1. Leases: Moving (Almost) Everything On-Balance Sheet
What’s Changing?
Under current UK GAAP (FRS 102), operating leases are typically kept off the balance sheet, with lease payments recognised as an expense over time.
From 1 January 2026, almost all leases will move “on-balance sheet.”
Companies will now recognise:
A Right-of-Use (ROU) Asset – representing the right to use the leased item
A Lease Liability – representing the obligation to make lease payments
This mirrors the approach under IFRS 16.
What Does This Mean in Practice?
Businesses with leased:
Office buildings
Vehicles
Plant and machinery
IT equipment
will likely see:
📈 Higher total assets
📈 Higher total liabilities
📊 Changes to key ratios (e.g., gearing, EBITDA, return on assets)
Why This Matters
1. Loan Covenants
Increased liabilities could impact debt-to-equity ratios and covenant calculations. Businesses should review agreements early and consider renegotiation if needed.
2. EBITDA Changes
Instead of a single lease expense, companies will record:
Depreciation of the ROU asset
Interest expense on the lease liability
This often increases EBITDA, which could affect performance metrics and bonus structures.
3. Systems and Processes
Companies will need accurate lease data, including:
Lease terms
Discount rates
Renewal options
Variable payments
2. Revenue Recognition: Introduction of a 5-Step Model
What’s Changing?
Revenue recognition under UK GAAP will adopt a new 5-step model, closely aligned to IFRS 15.
The 5 steps are:
Identify the contract with a customer
Identify performance obligations
Determine the transaction price
Allocate the transaction price to performance obligations
Recognise revenue when (or as) obligations are satisfied
Who Will Be Most Affected?
This change will particularly impact businesses that:
Deliver staged or milestone-based projects
Offer bundled goods and services
Provide long-term service contracts
Include performance bonuses or variable consideration
Key Impacts
1. Timing of Revenue Recognition
Revenue may be recognised:
Earlier, if performance obligations are satisfied over time
Later, if revenue must wait until control transfers
This could significantly alter reported profits between periods.
2. Greater Judgement Required
Companies will need to assess:
Whether performance obligations are distinct
Whether revenue is recognised over time or at a point in time
Estimates of variable consideration
This increases reliance on professional judgement and documentation.
3. Enhanced Disclosures
Expect more detailed disclosures explaining:
Contract balances
Judgements made
Revenue breakdowns
Strategic Considerations for Businesses
1. Impact Assessment
Businesses should conduct a detailed impact assessment now:
Quantify balance sheet changes from leases
Model revenue timing differences
Review covenant sensitivity
2. Stakeholder Communication
Proactively engage with:
Lenders
Investors
Directors and shareholders
Transparency will help avoid surprises.
3. System and Training Updates
Finance teams may need:
Updated accounting software
Lease tracking systems
Training on the 5-step revenue model
How JSB Accountants Can Help
Preparing for these changes requires more than just technical knowledge, it requires forward planning and commercial awareness.
JSB Accountants can support your business by:
Conducting a detailed impact assessment on leases and revenue
Modelling covenant implications and liaising with lenders
Reviewing existing contracts for revenue recognition implications
Assisting with transition calculations and opening balance adjustments
Updating accounting policies and disclosures
Providing training for finance teams and directors
Offering ongoing compliance and advisory support
Whether you operate a growing SME or a more complex group structure, early preparation can reduce disruption and protect your financial position.
Final Thoughts
The 1 January 2026 changes to UK GAAP represent one of the most significant shifts in UK financial reporting in recent years.
For some businesses, the impact will be modest.
For others, particularly those heavily reliant on leased assets or complex revenue contracts, the effect could be substantial.
Early action is key.
If you would like to understand how these changes may affect your business, speak to JSB Accountants to start planning now and ensure you are fully prepared for 2026.
As a family-run company, we pride ourselves on providing a bespoke service tailored to your particular needs.
Above all, our objective is to save you time, money and effort in managing your accounts, leaving you free to focus on building your business.
Remember, you’re not alone, we’re always here to help if you have an accounts problem or query
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