Have you considered how the recognition of operating leases will impact your company size?

The UK government’s recently announced revisions to company size thresholds – effective from financial years beginning on or after 6^th April 2025 – bring welcome administrative relief to many businesses.

At first glance, the increased thresholds appear generous, aiming to simplify reporting obligations and exempt more companies from statutory audits. However, a second wave of regulatory change is approaching: significant revisions to Financial Reporting Standard 102 (FRS 102) will take effect for accounting periods beginning on or after 1st January 2026. These two developments, when considered together, could have a material impact on your company’s financial reporting obligations.

One key area of change under FRS 102 involves lease accounting. For companies with significant leasing arrangements, these changes could result in a notable increase in total assets reported on the balance sheet. And, in turn, this may inadvertently push some companies into higher company size categories, counteracting the benefits of the increased thresholds coming into effect in 2025.

This article takes a closer look at how these two regulatory updates interact, the specific implications of the new lease accounting requirements, and what companies should do now to prepare.

A recap of new company size thresholds

Effective for accounting periods beginning on or after 6 April 2025, the UK government has raised the financial thresholds that determine company size. These new limits, aimed at modernising and simplifying reporting obligations, are as follows:

To qualify for a category, a company must meet at least two of the three criteria.

The overlooked impact of lease accounting changes

While the raised thresholds provide some relief, revisions to FRS 102 introduce a significant shift in how companies account for leases, one that could materially inflate balance sheet totals.

From 1^st January 2026, lessees will be required to recognise most leases on their balance sheets, aligning UK GAAP more closely with IFRS 16. Specifically, businesses must record:

• A right-of-use asset, representing the value of the leased item.
• A lease liability, representing the present value of future lease payments.

This change eliminates the previous distinction between finance and operating leases for lessees, except where leases are either short-term (12 months or less) or relate to low-value assets.

Combined impact: Thresholds vs. lease-heavy balance sheets

The timing of these two regulatory changes creates a significant consideration for lease-heavy businesses, potentially pushing them into a higher size category.

This could lead to either a return, or the introduction to more extensive reporting requirements, additional disclosures, or the loss of audit exemptions, despite momentarily falling within the revised monetary thresholds based on actual business activity.

For example:

• A retail business that leases multiple locations could see a substantial increase in reported assets.
• A logistics or construction firm with long-term vehicle or equipment leases may also find their balance sheet significantly impacted.

Overall, while the threshold increase is intended to reduce regulatory burdens, companies must assess whether their accounting treatment of leases under the revised FRS 102 could nullify these benefits.

5 things for businesses to do now

With new thresholds arriving in April 2025, and FRS 102 changes following shortly after in January 2026, businesses should act now to understand the combined effect::

1. Evaluate lease commitments – Conduct a comprehensive review of all lease agreements to determine their impact on your balance sheet under the new accounting standards.
2. Assess potential reclassification – Analyse how the recognition of lease liabilities may affect your company’s classification under the revised size thresholds.
3. Update financial systems – Ensure that your accounting systems are capable of handling the new lease accounting requirements and can accurately reflect the changes in financial statements.
4. Review audit requirements – Determine whether your company will qualify for audit exemption under the new thresholds and consider the implications of maintaining or opting out of an audit.
5. Consult with professionals – Professional advice from experts like Verallo can help navigate transitional provisions, tax impacts, and compliance risks.

Get in touch for support

At Verallo, we’re already supporting clients in planning for these changes. Whether you’re unsure how lease accounting will affect your balance sheet or want to understand the implications of your new company size, we’re here to help. Call our team on 0203 912 9933, or email us at info@verallo.com