FRS102: Lease Accounting - my experience of implementation
FRS 102 lease accounting: what implementing the changes actually involved
There are plenty of articles in the ether about the changes to lease accounting under FRS 102. Much of it explains the technical requirements: recognising right-of-use assets and lease liabilities, replacing rental charges with depreciation and interest, and preparing the necessary disclosures.
Having recently supported a client through early adoption for the year ended 31 December 2025, I wanted to share the practical experience of getting it done.
For a business with multiple property leases, this was a substantial exercise. The calculations took time, but so did working through the judgements, agreeing the treatment with the auditors and making sure the statutory accounts explained the outcome clearly.
Getting the spreadsheet to balance was one milestone, but agreeing the numbers and the narrative ready for signed accounts was another.
The formula needs decisions behind it
A lease calculation can look straightforward once all the inputs are agreed. Establish the payments, determine the term, apply a discount rate and calculate the liability.
However, with multiple properties, you need to understand the individual agreements and how they relate to the accounting records. A model helps, but it cannot resolve differences in contractual terms or decide how a particular payment should be treated.
Each judgement needs a rationale that someone else can follow and that becomes particularly important when it comes to audit review.
Determining the discount rate
The discount rate is easy to regard as a single input in a spreadsheet. It can have a material effect on the result.
At transition, the revised standard allows the use of the lessee’s incremental borrowing rate or obtainable borrowing rate. Establishing an appropriate rate still requires consideration of the borrowing circumstances and the relevant lease term. What if you don’t have any borrowing? How do you know what rate to use?
In practice, it’s about understanding what evidence supports the rate you propose to use, whether the same approach is appropriate across the entire lease portfolio and documenting the conclusion.
The key takeaway for me here was to discuss the methodology with the auditors early. Building the model around a provisional rate is useful, but getting the methodology and rate agreed before producing the numbers can avoid rework.
The lease term needs commercial input
The expiry date in the agreement does not always settle the accounting term.
Break clauses and extension options require consideration, including how reasonably certain the business is to exercise an option. That brings commercial knowledge into the accounting exercise.
How important is the property to the operation? What investment has been made in the site? What would relocation involve? What evidence supports management’s assessment?
It is important for Finance to get involved and understand the business’s intentions and the circumstances behind them, before assessing those against the accounting requirements. Even assumptions that the operational team think are obvious need to be explained and supported for audit purposes.
Lease premiums need attention
Lease premiums were another area requiring careful consideration.
The label alone does not determine the treatment. You need to understand what the payment related to, who received it, how it was accounted for previously and what carrying balance remains at transition.
That means going back to the underlying agreement and following the amount through the existing accounts before deciding how it fits into the new accounting.
It is also an area where the right-of-use asset and lease liability need to be considered separately. A payment already made does not need discounting and the transition at net book value needs the appropriate treatment, without omitting or double counting an existing balance.
Allow for several rounds with the auditors
Getting both the calculations and the notes agreed was quite an iterative process with the auditors and I would advise making sufficient time for this to be the case.
Questions about assumptions required explanations and supporting evidence. Changes to the calculations then needed to flow through the journals, supporting schedules and disclosures.
A model can be mathematically correct, while still leaving questions about its underlying judgements or its presentation in the accounts. I would recommend keeping a clear, version-controlled record of the assumptions, evidence, queries and conclusions. It also helps everyone work from the same position, reducing the risk of an agreed change appearing in one lease but being missed elsewhere.
The disclosures are a significant part of the job
This was one of the biggest lessons from the implementation.
Whilst lease comparatives are not restated on transition, the accounts did need to explain a current year using the new lease accounting alongside comparatives, prepared under the previous requirements. Readers of the accounts need to understand why assets, liabilities and expenses have changed, and how much of that movement reflects the accounting change rather than a change in trading.
The transition disclosures also need to connect the previous operating lease commitments with the opening lease liability, explaining relevant differences such as discounting and changes in the assessed lease term. Producing those notes requires more than copying figures out of the model. The narrative, reconciliations and accounting policies need to tell the same story as the primary statements.
What I learnt from this process and would tell another finance team
The main learnings for me of this process were:
Start outlining your assumptions early, particularly the discount rate, lease term and treatment of existing lease balances. Bring the auditors into those discussions before the model and draft accounts are too far advanced.
Build the disclosures alongside the calculations. They often expose more questions that you’ll need to answer.
Allow enough time for review and revision. Implementation involves technical accounting, commercial judgement, detailed reconciliations and clear communication, all within the statutory reporting timetable.
Having taken a client through early adoption, I now have a much clearer view of the work involved. If your business needs support with the first-year adoption of these lease accounting changes, please reach out to Insight FD. I help businesses turn complex finance requirements into practical, deliverable work, supporting teams through the calculations, audit discussions and reporting requirements.
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