Navigating FRS 102 changes

The ICAEW has updated FRS 102, the accounting standard applicable to most small businesses. One of the changes could mean your business suddenly breaches the audit exemption thresholds.

Most leased assets will be brought ‘on balance sheet,’ increasing the assets and liabilities recognised on the balance sheet. There will also be changes to lease expenses in the income statement. Only short-term leases and leases of low-value assets will remain ‘off balance sheet.’ A leased asset would become a fixed asset, with the lease shown as a liability (split between short and long term), and the annual lease expense would be replaced by depreciation and interest.

Key figures and KPIs could be affected:

• EBITDA increasing by the value of the operating lease expense that is removed
• finance and depreciation costs being higher, which may impact lending covenants
• gross assets used for the company size thresholds
• net current assets - decreased by the new short term liability
• gearing ratios increasing.

Comparatives cannot be restated on initial application of the FRS 102 changes, meaning adjustments will go to reserves at the start of the reporting year. This means that the transition year will look quite different to the prior years.

These changes are effective for periods commencing on or after 1 January 2026. We recommend using the intervening time to understand the impact on your accounts. You may need to talk to lenders about how covenant ratios will be affected, particularly EBITDA and interest cover. Additionally, you may need to budget for the cost of an audit. We recommend identifying all your leases, including any that are embedded in other contracts, and understanding the key terms in the agreements. The calculations may be complex.

Audit exemption thresholds are currently £10.2 million turnover, 50 employees and £5.1 million assets (2 out of 3 breached). If your business rents a property or a large piece of equipment this could be brought onto the balance sheet, increasing the assets value to over £5.1 million. The ICAEW are currently considering an increase in audit thresholds – potentially a 50% increase to the turnover and asset thresholds, which could eliminate this prospect for you.

An audit can be a significant cost, particularly in the initial period, where the current and comparative years must be considered. There are certain audit procedures that can’t be done retrospectively, such as attending stocktakes.

To discuss this, please contact Johnathan Dudley, Talitha Gibney or your usual Crowe contact. As well as helping you plan and assess the impact of your leases, there may be ways to alleviate your situation.