From accounting periods beginning on or after 1 January 2026, lease accounting under FRS 102 has fundamentally changed. The previous distinction between operating and finance leases for lessees no longer determines whether a lease is recognised on the balance sheet. Instead, FRS 102 now applies a single on-balance sheet model, similar in structure to IFRS 16.
This means the key question for UK finance teams has changed: It is no longer “Which leases can remain off-balance sheet?”
It is now: Are any leases still allowed to remain off-balance sheet under the revised FRS 102?
In this article: This guide explains which leases can still remain off-balance sheet under the revised FRS 102 effective from 1 January 2026. It outlines the short-term and low-value exemptions, what has changed compared to the previous operating lease model, and the practical steps UK finance teams should take to ensure audit-ready lease classification and reporting.
Under the revised FRS 102, lessees must now recognise:
for most lease contracts.
The old model worked like this (pre-2026):
This distinction no longer applies to lessees for recognition purposes. Instead, FRS 102 now follows a single recognition approach, bringing UK GAAP closer to IFRS 16.
Read more: How to prepare for your next audit under FRS 102 Section 20.
Yes – but only under specific exemptions.
Under the revised FRS 102, two main exemptions allow leases to remain off-balance sheet:
A lease may qualify for exemption if:
If the exemption is applied, lease payments are recognised as an expense rather than a right-of-use asset and lease liability.
Leases of low-value assets may qualify for exemption depending on the entity’s accounting policy.
Examples may include:
These leases can be expensed rather than capitalised.
The exemption is intended for assets that are individually low in value, even if aggregated across the portfolio.
Electing the low-value exemption does not remove disclosure requirements.
If an entity applies the exemption, the lease is not recognised as a right-of-use asset or lease liability. Instead, lease payments are recognised as an expense in profit or loss, typically on a straight-line basis over the lease term.
However, FRS 102 requires specific note disclosures for leases where recognition exemptions are applied.
Entities must disclose:
The maturity analysis should present future contractual payments by time band (for example: not later than one year, later than one year and not later than five years, and later than five years).
This differs from IFRS 16. Under FRS 102, future commitments relating to low-value leases remain visible through disclosure, even though they are not recognised on the balance sheet.
In practice, this means the exemption simplifies recognition, but not compliance. Finance teams must still:
Weak documentation of low-value classification is a common audit finding. The exemption should be applied consistently and supported by clear internal thresholds or qualitative criteria.
Read more: FRS 102 lease changes 2026 compared with IFRS 16.
Under the revised standard:
are generally recognised on the balance sheet unless they qualify for a specific exemption.
This represents a significant shift for entities that previously treated property and vehicle leases as operating leases.
Read more: FRS 102 Section 20: Why spreadsheets break – and how to get it right.
After the 2026 revision, the gap between FRS 102 and IFRS 16 has narrowed considerably.
|
Topic |
Revised FRS 102 (2026) |
IFRS 16 |
|
Recognition model |
Single on-balance sheet model |
Single on-balance sheet model |
|
Right-of-use asset |
Yes |
Yes |
|
Lease liability |
Yes |
Yes |
|
Short-term exemption |
Yes |
Yes |
|
Low-value exemption |
Yes |
Yes |
|
Complexity level |
Generally simplified vs IFRS 16 |
More detailed guidance and disclosures |
While IFRS 16 remains more prescriptive in certain areas, the recognition principle is now broadly aligned.
The shift to on-balance sheet recognition increases the importance of:
Entities that relied heavily on operating lease treatment may see:
For accounting periods beginning on or after 1 January 2026, entities were required to:
The quality of the transition process will directly influence audit risk and reporting reliability.
The most common issues observed in 2026 implementation include:
Lease accounting errors now typically arise from data and judgement gaps rather than technical journal mechanics.
Before 1 January 2026:
This model no longer applies for lessee recognition. Understanding the previous framework remains relevant for comparative reporting and historical financial statements.
Read more: Discount rates in FRS 102: How it differs from IFRS 16 and understanding OBR.
No. From 1 January 2026, most leases must be recognised on the balance sheet. The operating vs finance classification no longer determines recognition for lessees.
Short-term leases (12 months or less) and qualifying low-value asset leases may be exempt.
No, unless they meet a specific exemption. Most property leases are now recognised as right-of-use assets and lease liabilities.
The recognition model is similar, but IFRS 16 remains more detailed and prescriptive in certain areas.
Incomplete lease identification and weak documentation of lease term and exemption judgements.
Disclaimer: House of Control is a software company. We do not offer FRS 102 compliance consulting services. Thus, following this guidance does not guarantee compliance with all FRS 102 legal requirements. The contents of the article are based on our own research of the FRS 102 requirements and our experience with lease accounting, and includes inspiration from various actors offering compliance services. We do not assume any responsibility or liability for any failure to comply with FRS 102 requirements or resulting from the use of this guidance.