FRS 102 balance sheet impact: A worked example for UK and Irish lessees
Three leases, one Irish distribution company, one transition date. Exactly what FRS 102 Section 20 does to the balance sheet, P&L, EBITDA, and gearing - with numbers.
Take a medium-sized Irish distribution company with three leases: a Dublin office on a five-year term at €120,000 per year, a warehouse on a three-year term at €85,000 per year, and a van fleet of 18 vehicles costing €28,000 per year combined. The CFO needs to know what the balance sheet looks like on day one of FRS 102 Section 20, what the P&L looks like in year one, and what the EBITDA and gearing ratios actually say to a lender. This post carries those three leases through every calculation with the numbers committed (not described in principle, but computed and tabled) so that your team can see the shape of its own transition before it happens.
For context on how FRS 102 compares with IFRS 16 at the rule level, see FRS 102 vs IFRS 16: key differences finance teams need to know. For the mechanics of the discount rate itself, see FRS 102 discount rates: how to determine the obtainable borrowing rate.
Updated August 2026.
What FRS 102 Section 20 requires at transition
From the accounting period beginning on or after 1 January 2026, lessees under FRS 102 must recognise nearly all leases on the balance sheet: a right-of-use (ROU) asset representing the right to use the underlying asset, and a lease liability representing the obligation to make future lease payments, both measured at the present value of remaining payments discounted at the obtainable borrowing rate. For a December balance date, transition takes effect in December 2026; for a June balance date, June 2026. For the purposes of this example, the Irish distribution company has a December balance date and transitions on 1 January 2026.
The standard permits the modified retrospective approach, which means prior-year comparatives stay exactly as they were reported under the old FRS 102 rules. There is no restatement. On transition date, the ROU asset is set equal to the lease liability; the difference goes to retained earnings only if your group has elected to carry over IFRS 16 balances, which this company has not. The ICAEW has published guidance confirming this approach, and the FRC's revised FRS 102 text is available at frc.org.uk as the primary authority.
Low-value asset test: does your van fleet qualify for exemption?
Low-value assets under FRS 102: the asset-list approach
The low-value asset exemption under FRS 102 Section 20 is not a monetary threshold test. It is not a case of "this van is worth less than €5,000 so it qualifies." FRS 102 takes a different approach to IFRS 16: it explicitly names categories of assets that do not qualify as low value. Vehicles (including cars, vans, and trucks) appear on that list. Whether the van is brand new or ten years old, and whatever its current market value, the vehicle category is excluded.
Assets that can qualify as low value under FRS 102 are typically items like tablets, mobile phones, personal computers, and small office furniture — assets an individual employee might use and which have a low individual replacement cost when new. The key criterion is the value of the underlying asset when new, not its value at the time of the lease.
For the Irish distribution company: all 18 vans go on the balance sheet. The low-value exemption is unavailable for vehicle leases under FRS 102. If the fleet leases were for 12 months or fewer, the short-term lease exemption could apply instead, but these leases run for three years, so that option is also closed. All three lease categories require recognition.
For a full treatment of how fleet leases interact with FRS 102, see FRS 102 fleet lease accounting: a practical guide for UK and Irish businesses.
Transition-date balance sheet entries
Each lease liability is the present value of future lease payments discounted at the obtainable borrowing rate (OBR). The company's bank has confirmed an OBR of 5.5% per annum, a realistic rate for an Irish SME borrowing over similar terms in 2026. Annual payments are assumed at the end of each period. The ROU asset for each lease equals the lease liability at transition under the modified retrospective approach.
Note: the calculations in this section are simplified for illustrative purposes. LOIS performs exact daily calculations based on either nominal or effective interest, depending on the structure of each lease.
Dublin office (5 years, €120,000/year): Present value = €120,000 × 4.2703 (five-year annuity factor at 5.5%) = €512,434
Warehouse (3 years, €85,000/year): Present value = €85,000 × 2.6979 (three-year annuity factor at 5.5%) = €229,322
Van fleet (3 years, €28,000/year combined): Present value = €28,000 × 2.6979 = €75,541
Total ROU assets and lease liabilities recognised on transition date: €817,297.
The lease liabilities split between current and non-current portions based on how much of each liability will be settled within 12 months. The current portion is the principal repayment due in year one (the annual payment less the year-one interest charge). The non-current portion is the remainder.
Year-one interest: Office €512,434 × 5.5% = €28,184; Warehouse €229,322 × 5.5% = €12,613; Vans €75,541 × 5.5% = €4,155. Total current portion of liability (principal in year one): (€120,000 − €28,184) + (€85,000 − €12,613) + (€28,000 − €4,155) = €91,816 + €72,387 + €23,845 = €188,048. Non-current portion: €817,297 − €188,048 = €629,249.
| Balance sheet item | Before FRS 102 | After FRS 102 |
|---|---|---|
| Non-current assets | ||
| Right-of-use assets: property (office + warehouse) | — | €741,756 |
| Right-of-use assets: vehicles | — | €75,541 |
| Total ROU assets | — | €817,297 |
| Current liabilities | ||
| Lease liabilities: current portion (due within 12 months) | — | €188,048 |
| Non-current liabilities | ||
| Lease liabilities: non-current portion | — | €629,249 |
| Total lease liabilities | — | €817,297 |
Transition-date figures. ROU assets equal lease liabilities under the modified retrospective approach. Prior-year comparative figures are not restated.
How the P&L changes in year one
Under the old FRS 102 rules, the company recognised €233,000 in operating lease expense each year (€120,000 + €85,000 + €28,000), a straight charge through the income statement, sitting above EBITDA. From the first reporting period under the new standard, that treatment disappears and is replaced by two different line items.
Depreciation on each ROU asset runs straight-line over the lease term. Office: €512,434 ÷ 5 years = €102,487. Warehouse: €229,322 ÷ 3 years = €76,441. Vans: €75,541 ÷ 3 years = €25,180. Total depreciation charge in year one: €204,108. This sits above the EBITDA line, just as the old operating lease cost did.
Interest on the lease liabilities is calculated using the effective interest method: opening balance × OBR. Office: €512,434 × 5.5% = €28,184. Warehouse: €229,322 × 5.5% = €12,613. Vans: €75,541 × 5.5% = €4,155. Total interest in year one: €44,952. This sits below the EBITDA line as a finance cost.
Total P&L charge in year one: €204,108 + €44,952 = €249,060, which is €16,060 higher than the €233,000 that would have been charged under the old rules. The difference narrows as the leases mature, because interest is front-loaded: the effective interest charge is highest when the liability balance is largest, and it falls each period as principal is repaid.
| P&L line item | Old FRS 102 | New FRS 102 |
|---|---|---|
| Above EBITDA line | ||
| Operating lease expense | €233,000 | — |
| ROU asset depreciation (office) | — | €102,487 |
| ROU asset depreciation (warehouse) | — | €76,441 |
| ROU asset depreciation (van fleet) | — | €25,180 |
| Total charge above EBITDA | €233,000 | €204,108 |
| Below EBITDA line | ||
| Finance cost: interest on lease liabilities | — | €44,952 |
| Total P&L charge | €233,000 | €249,060 |
Year-one figures. The P&L difference of €16,060 reflects front-loaded interest; it closes in later years as the liability unwinds. Cash payments are unchanged at €233,000.
EBITDA and gearing: what the ratios actually show
Assume the company had operating profit before lease costs of €600,000, depreciation on owned assets of €50,000, and no other adjustments. Under the old FRS 102 rules, the calculation ran: revenue minus all operating costs including rent (€233,000). EBITDA (earnings before interest, tax, depreciation, and amortisation) added back the €50,000 depreciation on owned assets but not the operating lease expense, because leases were simply rent. So EBITDA under the old rules was €600,000 + €50,000 = €650,000.
Under FRS 102 Section 20, depreciation on ROU assets (€204,108) is added back when calculating EBITDA, just like depreciation on owned assets. The interest charge on lease liabilities (€44,952) is a finance cost and is already excluded from EBITDA. What was previously €233,000 of rent expense sitting above the EBITDA line is replaced by €204,108 of depreciation that gets added back. EBITDA under the new rules: €600,000 + €50,000 + €204,108 = €854,108, an improvement of €204,108.
The gearing picture is less comfortable. If the company had €500,000 of bank debt before transition, net debt was €500,000. After transition, the lease liabilities of €817,297 are debt-like obligations in every sense that matters to a lender, even though FRS 102 technically books them as lease liabilities rather than borrowings. Net debt moves to roughly €1,317,297.
Net debt/EBITDA: old rules €500,000 / €650,000 = 0.77x. New rules €1,317,297 / €854,108 = 1.54x. The ratio has roughly doubled, not because the business has changed, but because the presentation has. Your CFO's job is to make sure the company's lenders understand the difference before the accounts are filed, not after.
Covenant implications
Most lending facilities define "net debt" and "gearing" by reference to the borrower's financial statements. When those statements change in format, covenants tied to the old format can be breached even when the underlying trading position is unchanged. A net debt/EBITDA covenant of 1.5x, for example, would have been comfortably met at 0.77x. At 1.54x it is technically breached on the first set of FRS 102 accounts, without a single extra euro of borrowing.
The practical step is straightforward: model the impact on your covenant ratios before your transition date and take the analysis to your lender. Most banks are aware of the FRS 102 change and will offer a covenant waiver, a rebasement of the threshold, or a carve-out for lease liabilities. What they will not do is accept a surprise at year-end review. Get the conversation on the table six months before your balance date, with your modelled numbers in hand.
The same logic applies to remuneration schemes, performance targets, and internal KPIs that reference EBITDA or net debt. An EBITDA-linked bonus scheme that was calibrated under the old rules will pay out differently under the new ones, not because performance has changed, but because the denominator has. Review and update those schemes as part of your transition planning. The FRC's guidance on the changes is a useful reference for stakeholder communications; the ICAEW has also published practical notes on the modified retrospective approach and covenant considerations.
How the discount rate affects the initial measurement
The obtainable borrowing rate is the most consequential input in every lease liability calculation. A CFO who asks "what if our bank quotes us 4% instead of 5.5%?" is asking the right question. A lower rate produces a higher present value — a larger liability on the balance sheet and a higher ROU asset. For the Irish distribution company's portfolio, the difference across a 1.5-percentage-point spread is material:
| Obtainable borrowing rate | Total lease liabilities at transition | Difference |
|---|---|---|
| 4.0% | €847,803 | +€30,506 |
| 5.5% (base case) | €817,297 | base |
Illustrative. Based on the three leases in this example. At 4%: office €534,216 + warehouse €235,884 + vans €77,703 = €847,803.
A €30,506 difference in opening lease liabilities flows directly into every ratio, every covenant test, and every period's interest charge. On a larger portfolio (50 or 100 leases with more material annual payments) the rate sensitivity compounds significantly. Documenting the basis for your OBR before transition date is not a paperwork exercise; it is the foundation of every number in your opening balance sheet. For the mechanics of rate selection and the documentation your auditor will ask for, see FRS 102 discount rates: how to determine the obtainable borrowing rate.
Frequently asked questions about FRS 102 balance sheet impact
What balance sheet entries does FRS 102 Section 20 require on transition date?
On the transition date, the lessee recognises a right-of-use asset and a lease liability for each in-scope lease. Under the modified retrospective approach, the ROU asset equals the lease liability at transition: the present value of remaining payments discounted at the obtainable borrowing rate. Prior-year comparatives are not restated; the adjustment sits entirely in the opening balance sheet of the first FRS 102 period.
Does the total P&L charge increase in year one under the new rules?
Yes, in most cases the total P&L charge is slightly higher in year one and early years because the interest element is front-loaded: the liability balance is largest at commencement, so the effective interest charge is highest then. In this example the total year-one charge is €249,060 versus the €233,000 that would have been expensed under the old rules, a difference of €16,060 that narrows as the leases run down.
Why does EBITDA improve under FRS 102 even though total costs increase?
EBITDA improves because ROU asset depreciation is added back when calculating it, and the interest on lease liabilities sits below the EBITDA line as a finance cost. What was previously €233,000 of rent expense (not added back in EBITDA) becomes €204,108 of depreciation (added back) plus €44,952 of interest (below the line). In this example EBITDA rises by €204,108, from €650,000 to €854,108. Lenders and analysts who track EBITDA should be briefed on this reclassification before accounts are filed.
Can my van fleet qualify for the low-value asset exemption under FRS 102?
No. Under FRS 102 Section 20, the low-value exemption is based on an asset-class approach, not a monetary threshold. Vehicles (including cars, vans, and trucks) are explicitly excluded from the low-value category, regardless of their age or market value. This is one of the key differences from IFRS 16, which used a $5,000 threshold guideline rather than an asset list. Fleet leases must be recognised on the balance sheet unless they qualify as short-term leases (12 months or fewer).
How should I approach my lender before the first FRS 102 accounts are filed?
Model the transition-date balance sheet and the resulting covenant ratios before your balance date, not after. Take the numbers to your lender with a clear explanation that the change reflects a presentation shift, not a deterioration in trading. Most lenders will offer a covenant waiver, a threshold rebasement, or a carve-out for lease liabilities once they understand the accounting change. The conversation is much easier when you arrive with the analysis than when the audited accounts arrive unexpectedly with a breached ratio.
These are the calculations your team needs to run every month
LOIS automates every calculation in this post: ROU asset and liability recognition, effective interest, straight-line depreciation, current/non-current splits, and GL-ready journals. All delivered reconciled and audit-ready each reporting period. No spreadsheet required.
See LOIS lease accounting software FRS 102 compliance with LOIS