Amendments have been issued to FRS102, commencing on or after 1 January 2026 onwards, and these will have a direct impact on many businesses in the hospitality industry. The main change is with regards to lease accounting, and with many in the sector holding their sites on a leasehold basis, both the Balance Sheet and the Income Statement will change significantly going forwards. A practical overview of the changes and their implications for businesses with leasehold properties have been explored below.

Lease Accounting Changes

Under the current standard, businesses that hold leasehold properties generally account for lease payments as an expense in the Income Statement. With the updated FRS 102, businesses will be required to adopt a more comprehensive approach to lease accounting, that is more aligned with IFRS16.

The key change is the introduction of the “right-of-use” (RoU) asset. This means that leasehold properties are brought onto the Balance Sheet as RoU assets, with corresponding lease liabilities, being the obligation to make future lease payments.

The changes don’t just apply to leasehold properties, all leased assets that do not meet the definition or either ‘short’ or ‘low value’ are impacted. Short is considered less than 12 months. There is no specific low value given, instead guidance is given on what is not considered low value.

Impact on the Income Statement

The changes will affect the Income Statement. Under the existing standard, lease payments were recognised in administrative expenses. With the new approach, businesses will need to separate their lease expenses into two components: depreciation and interest:

• Depreciation of the RoU asset: The RoU asset will be depreciated over the lease term. This will not be the same value as the previously recognised rent charge.
• Interest on lease liabilities: The lease liability will incur interest expenses. This will likely result in higher overall costs in the earlier years of the lease, as the interest expense will be larger at the outset of the lease term.

This change will lead to a shift in the timing of expense recognition. Hospitality businesses may experience a higher level of total expenses in the early years of the lease compared to the operating accounting treatment, even though their cash flows for lease payments remain the same.

For businesses that focus on EBITDA, this is likely to increase as the rent charge is removed from administrative expenses and replaced with depreciation and interest that would not be included in the EBITDA calculation.

Increased Balance Sheet Complexity

The value of RoU assets and liabilities brought onto the Balance Sheet is driven from non-cancellable lease team and the present value of lease payments. Variable lease payments, such as turnover rent are typically excluded here. Therefore, leases with a turnover rent will result in lower assets and liabilities on Balance Sheet, and a lower EBITDA, when compared with a lease of the same value fixed rent.

While the balance sheet will provide a more complete view of a company’s obligations, the increased complexity might lead to challenges in financial reporting and analysis.

This accounting change will result in a much larger balance sheet. The recognition of RoU assets and lease liabilities will affect key financial metrics, such as total assets, liabilities, and equity. These changes could influence how investors and lenders view the business’s financial position, as they will now see significant liabilities and assets. The increased liabilities on the balance sheet may affect credit ratings and liquidity ratios, as businesses will be required to show larger short-term liabilities related to their lease obligations. Gearing ratios will also increase due to the higher liabilities.

Implications for Cash Flow

Although the changes to lease accounting will affect the Balance Sheet and Income Statement, they will not impact cash flow directly. Lease payments will still be treated as cash outflows under operating activities.

Strategic Decisions and Financial Planning

The changes are not just an accounting matter, they could have strategic implications. Businesses may need to adjust their financial planning and forecasting processes. The recognition of lease liabilities could affect creditworthiness assessments, and covenant compliance. Hospitality businesses will need to incorporate these factors into their decision-making and financial models to ensure that they remain compliant and financially sound.

Consideration will also need to be given over how these changes impact internal budgeting and management accounts processes, as well as the monitoring of site-by-site results. Management may wish to consider whether to show the lease accounting different for such purposes.

The changes may also impact whether a company or group can take small company exemptions, which can be linked to audit exemptions. Increased RoU assets may see the gross asset threshold for small companies breached, and if turnover or employees are already in excess of the thresholds, movement towards medium company financial statements which include more disclosures, and statutory audit, maybe required.

For groups that have a lease in one company (Propco), and the operations in another company (Opco), consideration will need to be given as to whether a lease exists between the Propco and the Opco. A lease comes down to whether a legal obligation exists between the two entities, which may be linked to whether there is a formal sub-let in place. There is no group exemption for this.

Implementation date

The implementation date impacts periods commencing on or after 1 January 2026 onwards. For those with 12-month reporting periods, and a December year-end for example, the first impacted reporting period will be the one ending 31 December 2026.

For those who use the 445 model, also known as the 52-week period model, consideration should be given as to the period end date for 2025. If this were to fall on the 3 or 4 January 2026, adoption would be in line with the majority of businesses for the 2026 year-end. If this were to fall on 27 and 28 December 2025, then the first impacted period would be the 2027 year end, but early adoption could be considered to ensure alignment with the industry.

While 2026 may seem a long way away, the impact these changes will have, and the addition time required to adjust, should not be underestimated. Get in touch with Isabelle Shepherd, Director, for advice or support with any of the above.