The revised FRS 102 lease accounting rules will bring important changes for many leisure and hospitality businesses, particularly hotels, pubs, restaurants, visitor attractions and other operators with leased properties with the biggest impact being felt by operators with larger estates.
Whether you operate hotels, pubs, restaurants or visitor attractions, it is likely property will represent one of your largest investments and longest-term commitments.
For accounting periods beginning on or after 1 January 2026, many lease arrangements will be brought onto the balance sheet for the first time. This will not change day-to-day operations, but it may significantly affect reported assets and liabilities, EBITDA, banking covenants and other key financial metrics.
Why does this affect hospitality operators?
Historically, many operators’ leases have been treated as operating leases, with rental payments recorded as an expense in the profit and loss account. Under the revised FRS 102 rules, most of these leases will move onto the balance sheet for the first time through the recognition of:
- A Right-of-Use asset; and
- A Lease Liability.
For operators with multiple leased properties, this could result in a substantial increase in both reported assets and liabilities, despite there being no change in the underlying economics of the business.
What impact could this have?
- You balance sheet may look very different
The new rules could significantly increase the size of your balance sheet as lease obligations become visible for the first time. Operators with long-term property leases are likely to see some of the most noticeable impacts.
2. Key financial ratio may change
Measures such as gearing, net assets and leverage could move overnight, even though your revenue, occupancy, room rates, covers and cashflows remain unchanged. These changes may influence how lenders, investors, landlords and other stakeholders assess your business.
3. Banking covenants may need reviewing
If your business has bank facilities, it is important to assess whether covenant calculations could be affected by the changes. Ratios linked to EBITDA, net debt, gearing, interest cover or debt service may all be impacted by the revised accounting treatment. This may be particularly important where facilities are linked to property acquisitions, refurbishments, or site expansion. Engaging with lenders early can help provide clarity and ensure the transition is managed smoothly.
4. EBITDA may increase
Under the new rules, rental costs are replaced by depreciation and finance charges. As a result, many operators will see EBITDA increase, even though there has been no change in trading performance or cash generation. Understanding and explaining these movements will be important when reporting results and engaging with stakeholders.
