Significant amendments to FRS 102 are coming into effect from 1 January 2026, and they will have a direct impact on many Hospitality businesses. With a large proportion of operators holding sites on a leasehold basis, both the Balance Sheet and Income Statement will look very different once the new rules are adopted. Below is a practical overview of what’s changing and what businesses with leasehold properties need to consider ahead of implementation.
What’s changing?
Under the current standard, leasehold properties are generally accounted for by recognising lease payments as an expense in the Income Statement, on a straight line basis over the lease team. The revised FRS 102 introduces a more comprehensive approach aligned with the principles of IFRS 16, requiring most leases to be brought onto the Balance Sheet.
The most significant change is the introduction of the Right-of-Use (RoU) asset:
- Leasehold properties and other relevant leased assets will now be recognised as RoU assets on the Balance Sheet.
- A corresponding lease liability will be recorded, representing the obligation to make future lease payments.
The changes apply to all leases that are not classified as either short-term (less than 12 months) or low value. While no specific monetary threshold is provided for low-value assets, the guidance suggests laptops and furniture items will qualify, but larger items, such as vehicles, will not.
Impact on the income statement
Under the revised standard, lease costs will no longer sit entirely within administrative expenses. Instead, they will be split between:
- Depreciation of the RoU asset: The RoU asset will be depreciated over the lease term. This amount will differ from the rent expense previously recognised.
- Interest on the lease liability: Interest will accrue on the liability, resulting in higher total lease-related costs in the early years of the lease due to the front-loaded nature of interest charges.
This shift alters the pattern of expense recognition. Although cash outflows for lease payments remain unchanged, hospitality businesses, especially those with long leases, may see early-period profitability dip compared to the old treatment.
For businesses that monitor EBITDA, this metric will generally increase, as rent charges will be replaced by depreciation and interest, neither of which are included in EBITDA.
Greater Balance Sheet complexity
Bringing RoU assets and lease liabilities onto the Balance Sheet will substantially increase both total assets and total liabilities.
The key considerations here are:
- Values are based on non-cancellable lease terms and the present value of future lease payments.
- Variable payments, including turnover rent, are generally not included in the initial liability. As a result, turnover-linked leases typically lead to lower recognised assets and liabilities, but they will also reduce EBITDA.
These additions will affect a range of financial metrics, including gearing, liquidity ratios, and potentially credit assessments. Lenders and investors will now see more substantial long-term commitments reflected on the Balance Sheet, which could influence discussions around covenants or risk assessments.
Cash flow treatment
Despite changes to the Income Statement and Balance Sheet, cash flow is unaffected. Lease payments will continue to be recognised as operating cash outflows. Only the presentation within the financial statement changes, not the underlying cash movements.
Strategic and operational implications
The amendments extend beyond compliance and will influence planning, budgeting, and financial decision-making:
- The recognition of lease liabilities may affect creditworthiness and covenant compliance.
- Forecasting models and internal reporting processes may need to be updated.
- Site-level profit monitoring may require revised methodologies as the mechanics of lease cost allocation change.
The new rules may also affect eligibility for small company exemptions. Companies previously below the thresholds may exceed the gross asset limit once RoU assets are recognised, potentially triggering the need for medium-sized accounts and statutory audit.
For group structures where a property company owns the site and an operating company runs the business, it will be essential to assess whether a lease exists between the entities. A formal legal obligation, often linked to a sublease, will determine the accounting treatment. There is no group exemption from these requirements.
Implementation timeline
The amendments apply to accounting periods beginning on or after 1 January 2026.
For example, for those with a December year end:
- If a calendar year-end (31 December) is used: The first affected period will be the year ending 31 December 2026.
- If a 445/52-week reporting basis is used:
- And the 2025 period end falls on 3 or 4 January 2026, adoption will be for the December 2026 year end, aligning with most businesses in 2026.
- And the period end falls on 27 or 28 December 2025, the first affected period will be the December 2027 year-end, though early adoption may be preferable for alignment.
Are you ready for the changes?
The new FRS 102 lease accounting rules will reshape financial reporting for Hospitality businesses starting 1 January 2026. Don’t wait until year-end – start planning now to avoid surprises:
- Review your lease portfolio
- Update forecasting and covenant assessments
- Train your finance team on the new requirements
Need expert guidance?
Contact our Hospitality team today to ensure your business is prepared for a smooth transition. Get in touch with Isabelle Shepherd, Hospitality Partner, to find out more.
