The majority of businesses will be required to make this significant alteration to their accounting processes to capitalise operating leases as a ‘right of use’ asset due to a major change under FRS 102, the Financial Reporting Standard applicable in the UK and the Republic of Ireland.

Joanna Gray, head of audit and Armstrong Watson, said: “This is a big change in accounting treatment for businesses who use assets that are held under an operating lease agreement.

“The changes do not impact companies under the FRS105 micro regime but if you are a small, medium or large business, it is important to be aware of what is changing and how to prepare for the transition.”

The firm is hosting a webinar to help businesses understand the impact of the incoming requirements and how they can prepare.

For accounting periods commencing on or after 1 January 2026, businesses will need to change the way they account for operating leases. Put simply, they will need to bring high-value operating leased assets onto the balance sheet as a ‘right of use’ asset with a corresponding lease liability. Examples of such assets could include property, motor vehicles or plant and equipment.

There are some exemptions for low-value assets such as small office furniture and mobile phones, and short-life leases of less than 12 months.

Lauren Graham, audit and assurance director at Armstrong Watson, explained that any adjustments will impact a company’s gross asset position, which has the potential to breach company size and audit limits. The change could also impact agreed bank covenants and EBITDA-linked bonuses.

“For a business with a number of operating leases, there will be some work to do to identify operating leases and prepare to bring them on balance sheet, as well as updating their systems and process to comply with the new FRS 102 requirements,” added Ms Graham. “While accounting for new lease changes won’t be mandatory until accounting periods commencing on or after the 1 January 2026, businesses need to be thinking about it now to ensure they are aware of any impacts it may have on the business.”

The webinar, at 9am on 25 June, will cover how business can prepare for the transition, including practical steps to ensure compliance and early adoption strategies. Armstrong Watson is also introducing a free calculator tool available to download following the webinar. To join, please visit armstrongwatson.info/webinar_leases.