For accounting periods beginning on or after 1 January 2026, there are significant changes to UK Generally Accepted Accounting Practice (UK GAAP). One of the key areas of amendments relates to lease accounting and below we consider what these changes are, the impact and what action you should take.
What are the changes?
The upcoming changes impact operating leases (also known as ‘off balance sheet’ leases). These are leases where you have the right to use an asset without owning it. Until now rental expenses for operating leases have been recognized on a straight-line basis over the lease term, in the profit and loss account. Under the new amendments, operating leases will be recognised on the balance sheet. This will mean that a right-of-use asset will be recorded as an asset, with a corresponding liability reflecting the present value of future lease payments. While there are exemptions for short-term (with a lease term of 12 months or less) and low value leases, these changes are expected to affect the majority of operating leases, significantly altering how leases are presented in financial statements.
What could be the impact of this?
Beyond the increase to assets and liabilities, there could be wider implications for your business that should be considered now. These include:
- Increase liabilities on your balance sheet may impact the metrics for borrowings and credit ratings.
- Increase in assets on your balance sheet may cause your organisation to breach the audit thresholds meaning an audit might now be required.
- Earnings Before Interest Tax and Depreciation (EBITDA) may increase, as the operating lease expense will no longer be recorded as a single rental expense in the profit and loss account. Instead, the leased asset will now be subject to depreciation, and interest expense will be recognised on the liability which could alter profitability metrics and affect performance indicators.
When should I act?
The impact of this change may be significant for your organisation and it’s important to act early to ensure the impact is fully understood and all stakeholders are managed. We’d encourage all companies to start thinking about this now.
Key points to start considering include:
- Identify all operating leases your organisation currently holds and the number of such leases.
- Review these leases to assess the impact of the changes, including whether any qualify as low-value leases.
- Evaluate whether lease accounting software is necessary to efficiently manage your leases, depending on the volume and complexity.
- Understand how the amendments will affect your balance sheet and profit and loss account.
- Communicate with lenders and other key stakeholders about the impact of these changes to avoid any surprises.
- Consider the amendments when entering into new leases and assessing the implications when deciding between operating leases, finance leases, or purchasing outright.
- Assess the potential tax implications of the new accounting treatment.
