In 2026, many organizations with material operating leases will see EBITDA rise while interest and depreciation increase. This article focuses on how to communicate these changes to the board.
For many finance directors in the UK and Ireland, the upcoming amendments to FRS 102 Section 20 represent a significant administrative task. Beyond the data gathering, there is a secondary challenge that is sometimes overlooked, which is how to clearly communicate the change.
In 2026, the P&L statement for many companies will look quite different. Margins will shift, finance costs will increase, and debt levels will appear to rise. This happens without any change to the actual cash flow of the business.
This might feel familiar, and international board members may ask if the company did not already implement this years ago. It is important to clarify that while global companies adopted this model under IFRS 16 previously, UK GAAP is now aligning with those standards.
Read more: FRS 102 lease changes 2026 compared with IFRS 16.
To explain this to a non financial board member, start with the simplest concept, which is that for most leases the rent line item is being removed.
Under the current rules for operating leases, renting an office or a fleet of vans appears as a single operating expense. Under the new 2026 rules, that single expense line is replaced.
The accounting standard splits the payment into two separate parts:
EBITDA (earnings before interest, tax, depreciation and amortisation) is a common measure of operating performance. The most immediate impact of removing leases from operating expenses is that operating profit and EBITDA will increase.
When a company moves a large cost, such as office rent, from operating expenses into depreciation and interest, the EBITDA margin increases immediately.
If the finance team does not communicate with the board, directors might see a sudden spike in EBITDA and assume the business has become more efficient or profitable.
We recommend you to act as the voice of reason and explain that this is a regulatory accounting change rather than a performance improvement. The finance team has simply moved the costs to a different section of the P&L statement.
While EBITDA goes up, the net profit can decline in the first few years of a new lease. This is often the most difficult concept to explain.
Under the previous rules, rent was typically the same amount every year. Under the new rules, the lease itself has not changed, only how the expense shows up in the accounts.
This means that in the early years of a lease, the combined cost of interest plus depreciation is often higher than the old lease expense would have been.
A board member might see EBITDA rise while profit before tax falls. They might ask why profits are lower if the company is apparently more efficient. You must explain that this is a timing difference. Profits will be technically lower now but will be higher in the later years of the lease term.
Read more: Revised FRS 102 vs the pre-2026 FRS 102 and older UK GAAP explained.
The new rules require the company to record future lease payments as a liability on the balance sheet. This will make the company appear significantly more indebted overnight.
We advise you to review banking covenants early in the process. If the bank defines debt based on current accounting rules rather than historical standards, this change could trigger a breach in covenants.
For the first year, present management accounts with a specific column labeled impact of FRS 102 leases and show results both before and after the change. This will simplify comparison.
If profit before tax declines due to front-loaded interest, the distributable reserves available for dividends might technically be lower. Reassure shareholders that while the accounting profit is lower, the cash available to the business is exactly the same as it was before.
Disclaimer: This article is intended as a general guide to the changes under FRS 102 Section 20 and does not replace professional accounting or legal advice. We recommend discussing specific impacts with your auditors or financial advisors.