With stricter audit demands under FRS 102 Section 20, preparing your leases properly is the key to a faster and more affordable audit.
The transition to the revised FRS 102 Section 20, effective for periods beginning on or after 1 January 2026, marks a major shift for UK and Irish SMEs. The old distinction between operating and finance leases is removed. From now on, nearly all leases now appear as right-of-use assets and lease liabilities on the balance sheet.
For CFOs and finance teams, this means your next audit (and every audit after that) will place far deeper scrutiny on your lease accounting than ever before.
Auditors will no longer review a simple rental expense: they will test calculations, remeasurements, completeness of your lease population, judgement areas such as the OBR and the IBR, and the strength of your audit trail. Preparation is everything.
The Obtainable Borrowing Rate (OBR) is introduced as part of the revised FRS 102 Section 20. OBR focuses on the rate you can obtain to borrow the amount needed to cover the remaining lease payments, without the detailed asset-by-asset analysis required under an Incremental Borrowing Rate (IBR).
This makes OBR easier to calculate, easier to document and easier to explain to auditors. It is typically the preferred choice for companies with many smaller or standardised leases, or for organisations that have not previously worked with IFRS 16-style discount rate models.
Read more: 2026 profit changes under FRS 102 Section 20: Explaining the new UK GAAP lease P&L to the board.
Summary
- Audits under the revised FRS 102 Section 20 focus on balance sheet accuracy, completeness of leases, and defensible documentation.
- CFOs must be ready to prove their methodology for key judgements, including the Obtainable Borrowing Rate (OBR) and the Incremental Borrowing Rate (IBR).
- Remeasurements are major audit focus areas, including CPI-linked adjustments and lease terminations.
- A centralised, auditable system is the most reliable way to ensure accuracy and reduce audit workload.
- House of Control’s new Lease Accounting Software for FRS 102 is a solution based on our IFRS 16 software, and is a mature, proven solution backed by Visma. More information about this solution will be shared early 2026.
Why FRS 102 Section 20 changes the audit conversation
The new standard aligns closely with IFRS 16, meaning auditors will test:
- Completeness of your lease population (including embedded leases, assets implicitly controlled by you)
- Accuracy of lease liabilities and right-of-use assets
- Appropriateness of discount rates applied
- Correct handling of modifications and CPI changes
- Consistency of calculations across the full portfolio
- Quality of your audit trail and supporting documentation
This shift elevates lease accounting from a note disclosure to a material balance-sheet issue. In other words: if your lease accounting is wrong, your financial statements are wrong. Auditors will approach it accordingly.
Read more: FRS 102 lease changes 2026 compared with IFRS 16.
Where audits become most challenging
1. Contract identification and completeness
Many errors stem from unknown leases, for example, service agreements containing embedded leases (assets implicitly controlled by you), or contracts sitting outside the finance team’s view. Auditors increasingly test the completeness of the lease population through expenditure reviews, contract sampling, as well as discussions with departmental leaders. A decentralised contract landscape (different teams storing their own spreadsheets) increases audit risk significantly. Centralisation is essential.
2. Critical judgements – especially the IBR and the OBR
The Incremental Borrowing Rate (IBR) is one of the most scrutinised judgements in any FRS 102 Section 20 audit. Auditors will expect:
- A documented, repeatable IBR methodology
- Consistency across similar leases
- Justification for assumptions such as term, currency, credit risk and market conditions
- Clear evidence of governance and review
If your IBR policy cannot be defended, the audit will slow down, and may even require recalculation.
The same applies to the Obtainable Borrowing Rate (OBR). OBR is simpler to determine, but it must still be supported by:
- Evidence of the rate the business can realistically obtain in the market
- A clear explanation of how the rate was derived
- Consistency when applying the rate across groups of similar leases
- Documentation showing why OBR is appropriate compared with IBR
Auditors will expect OBR to be more than a shortcut. It must be a reasonable, supportable estimate, backed by market data or borrowing evidence. If the rationale is weak or undocumented, the audit will be just as demanding as with a poorly prepared IBR. A well-governed OBR process gives you the benefit of simplicity.
3. Ongoing management: CPI, indexation and modifications
Leases are not static. Common “pain points” in Section 20 audits include CPI-linked rent reviews, lease extensions or early terminations, changes in scope, and variable or contingent payments.
Each event requires a specific type of remeasurement, using the correct discount rate and fully documented judgements. Under manual methods, this is labour-intensive and error-prone. Under audit, every undocumented judgement becomes a query.
Why spreadsheets struggle in audits (short version)
Although Excel is a familiar tool, it rarely meets modern audit expectations under Section 20. The core issues are:
- Lack of control: Formulas can be overwritten without traceability.
- No audit trail: Auditors cannot see when or why numbers changed.
- Inconsistency: Even small formula differences create divergent results.
- Scalability: Portfolios above 15–20 leases become increasingly fragile.
For an auditor, a spreadsheet is not evidence – it is a risk indicator.
The three pillars of audit readiness
Modern FRS 102 Section 20 compliance requires three core controls. These can be achieved manually in theory – but in practice, they require a dedicated lease accounting system.
Pillar 1: Full transparency and centralisation
Auditors expect your entire lease population to sit in a single source of truth. Here, every contract is captured, metadata is consistent, and documents are stored alongside calculations. There is a trail where changes are visible, and links to source contracts exist. This eliminates the biggest audit risk: incomplete lease registers.
Pillar 2: Automated accuracy and consistency
Audit success depends on whether calculations can be trusted. A system ensures:
- Uniform liability and ROU asset calculations
- Correct discounting
- Consistent handling of consumer price indexes (CPI) CPI/indexation
- Accurate remeasurements
- Reliable amortisation schedules
- Currency and entity-level consistency
Automation removes the errors auditors spend hours trying to replicate or correct.
Pillar 3: Immutable documentation and audit trail
Auditors require clear, defendable evidence for IBR or OBR selection, lease classification, and modification decisions. Also, the auditor wants to review your exemptions, contract inputs, and remeasurement calculations. A modern lease accounting system provides full change logs, timestamps, and user history. This allows auditors to verify every judgement quickly and confidently.
How software transforms the audit experience
A specialist solution like House of Control Lease Accounting Software for FRS 102 provides a structured, audit-ready workflow. It has been refined since 2019 through input from hundreds of Scandinavian and European listed companies and is backed by the Visma group.
Key advantages include:
- Instant access for auditors (read-only)
- Centralised contract archive
- Automatic handling of CPI and modifications
- Consistent, system-driven calculations
- Easy extraction of notes, journals, and disclosures
- Audit-ready history logs
Instead of auditors recreating spreadsheets and questioning formulas, they verify system-generated numbers and drill down to source documents in seconds.
Conclusion: From audit anxiety to audit advantage
Preparing for an audit under the revised FRS 102 Section 20 is not just compliance. It may be your best opportunity to demonstrate control, strengthen financial governance, and streamline year-end.
With centralised data, consistent calculations, and a robust audit trail, CFOs move from reactive firefighting to confident, continuous compliance. The result is fewer queries, faster audits, and stronger trust from stakeholders.
Read more: Revised FRS 102 vs the pre-2026 FRS 102 and older UK GAAP explained.
Key takeaways
- Start early: Migrate your lease data to a centralised system well before year-end.
- Document the IBR or the OBR: Auditors will expect a clear, defensible methodology, including for your transition approach.
- Prepare for CPI and modifications: Ensure remeasurements are handled accurately and documented.
- Strengthen your audit trail: Immutable logs and centralised documentation reduce audit time dramatically.
- Aim for continuous compliance: With the right system, your lease portfolio remains audit-ready every day of the year.
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