FRS 102 Lease Accounting in 2026: Preparing Your SME Lease Register
Office, vehicle and equipment agreements can change how your balance sheet looks even when the cash payments stay the same. Start with complete contracts, not an estimated rent total.
Check the framework and effective period
The revised FRS 102 Section 20 generally applies for accounting periods beginning on or after 1 January 2026. For lessees, most leases move to a model recognising a right-of-use asset and a lease liability, subject to the standard’s exemptions and requirements.
This is not a rule that every small business must apply IFRS 16. Confirm your reporting framework first. Lessors have different requirements, and a company using FRS 105 should not assume this FRS 102 guide determines its accounting.
Find every agreement before calculating a liability
Search beyond the rent nominal code. Premises, vehicles, equipment and agreements embedded in wider supply arrangements all deserve review. Collect the actual signed contracts, amendments and side letters; a supplier payment listing rarely contains enough information.
For each arrangement capture commencement, the non-cancellable period, renewal or termination options, payment dates, incentives, deposits, index-linked payments and any separate services. Options and variable payments need accounting judgement rather than a blanket rule.
Understand the recognition exemptions
Qualifying short-term and low-value leases may be eligible for recognition exemptions. These are optional, specific exemptions, not an automatic exemption for every SME or for every contract with a small monthly payment.
The short-term definition generally considers a term of twelve months or less and excludes leases containing a purchase option. Low value concerns the underlying asset, not simply a low instalment; do not invent a universal sterling threshold. Confirm eligibility and the appropriate election with your accountant.
Keep the cash schedule separate from the expense profile
Consider an illustrative three-year equipment agreement with equal annual payments. The cash schedule follows the payment dates, while the accounting may show depreciation of the right-of-use asset and interest on the liability rather than a single straight-line rental expense.
Initial measurement, discounting, subsequent changes and transition treatment require the relevant contractual facts. A spreadsheet total of remaining instalments is not necessarily the correct liability. Reconcile opening balance, additions, interest, payments and closing liability, and separately reconcile the asset and depreciation.
Make the board explanation useful
Changes to EBITDA, debt measures or net assets may result from presentation and recognition changes rather than improved trading or new cash borrowing. Label these effects clearly when comparing the first affected period with earlier periods.
Review loan-agreement definitions with the lender and adviser. Do not assume an accounting change automatically causes a covenant breach or that a lender will automatically adjust its calculation. Maintain both the payment forecast and the accounting reconciliation so decisions remain grounded in cash as well as reported performance.
Sources and further guidance
General guidance, not accounting, legal or tax advice. Confirm the treatment for your circumstances with a qualified adviser.
Frequently asked questions
Will recognising a lease liability change the rent I pay?
Accounting recognition does not itself change contractual payments. Keep the contract payment schedule alongside the accounting workings.
Are all small-company leases exempt?
No. Eligibility depends on the specific standard and exemption criteria, not merely the size of the business.