The Financial Reporting Council (FRC) recently confirmed that lease accounting standards for UK SMEs will be brought broadly into line with international standards – the changes may have a profound effect on the financial statements of some SMEs and we are advising clients to make an early assessment of the likely impacts and any necessary action.
This change will be fully in place for accounting periods beginning on or after 1 January 2026, although earlier adoption is permitted. It will shift how companies recognise revenue, which could potentially impact how your business closes lease arrangements.
Most significantly, leaseholders will be required to recognise lease liabilities and right-of-use assets on their balance sheets for most lease arrangements, including operating leases. There will however be a de-minimis exception for some low-value leases which should ease the compliance burden for some companies.
In theory, this should make lease accounting more transparent but it’s unlikely to make the process any simpler.
Unlike the current practice under UK GAAP, liabilities under operating leases will now need to be recognised on the balance sheet, with corresponding recognition of the associated asset(s). The appropriate interest expense will be recognised in the income statement.
Enhanced disclosure requirements are intended to provide stakeholders with greater transparency about the whole company's lease commitments, including lease terms, future lease payments, and significant leasing arrangements.
Even though the proposed changes are intended to improve transparency and financial reporting quality, they may present challenges for smaller businesses.
Potential challenges you may face
SMEs with extensive leasing arrangements might endure a protracted administrative process, making the application of new accounting rules particularly difficult.
We’re predicting that compliance efforts, including lease data collection, system enhancements, and financial statement disclosures, may involve the investment of a large amount of time and resources on your part.
Acknowledging lease liabilities on the balance sheet could also have a notable effect on vital financial ratios and performance indicators, such as leverage ratios and return on assets too.
As such, you might need to evaluate the potential implications of the updated lease accounting regulations on your financial statements and communicate this with other stakeholders.
Financial statement changes regarding lease liabilities and assets may affect your access to financing and credit options if there are significant changes. It may also impact any existing debt covenants so early assessment of any potential impacts in this area is strongly advised.
It’s also important from a financial perspective because funding is often a significant part of continuing business operations.
Additionally, you may need to review your processes when negotiating leases for properties and equipment and consider buying rather than renting.
It’s going to be more important than ever to have a qualified and experienced accounting team on your side going forward.
We’ve already been advising many of our clients on this issue and getting them ready for implementation of these new standards in 2026, so please don’t hesitate to reach out if you require further information.
For tailored advice based on your specific business circumstances, please contact the Scholes CA team.
Email: enquiries@scholesca.co.uk or call +44 (0) 1856 872983
