Changes to UK GAAP FRS 102 are on their way and the revised standard will fundamentally alter the treatment of leases for consumer businesses, by eliminating the difference between finance and operating leases.

As a result of the changes to FRS 102, there will now be a requirement for lessees to bring most operating leases (except for short-term leases and leases of low-value assets) onto the balance sheet.

Understanding and preparing for this change is crucial. Here, we explore the impact of the new lease accounting requirements and provide insights into the considerations for consumer businesses.

What impact will the changes to FRS 102 have on lease accounting for consumer businesses?

It is common practice for consumer businesses to lease their properties.

Under the current FRS 102, operating leases are not reflected on the balance sheet. Lease costs are typically recorded as rental expense, which keeps the lease obligations off the company's balance sheet. However, the revised FRS 102 mandates that all leases, except for short-term leases and leases of low-value assets, must be capitalised.

For consumer businesses, which often lease retail spaces, office buildings, or warehouses, this change will significantly alter the appearance of the financial statements. This shift means that right-of-use assets and associated liabilities will potentially have a consequential effect on key financial metrics such as leverage ratios and EBITDA, which may impact debt covenants, credit ratings and the tax position.

As property leases usually last for several years, existing arrangements will likely be caught by the changes to FRS 102, despite the effective date being 1 January 2026.

UK GAAP FRS 102 implementation challenges

Given the complexity and potential impact of these changes, consumer businesses should start preparing in advance of the effective date.

For those businesses with a significant portfolio of leases, gathering the required information on existing leases will be critical to an orderly and smooth transition. In addition, data will need to be captured for new leases at the outset. Companies will need to develop robust systems and processes to manage this ongoing compliance.

FRS 102 considerations for consumer businesses

As businesses gear up for the application of the new FRS 102 standard, several issues require careful attention, including:

• Uncertainty of lease term – where lease agreements include extension and termination options, assessment is required whether these options will be exercised. Under the amended FRS 102, the calculation of the lease liability and right-of-use asset includes consideration of management’s intentions at lease inception. For rolling leases with terms of less than one year, businesses may need to reevaluate whether they can continue to be treated as short-term leases.
• Variable lease payments – where rent payments are linked exclusively to turnover, these leases may be off-balance sheet. Where rent payments are not a fixed amount, the calculation of the lease liability may not be straightforward.
• Determining the discount rate – the discount rate used to calculate the present value of lease liabilities is crucial but can be complex to determine. Companies must use the interest rate implicit in the lease if readily determinable. If not, they use either their incremental borrowing rate, which requires an understanding of the company's creditworthiness and borrowing terms or their obtainable borrowing rate.

Other changes to UK GAAP FRS 102

In addition to the changes to lease accounting, several other important updates will affect financial reporting under FRS 102. The changes will also see the alignment of Revenue Recognition under UK GAAP with IFRS 15’s comprehensive five-step model.

There will also be enhancements in fair value measurement, changes in the accounting for business combinations, expanded disclosures for supplier financing arrangements, guidance on uncertain tax positions, and updates to the accounting for share-based payments. It is crucial for businesses to not only prepare for the major changes in lease and revenue accounting but also to stay informed and ready for these additional modifications to FRS 102.

How we can help

We have a dedicated team of accounting and financial reporting experts experienced in accounting for the new revenue and leasing requirements, together with other changes to FRS 102.

We can help you understand the impact of the amended standards on your management information, financial statements, and business operations, providing practical guidance on how to implement them effectively and efficiently.

We can also help you plan your communications with your stakeholders and ensure that your financial statements are clear, transparent and compliant with the new requirements.

If you require any support or would like to discuss financial reporting for your retail or consumer markets in more detail, please contact Danielle Stewart OBE, Helen Jones or your usual RSM contact.