Leases are on the balance sheet now. Check the covenants before the bank does.

For accounting periods beginning on or after 1 January 2026, the FRS 102 periodic review brings most leases onto the lessee's balance sheet. A right of use asset on one side, a lease liability on the other, with exemptions for short leases and low value items. The mechanics have been well covered. The knock on effects have not been discussed nearly enough with the people they affect.

What actually moves

Three things change at once, and they do not all move in the same direction, which is what makes the conversation confusing if it happens in a hurry.

• Total assets and total liabilities both rise, so gearing and net debt ratios look worse.
• Operating lease rentals disappear from operating costs and reappear as depreciation and interest, so EBITDA looks better.
• The charge is front loaded over the life of the lease, so early years carry more cost than the old straight line rental.

The covenant problem

A business can be trading exactly as it was in December and breach a gearing covenant in January because of an accounting change. Whether that happens depends entirely on how the facility agreement is drafted. Some contain frozen GAAP clauses that hold the old basis for covenant testing. Some define EBITDA and leverage in ways that absorb the change. Some do neither, and the answer is whatever the lender decides.

Read the definitions in the agreement rather than assuming. If there is any doubt, the time to raise it with the lender is while it is a technical question, not after a test date has been missed.

No lender enjoys being told about an accounting change by a breach notice.

Model it before it is real

This is a straightforward forecasting exercise and it needs doing once per affected client. Take the lease portfolio, apply the new treatment, and run the covenant tests across the next four quarters on both bases. The output is one slide: here is the ratio under the old basis, here it is under the new one, and here is the quarter where headroom gets thin.

Where the model is connected to the ledger and built on drivers, this is a scenario rather than a rebuild. You change the treatment, the statements respond, and the covenant calculation runs off the same numbers as everything else. Doing it in a standalone spreadsheet works too, right up until the underlying forecast changes and nobody remembers to update the covenant tab.

Tell the client in plain terms

Business owners do not care about right of use assets. They care about whether the bank is going to call, whether their numbers still support the borrowing, and whether their profit share is affected. Lead with those three, and keep the technical explanation for the file note.

The detail of the amendments and their effective dates should be checked against the current FRC guidance and the specific facts of each client before advice is given.