A lessee first applying the revised Section 20 of FRS 102 does not restate its comparatives. At the start of the first period on the new rules it recognises a lease liability for each former operating lease at the present value of the remaining payments, and a right of use asset normally equal to that liability adjusted for prepaid or accrued rent. Paragraphs 1.45 to 1.55 offer practical reliefs that can remove many leases from the exercise altogether.

When does the transition happen, and are comparatives restated?

Paragraph 1.37(b) makes the Periodic Review 2024 amendments, including the new lease rules, mandatory for accounting periods beginning on or after 1 January 2026. Early application is allowed only if all the amendments are applied at the same time. Paragraph 1.40(a) defines the date of initial application as the beginning of the reporting period in which the amendments are first applied.

  • A company with a 31 December year end has a date of initial application of 1 January 2026.
  • A company with a 31 March year end first applies the rules for the year beginning 1 April 2026, so that is its date of initial application.

For the wider package of changes, see FRS 102 changes from January 2026. This page deals only with getting existing leases onto the balance sheet.

The comparative year is not restated. Paragraph 1.46 requires retrospective application, but only in the modified form set out in paragraphs 1.47 to 1.50. Paragraph 1.47 says a lessee shall not restate comparative information and instead recognises the cumulative effect of the change as an adjustment to opening retained earnings, or another component of equity, at the date of initial application. The prior year figures stay as originally reported under the old operating lease model.

Do contracts have to be reassessed to see whether they contain a lease?

Not necessarily. Paragraph 1.45 is a practical expedient: the company may apply the revised Section 20 to contracts previously identified as containing a lease, and not to contracts that were not. If it uses the expedient it must apply it to all contracts and disclose that it has done so. This saves a contract by contract review, but it also means an arrangement that was wrongly classified before is not picked up at transition.

How are former operating leases measured?

Unless the group IFRS 16 option described below is used, paragraph 1.51 applies to each lease previously classified as an operating lease:

  1. Lease liability. The present value of the remaining lease payments, discounted at the lessee’s incremental borrowing rate or its obtainable borrowing rate for each lease at the date of initial application.
  2. Right of use asset. An amount equal to the lease liability, adjusted for any prepaid or accrued lease payments in the balance sheet immediately before the date of initial application. Adjustments are also made where the lessor provided a government grant element.
  3. Impairment. Section 27 is applied to the right of use assets at the date of initial application, unless the onerous lease expedient below is used.

The glossary defines the incremental borrowing rate as the rate the lessee would pay to borrow, over a similar term and with similar security, the funds needed to obtain an asset of similar value to the right of use asset. The obtainable borrowing rate is the rate it would pay to borrow, over a similar term, an amount similar to the total undiscounted lease payments. The FRC added the obtainable rate as a simpler alternative (paragraph B20.12(a)). A public benefit entity that cannot readily determine either may use the rate it could obtain on deposits (paragraph PBE20.50).

Because the asset starts at the same figure as the liability, adjusted only for existing prepayments or accruals, the opening equity adjustment for most simple leases is small or nil. HMRC’s Business Leasing Manual at BLM52005 makes the same point, saying that under the revised FRS 102 there will be fewer situations where a transitional adjustment is likely to arise than under IFRS 16.

Which practical reliefs are available?

Paragraph 1.52 removes certain leases from the measurement exercise:

  • no transition adjustment is needed for leases of low value assets that will be accounted for under the paragraph 20.6 exemption;
  • no adjustment is needed for leases previously accounted for as investment property at fair value; and
  • a former operating lease that will be investment property is measured at fair value.

Paragraph 1.53 then allows these expedients, chosen lease by lease:

  • a single discount rate for a portfolio of leases with reasonably similar characteristics;
  • relying on the existing Section 21 onerous lease assessment instead of an impairment review, reducing the right of use asset by any onerous lease provision;
  • treating leases that end within 12 months of the date of initial application as short term leases; and
  • using hindsight, for example to set the lease term where there are extension or break options.

Paragraph 1.48 offers a further option for subsidiaries: a lessee may bring in the carrying amounts of its lease liabilities and right of use assets calculated under IFRS 16 for its group’s IFRS consolidation. That choice must be applied to all leases and disclosed. The ongoing exemptions are explained in short term and low value lease exemptions.

What about finance leases, lessors and sale and leasebacks?

For a lease previously classified as a finance lease, paragraph 1.55 carries the existing leased asset and finance lease liability across as the right of use asset and lease liability. A lessor makes no transition adjustments (paragraph 1.56), except an intermediate lessor, which must reassess subleases previously classified as operating leases on the remaining terms at the date of initial application (paragraph 1.57); see lessor accounting under FRS 102. Paragraph 1.58 says sale and leaseback transactions before the date of initial application are not reassessed to decide whether there was a sale.

What does a worked example look like?

Illustration only. A company with a 31 December year end rents an office. At 1 January 2026 four annual payments of £20,000 remain, each paid at the end of the year. Because of an earlier rent free period, the balance sheet at 31 December 2025 includes an accrual of £5,000. The company’s obtainable borrowing rate is 6%. It also rents a storage unit on a lease ending in October 2026.

At 1 January 2026 £
Lease liability: present value of four payments of £20,000 at 6% 69,302
Less the accrual derecognised (5,000)
Right of use asset 64,302
Adjustment to opening retained earnings Nil

The storage unit lease ends within 12 months, so under paragraph 1.53(c) it stays off the balance sheet and its cost is shown with short term lease expense. In 2026 the office lease gives interest of £4,158 (6% of £69,302) and straight line depreciation of £16,076 over the remaining four years. After the first payment the liability is £53,460. The 2025 comparatives are not changed.

What has to be disclosed?

  • A description of the transitional provisions applied (paragraph 1.50), and disclosure of the paragraph 1.45 and 1.48 expedients if used.
  • Paragraph 1.44 removes the usual paragraph 10.13(b) to (d) disclosures for the Section 20 change, but requires the current period adjustment to profit or loss from applying the revised section, so far as practicable, or an explanation of why it is impracticable.
  • Small companies using Section 1A must give a general description of significant leasing arrangements (paragraph 1AC.31A) and the disclosures on short term leases, low value leases and variable payments (paragraph 1AC.32A). See Section 1A.

How is the transition treated for tax?

HMRC’s BLM50005 says the same basic principles remain for taxing a right of use lessee, with most rentals still on revenue account. BLM52005 explains that Schedule 14 to the Finance Act 2019 requires transitional adjustments arising when right of use assets for existing leases are first recognised, in periods of account beginning on or after 1 January 2019, to be spread over the mean average length of the leases giving rise to them. Deferred tax may also need revisiting; see deferred tax under FRS 102.

What mistakes come up most often?

  • Restating the comparative year, which paragraph 1.47 does not allow.
  • Leaving existing rent accruals, prepayments or lease incentive balances on the balance sheet as well as recognising the new asset.
  • Using the paragraph 1.48 IFRS 16 option when no group IFRS figures exist.
  • Applying the paragraph 1.45 expedient to some contracts but not others.
  • Skipping the impairment or onerous lease check on the opening right of use assets.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.