Big changes are coming to UK and Irish financial reporting. Following its 2024 periodic review, the Financial Reporting Council (FRC) has updated FRS 102, Section 20 “Leases”, bringing it closer to the IFRS 16 lease model.

From 1 January 2026, most leases will now appear on the balance sheet for lessees. That means recognising a right-of-use (ROU) asset and a corresponding lease liability for the majority of leasing arrangements including company car and salary sacrifice vehicle schemes.

How will FRS 102 Change?

Under the current FRS 102, most car or equipment leases have been classified as operating leases, with payments simply expensed through the Profit and Loss (P&L).

The revised standard removes the “operating vs finance” distinction for lessees. Instead:

• If you have the right to use an identifiable asset for a period of time in exchange for payment, the lease goes on balance sheet.

• You’ll recognise:

  • A Right-of-Use Asset (cost less depreciation)

  • A Lease Liability (present value of future lease payments)

• Expense recognition changes from a simple “rental cost” to:

  • Depreciation of the ROU asset, plus

  • Interest expense on the lease liability

Exemptions:

Consistent with IFRS 16, lessees may elect to:

• Keep short-term leases (12 months or less, including those with less than 12 months remaining at transition)

• Keep low-value leases off-balance-sheet, continuing to charge rental expense to the P&L.

Transition

Businesses are not required to reassess historic contracts to determine whether they contain a lease prior to transition. Comparative restatement is not mandatory; instead, the cumulative impact is recognised as an adjustment to opening reserves at the transition date.

Impact on Company Cars

For companies that lease vehicles for employees, the accounting will now look very different.

• Each car lease will appear on the balance sheet as an asset and a liability.

• Profit and loss impact changes: instead of a straight rental expense, there’s depreciation and interest.

• Key metrics like EBITDA, gearing and interest cover will shift as operating costs reduce but finance charges increase.

• Lenders and stakeholders may need reassurance that higher liabilities simply reflect accounting, not new borrowing.

Even where the lease is “bundled” with maintenance or insurance, the embedded lease component must still be identified and treated under Section 20.

Salary-Sacrifice Vehicle Schemes

Salary-sacrifice car schemes are increasingly popular with employers seeking to offer flexible benefits. However, under the revised FRS 102 (effective for accounting periods beginning on or after 1 January 2026), these arrangements will also attract on-balance-sheet lease accounting.

Here’s what it means:

• The employee’s salary reduction doesn’t remove that accounting requirement, it offsets payroll costs in the income statement.

• The employer’s lease with the provider becomes a right-of-use asset and a corresponding lease liability.

• The maintenance or service element of the lease remains a non-lease component and continues to be charged directly to the profit or loss account.

As the employer and employee enter into an agreement that allows the employee to use the leased vehicle in exchange for a reduction in gross salary, this may resemble a sublease. The accounting treatment depends on who controls the ROU asset:

• In most cases, the employer retains control, so the arrangement is treated as an employee benefit, not a sublease. The related lease cost (net of employee contributions) is recognised in the P&L.

• Only where a genuine sublease exists,typically if the employer acts as an intermediate lessor granting the employee specific rights of use,will sublease accounting apply. Under revised FRS 102, such subleases are classified by reference to the ROU asset, and many will meet the definition of a finance lease.

What Employers Should Do Now

We encourage all businesses to discuss the upcoming FRS 102 lease accounting changes with their accountants and financial advisers to understand the full impact on their reporting obligations. 

If your company cars or salary sacrifice vehicle schemes are managed through Lease Electric, please get in touch we’ll provide you with an updated vehicle inventory spreadsheet and ensure your fleet records are aligned with the new requirements.

If you’d like additional support in reviewing your fleet strategy or understanding how these changes may affect your business, speak with our team we’re here to help you plan ahead with confidence.

This is Lease Electric's interpretation of UK GAAP (Generally Accepted Accounting Practice in the UK) and the incoming changes to FRS 102 . To navigate these complexities, Lease Electric recommends consulting your financial advisor, accountant or auditors.