Important changes to accounting standards came into force on 1st January 2026, with significant implications for how leases are treated in accounts and simplified rules for balance recognition.
The latest amendments to FRS 102 are intended to further align UK accounting practices with IFRS international standards. FRS 102 was introduced in 2015 to replace the old UK GAAP standards and applies to most UK companies that do not have to follow the IFRS directly.
On-balance sheet accounting for operating leases
The biggest changes relate to operating leases, or those where the lease contract permits use of an asset without any transfer of property rights. In UK accounting practice, these types of leases have always been treated differently to finance leases, where the contract does stipulate the eventual transfer of ownership of the asset. Up until now, there’s been no requirement to record assets held under an operating lease on the company balance sheet.
At present, leases are split into two categories:
- Finance leases – recognised on the balance sheet, with both an asset and a liability.
- Operating leases – kept off balance sheet, with rental payments simply expensed.
This distinction has allowed many businesses (especially in retail, hospitality, and transport) to keep large commitments out of their reported liabilities.
| Balance Sheet | Before | After New Rules |
| Assets | No assets recognised | Right of Use Asset |
| Liability | No liability recognised | Lease Liability |
| Profit and Loss | Before | After New Rules |
| Lease Expense | Rent Paid | Eliminated |
| Depreciation | N/A | On RoU asset |
| Interest Expense | N/A | On lease liability |
| EBITDA | Lower | Higher |
The amended FRS 102 includes a new balance sheet category for ‘right of use’ (RoU) assets – i.e. those held under an operating lease. The value of RoU assets must be recorded along with a corresponding lease liability, or the value of future lease payments.
The changes will be felt most keenly if an operator has office premises or high-street stores, where leaseholds without transfer of ownership rights are the norm. In practical terms, companies renting property and equipment that will eventually be returned to the owner face a switch from accounting for a fixed periodic rent expense to having to consider depreciation of the asset’s value and interest on the lease liability.
While the new rules will apply to most operating leases, exemptions remain for short-term leases under 12 months and for certain low-value assets like IT equipment. These can continue to be treated as ‘straight line’ rental expenses in profit and loss accounts only.
Revenue recognition based on transfer of control
The other key change to be aware of in FRS 102 is the introduction of a new revenue recognition model. Under the existing system, consideration of when revenue is earned has been based on analysis of transfer of risk and reward between vendor and customer.
From 1st January, emphasis will switch to considering when control of an asset changes hand. In support of this, the new standards introduce a much more prescriptive five-step model for working out when control transfers. This should provide greater clarity to accountants and finance teams, but also sets the bar higher for ensuring the standards are followed to the letter.
In travel, Each booking has a myriad of different elements to it; accommodation, transfers, flights, activities etc. Previously the total package would be recognised once the customer departed. Now, of the total package, revenue must be proportioned out for each element and recognised as they are fulfilled.
Travel Agents – You will still recognise the commission you are paid as income. This will be once your service is complete and non-refundable.
Vouchers- If you give out reward vouchers or points these need to be accounted in a different way. For example airline frequent flyer point schemes.
Under the new revenue recognition changes, operators will need to watch out for those bookings which straddle over their financial year-end. Apportioning out elements of fulfilment of the trip across the two financial years.
What does this mean for my business?
If you have not already reviewed your accounting practices in lieu of these changes, especially with regards to any operating leases you hold, the time to act is now. Importantly, the changes to accounting treatment could have consequences for your business. The removal of operating leases from operating expenses will push EBITDA up, while the depreciation of RoU assets and liabilities on the balance sheet will affect net profit calculations. These could all have implications for financial performance reporting, potentially affecting debt covenants and investor relations.
Zoe Powell
Director – Travel, Hospitality and Leisure
Email Zoe.Powell@xeinadin.com