When the UK revises Section 20 of FRS 102, it won't just change lease accounting—it will rewrite the entire workflow for CFOs. Mark Chambers, Managing Director at IRIS Software Group, explains why this is a strategic shift with fundamental implications for your business, and what you need to do to prepare before the 2026 deadline.
When UK accounting standard-setters revised Section 20 of FRS 102 to bring it in line with IFRS 16, they didn’t just change how leases are recorded. They rewrote the entire workflow for CFOs and financial controllers tasked with managing them.
From 1 January 2026, almost every lease will need to be accounted for on balance sheet. That means goodbye to the long-favored simplicity of off-balance-sheet operating leases, and hello to a reporting model that demands precision, consistency, and judgment.
For many CFOs, this will be the most significant accounting change they’ve dealt with since the transition to new UK GAAP in 2015. And unlike other standards updates, this one brings with it not just technical accounting challenges, but fundamental implications for covenants, investor relations, systems integration, and strategic planning.
The knock-on effects will reach into board-level decision-making, compliance risk, financial forecasting, and audit preparation.
“The shift is substantial,” says Mark Chambers, Managing Director, Accountancy at IRIS Software Group. “Finance teams need to think beyond accounting adjustments. They’re looking at data clean-up, rethinking internal controls, and facing deeper scrutiny from auditors, lenders, and boards.”
That burden typically falls into three areas: data gathering, technical judgment, and stakeholder communication.
And while each of these on its own would require additional resource and planning, what makes the challenge unique is how interconnected they are. Fail to centralize lease data and the judgments suffer. Fail to document judgments, and the credibility of stakeholder communications starts to fray.
“Data is the first domino,” Chambers says. “Many businesses still don’t have a central lease register. Contracts are buried across legal, finance, and procurement functions. Identifying embedded leases alone can stall a project by weeks.”
From there, the complexity escalates. Determining lease terms, selecting appropriate discount rates, and accounting for lease modifications over time require documented judgments that auditors will challenge. “And rightly so,” he adds. “This is no longer a footnote in the accounts. It’s a material balance sheet movement that changes how your business is perceived externally.”
Then comes the external impact. Key performance metrics—EBITDA, gearing ratios, interest cover—will shift. That makes covenant compliance a live risk and alters how investors interpret performance trends. “This is not just about getting the accounting right,” Chambers notes. “It’s about controlling the narrative around it.”
Under the revised FRS 102, businesses can choose between a full retrospective approach or a modified retrospective method. The market preference is clear.
“We’re seeing most firms lean toward the modified option,” Chambers says. “It’s more practical and avoids restating multiple years of financials. But it’s not without consequence.”
The downside? Comparability. Financial statements won’t be restated for prior years, meaning 2026 could look markedly different from 2025.
“Investors and lenders need clear explanations to understand what’s changed and why. That’s not a one-slide job. It’s a communication plan.”
IRIS Software Group is no stranger to this terrain. Having guided organizations through IFRS 16 adoption, they’ve seen the missteps and the successes.
“The businesses that fared best started early,” Chambers recalls. “They built a clean, centralized lease data set and made early decisions on key policies. They didn’t rely on spreadsheets to do heavy lifting—because frankly, spreadsheets aren’t designed for this.”
Documentation, he says, is another recurring pain point.
“Policies around discount rates, lease terms, and reassessments need to be not just sound, but well-defended. Auditors are no longer accepting vague or undocumented positions. A verbal policy doesn’t count in a year-end audit.”
The firms that succeeded also treated the transition not as a compliance task, but as a chance to modernize part of their finance function—automating previously manual tasks, centralizing fragmented processes, and improving audit readiness across the board.
There’s a misconception that only large, asset-heavy companies need to worry. Chambers disagrees. “For many SMEs, this could be the first time they’ve had to model future lease liabilities. One sizeable office lease could significantly alter their leverage ratio. That’s not theoretical. That’s a boardroom discussion.”
Smaller firms also struggle more with determining discount rates, lacking treasury functions or access to comparable borrowing data. And without proper tooling, even basic changes to lease terms can snowball into material misstatements.
“It’s not a side note. It’s a calculation that drives the whole model, and if you get that wrong, it affects everything downstream.”
Automation and accuracy are now a baseline expectation.
“Innervision handles everything from lease modifications and remeasurements to retrospective adjustments with full audit trails,” Chambers explains. “You make a change, the platform updates everything. Reports, journals, disclosures—done.”
For firms managing lease portfolios at scale, centralizing and automating isn’t just about time savings. It’s about risk reduction, data integrity, and internal credibility.
“One late-stage discovery of a missed embedded lease can derail your year-end,” Chambers says. “That’s avoidable, but only if you build the right foundation early.”
Beyond efficiency, Chambers points to the deeper value of systematizing lease management.
“You move from firefighting to forecasting. From reacting to controlling. That’s where the value is unlocked.”
With the go-live date just months away, Chambers advises CFOs to treat Q3 2025 as the point of no return.
“Right now, businesses should be collecting lease data, choosing their system, and drafting policy positions. By Q4, they should be finalizing data entry and aligning with auditors. If you’re still debating tech platforms in January 2026, you’re already behind.”
He stresses that cross-functional engagement is critical: legal, IT, procurement, and treasury all need to be in the loop. “This is not a finance-only project. CFOs who treat it that way risk missing key dependencies.”
Early audit engagement is also essential. “Policy decisions made now will be tested later. Auditors don’t want surprises in Q2 next year. Get their input early and often.”
For all the effort required, Chambers believes this transition holds a silver lining.
“Handled properly, this can give CFOs better visibility into lease costs, more leverage in negotiations, and tighter control over commitments. But that value only materializes if the implementation is done with purpose.”
The time for assessment is over. The time for execution is now.