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.
The new standard aligns closely with IFRS 16, meaning auditors will test:
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.
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.
The Incremental Borrowing Rate (IBR) is one of the most scrutinised judgements in any FRS 102 Section 20 audit. Auditors will expect:
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:
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.
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.
Although Excel is a familiar tool, it rarely meets modern audit expectations under Section 20. The core issues are:
For an auditor, a spreadsheet is not evidence – it is a risk indicator.
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.
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.
Audit success depends on whether calculations can be trusted. A system ensures:
Automation removes the errors auditors spend hours trying to replicate or correct.
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.
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:
Instead of auditors recreating spreadsheets and questioning formulas, they verify system-generated numbers and drill down to source documents in seconds.
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.