been live since January 2019. In the seven years since, thousands of companies have navigated the transition from operating lease expensing to on-balance-sheet recognition. Some managed it smoothly; however, many did not.

With the revised FRS 102 Section 20 taking effect for periods beginning on or after 1 January 2026, UK companies now face a very similar challenge. The good news is that you do not need to learn every lesson from scratch. The IFRS 16 experience offers a wealth of practical insight into what goes wrong and what to prioritise.

This article distils the most common pitfalls from IFRS 16 transitions and turns them into actionable guidance for FRS 102 preparers. Whether you are just starting your transition planning or already well underway, these lessons can save you significant time, cost, and frustration.

1. Data Collection Was the Biggest Bottleneck

Ask any company that went through the IFRS 16 transition what surprised them most, and the answer is almost always the same: gathering the data took far longer than expected.

Lease information rarely sits in one place. Property leases might be managed by the estates team, vehicle fleets by the operations team, equipment by procurement, and photocopiers by office managers. Some contracts live in filing cabinets. Others exist only as email attachments or scanned PDFs buried in shared drives. In larger organisations, local offices may have signed leases without central finance ever seeing the paperwork.

For each lease, you need to extract the following:

• Lease term, including any extension or termination options
• Payment amounts and frequency, plus any escalation clauses
• Commencement date and any modification history
• Incentives, rent-free periods, and restoration obligations
• Whether the contract contains a lease at all (embedded leases in service agreements are easy to miss)

Under IFRS 16, companies that started this process six months before their effective date found themselves scrambling. Those who started a year ahead were in a far better position.

Lesson for FRS 102 preparers: Begin your lease data collection now. Even if the numbers are not yet finalised, having a complete inventory of contracts is the foundation on which everything else depends.

2. Discount Rates Consumed Disproportionate Time

Under IFRS 16, determining the incremental borrowing rate (IBR) for each lease proved to be one of the most time-consuming and contentious aspects of the transition. Under FRS 102, the equivalent concept is the obtainable borrowing rate (OBR), and the same challenges apply.

The difficulty is not the calculation itself but rather agreeing on the methodology. Companies found themselves debating:

• Whether to use a single rate or different rates by lease type, currency, or term
• How to adjust for collateral (the rate should reflect a secured borrowing)
• What reference rate to start from and how to build up the credit spread
• How to handle subsidiaries with different credit profiles from the parent
• Whether a portfolio approach was acceptable, and how to define the portfolios

These discussions often went back and forth with auditors for weeks. Companies that had their methodology reviewed and agreed by auditors before the transition date avoided last-minute surprises and potential adjustments to their opening balances.

Lesson for FRS 102 preparers: Draft your discount rate methodology early and share it with your auditors for feedback well before your transition date. Getting alignment on the approach is far easier than defending it after the fact.

3. Spreadsheets Broke Under the Weight

Many companies began their IFRS 16 journey in Excel. For a handful of simple property leases, spreadsheets worked. But as portfolios grew and the standard's requirements kicked in, cracks appeared quickly.

The issues were predictable in hindsight:

• Modifications and remeasurements required recalculating the lease liability mid-term, which meant maintaining multiple versions of each schedule
• Rent reviews and CPI escalations triggered remeasurements that had to flow through correctly
• Disclosure generation, including maturity analyses and roll-forward schedules, had to be built from scratch and reconciled manually
• Audit trails were difficult to maintain when formulae were complex, and multiple people edited the same file
• Version control broke down, with different team members working from different copies

The tipping point was surprisingly low. Companies with more than 20 to 30 leases found that the overhead of maintaining spreadsheets exceeded the cost of dedicated software. Those with hundreds of leases often spent more time managing the spreadsheet than doing the accounting.

Lesson for FRS 102 preparers: Be honest about the size and complexity of your portfolio. If you have more than a handful of straightforward leases, evaluate lease accounting software early. The time saved on modifications, disclosures, and audit support alone typically justifies the investment.

4. Transition Method Choice Had Lasting Consequences

Under IFRS 16, companies could choose between the full retrospective approach (restating comparatives as if the standard had always applied) and the modified retrospective approach (recognising the cumulative effect at the transition date without restating). Most chose the modified approach because it was simpler, but many underestimated the downstream effects.

The modified approach created comparability issues that persisted for years. Year-on-year trends in operating profit, EBITDA, and leverage ratios were distorted because the prior period reflected the old accounting, while the current period reflected the new. Analysts, boards, and lenders struggled to compare periods meaningfully.

For FRS 102, the transition approach is more prescribed than IFRS 16, but the practical considerations are similar:

• Expect comparability gaps. Your first set of accounts under the new standard will show a step change in balance sheet metrics. Prepare explanatory notes and briefing materials.
• Plan your opening balance calculations carefully. The simplified approach still requires determining the lease liability at the date of initial application, and errors in opening balances carry forward indefinitely.
• Consider the practical expedients available. FRS 102 offers reliefs that can simplify the transition, but they must be applied consistently and documented clearly.

Lesson for FRS 102 preparers: Even though the transition method is prescribed, do not treat it as straightforward. The opening balance calculations and practical expedient elections require careful thought, and mistakes made here will persist in your accounts for years.

5. Underestimation of Ongoing Maintenance

Perhaps the most common misconception about IFRS 16 was that it was a one-off transition exercise. Companies staffed up for the transition, built their models, loaded their data, and then assumed the hard work was done.

It was not. The ongoing requirements turned out to be just as demanding:

• Every rent review triggers a remeasurement of the lease liability
• Every lease modification (extending a term, changing the space, renegotiating payments) requires recalculation, potentially with a new discount rate
• Every new lease needs to be identified, assessed, measured, and added to the system
• Quarterly or annual disclosures require maturity analyses, roll-forward schedules, and reconciliations
• Reassessment triggers (significant events, approaching option dates) need to be monitored and acted upon

Companies that treated IFRS 16 as a project rather than a process found themselves scrambling at each reporting date. Those that embedded lease accounting into their ongoing finance operations fared much better.

Lesson for FRS 102 preparers: Design your transition with ongoing requirements in mind. The processes, systems, and responsibilities you put in place now should be sustainable for the long term, not just sufficient to get through the opening balance.

6. Stakeholder Communication Was an Afterthought

When IFRS 16 hit the balance sheet, many boards, lenders, and analysts were caught off guard. Net debt increased. Leverage ratios shifted. Operating profit changed. For some companies, the balance sheet impact was material enough to affect debt covenants or credit ratings.

The problem was not the numbers themselves. It was the lack of advanced communication. Stakeholders who were briefed early could plan for the changes. Those who were not, often reacted with concern or confusion.

Common communication failures included:

• Boards seeing the balance sheet impact for the first time in the draft accounts
• Lenders not being consulted about whether covenant definitions needed updating to exclude lease liabilities
• Auditors being presented with the methodology and calculations at the last minute, with no time for discussion
• Internal teams (budgeting, FP&A, treasury) not understanding how their metrics would change

Lesson for FRS 102 preparers: Brief your key stakeholders before the numbers land. Run a preliminary impact assessment on your largest leases and share the results with your board, lenders, and auditors. A five-minute conversation now prevents a difficult meeting later.

7. What FRS 102 Preparers Can Do Now

The deadline is approaching, but there is still time to get ahead of it. Based on the collective experience of IFRS 16 adopters, here is a practical checklist for FRS 102 preparers:

• Inventory all leases. Gather contracts from every department and location. Include property, vehicles, equipment, and any service agreements that might contain embedded leases. Aim for a complete, centralised register.
• Agree your discount rate methodology with auditors. Draft your approach to determining the obtainable borrowing rate, share it with your auditors, and incorporate their feedback before the transition date.
• Evaluate your software needs. Be realistic about whether spreadsheets can handle your portfolio size and complexity. If you have more than 20 to 30 leases, or leases with frequent modifications, purpose-built software will likely save you time and reduce errors.
• Plan stakeholder communication. Identify who needs to know about the balance sheet impact (board, lenders, auditors, internal teams) and prepare a timeline for briefing them.
• Run a dry run on your largest leases. Take your five or ten most material leases and calculate the opening right-of-use asset and lease liability. This will surface data gaps, methodology questions, and provide a preliminary view of the balance sheet impact.
• Understand the transition requirements. Familiarise yourself with the simplified approach, available practical expedients, and first-year disclosure requirements.
• Build sustainable processes. Design your workflows, responsibilities, and system setup with ongoing maintenance in mind, not just the transition date.

The companies that navigated IFRS 16 most successfully were not the ones with the biggest teams or the most complex models. They were the ones who started early, communicated proactively, and built processes that lasted beyond day one. FRS 102 preparers have the advantage of learning from their experience.