Changes to UK GAAP - Leases

For periods beginning on or after 1 January 2026, lessees will be required to recognise a new right-of-use asset within fixed assets, which represents the right to use the underlying asset specified in the contract. This, together with a corresponding lease liability, is measured at the present value of the future lease payments.  

The current rental expense will be replaced with depreciation and finance charge. These requirements apply to all leases except those agreed for 12 months or less and those relating to low value assets. 

Subsequently, the right-of-use asset will be depreciated over the remaining term of the lease. The lease liability is decreased by the lease payments and increased by the unwinding of the discount (the finance charge). 

Accounting by lessors has not been significantly changed. 

The headline impact is that for most lessees both assets and liabilities will increase, with a likely increase in EBITDA. Whilst the charge to the income statement may remain largely equal over the lease term, the timing of this will change with a higher finance charge at the start of the lease as the lease liability unwinds. 

The larger balance sheet may trigger change in company size, resulting in additional disclosure and audit requirements. Further, the financial impact of the changes may give rise to a possible covenant breach or alter an entity’s credit rating for future lending, especially where there is a negative impact on interest cover, gearing or net debt ratios. It will be important to also consider the impact on other contractual arrangements where there is a link to performance, such as performance related remuneration and employee bonus and share option schemes. 

Almost all lessees will be impacted to some extent, although those with a higher number of leases on balance sheet will clearly feel the greatest effect.  

Industries that are expected to see significant change are: 

• Retail, hospitality and leisure 
• Professional services 
• Telecoms 
• Shipping 
• Healthcare 
• Aviation 

Practical considerations to start thinking about include: 

• Are changes needed to systems and processes required to identify new leases, extract relevant data and prepare the requisite calculations? 
• Will lease accounting software be required to produce the calculations and manage lease data going forward or will a spreadsheet suffice? 
• How will the completeness and accuracy of lease portfolio data be managed on an ongoing basis? 
• How will the discount rate be determined? 
• How do financial metrics change because of the new requirements? 
  • Is there a change to profit or EBITDA, profit shares, bonus arrangements or any earn-out arrangements? 
  • Do other agreements, such as and loan agreements with covenants linked to profit measures, require renegotiation? 
  • Is there a significant impact distributable reserves, affecting a company’s ability to pay out dividends? 
  • How will investor expectations be managed? 
• How will new leases be identified?  

For businesses with a large number of leases, the adoption of the amendments may require months of preparation.  An early start will minimise disruption and ensure compliance.   

Entities should: 

• Upskill finance and commercial teams to understand the impact on the business 
• Engage early and communicate with stakeholders (particularly lenders) 
• Undertake an impact assessment on lease accounting 
• Gather leases contracts, identify any embedded leases within other contracts and consider what data is needed for calculations 
• Consider future leasing strategy – utilise shorter term lease arrangements or purchase outright 
• Appoint a project sponsor and develop implementation plan 
• Consider systems and IT requirements, particularly where vendor is required