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Changes to UK GAAP FRS 102 are effective from 1 January 2026, with early application permitted. 

As a Real estate company, there are two aspects to the new model for lease accounting which will affect your business. Mainly, it will have a significant impact on your tenants, since they will be required to use an on-balance sheet model for most of their property leases. An exception to this is turnover rent, which your tenants will continue to expense to their P&L as incurred. As a result, your tenants may be more sensitive to changes in the determination of turnover rent going forward.

The new model will have a limited impact on you as a lessor, since lessor accounting requirements are largely unchanged. The majority of your property leases will continue to be classified as an operating lease, with income recognised on a straight line or other systematic basis.

If you do have any property leases classified as a finance leases, variable lease payments will only be included in the initial measurement of the net investment in the lease if they depend on an index or rate. In addition, the amendments introduce guidance on how lessors should account for a modification of a finance lease, depending on whether the modification meets the criteria to be accounted for as a separate lease or not.

The FRS 102 amendments largely align the fair value requirements for investment properties in FRS 102 to the principles IFRS 13 Fair value. Practically, this is unlikely to impact your external property valuations for investment property, but your accounting policies will need to reflect the updated fair value measurement requirements. Furthermore, any ground rent on leasehold investment properties may qualify as a lease and need to be accounted for under the lessee requirements, with recognition of a right-of use asset and lease liability onto your balance sheet.

Given the significant impact of the new lease model on your tenants, you may be asked for details of the unguaranteed residual fair value, your initial direct costs and the fair value of the underlying property. This information will be needed by tenants that wish to use the rate implicit in their property leases for measurement of their property leases.

How 91探花can help

We have a team of accounting and financial reporting experts experienced in UK GAAP and IFRS. We can help you understand the impact of updates to FRS 102 on your business, provide practical guidance on implementing change, and help with communication planning and ensuring compliance with new requirements. If you would like to discuss these changes further, please get in touch with Stacy Eden, Danielle Stewart OBE or your usual 91探花contact.