A healthcare practice can have a substantial amount of equipment and property under lease without owning the underlying assets. Dental chairs, diagnostic equipment, pharmacy machinery, clinical rooms, vehicles and entire practice premises may all involve long-term contractual commitments.
Until recently, many operating leases were recorded mainly as rental expenses, with future commitments disclosed in the accounts. That approach is changing for businesses reporting under FRS 102. The revised lease accounting requirements, effective for accounting periods beginning on or after 1 January 2026, mean that most leases will now appear on the balance sheet.
For practice owners, this is more than an accounting adjustment. It can affect reported assets, liabilities, profit presentation, financial ratios and discussions with lenders. Understanding the changes is particularly important when working with specialist healthcare accountants who understand the financial structure of clinics, pharmacies and other healthcare organisations.
When Do the New FRS 102 Lease Rules Apply?
The Financial Reporting Council introduced amendments to FRS 102 following its Periodic Review 2024.
Most of these amendments apply to accounting periods beginning on or after 1 January 2026. Earlier application is permitted where the relevant conditions are met.
It is important to understand the effective date correctly. The rules apply according to when an accounting period begins, not simply because a business has a year-end falling during 2026.
For example:
A company with a year beginning on 1 January 2026 will generally apply the revised requirements for that period.
A company with a year beginning on 1 April 2026 will apply them from that date.
A company whose accounting period began on 1 April 2025 does not automatically move to the new requirements simply because its accounts are finalised during 2026.
Businesses preparing accounts under FRS 102 should assess their position with their accountant before completing their next year-end accounts.
What Has Actually Changed?
The main change is the removal of the distinction between operating leases and finance leases for lessees.
Under the previous approach, an operating lease was generally treated as a rental expense over the lease term. A finance lease, on the other hand, was recognised on the balance sheet as an asset and liability.
Under the revised FRS 102 model, lessees must generally recognise:
A right-of-use asset, representing the right to use the leased property or equipment.
A lease liability, representing the obligation to make future lease payments.
The asset is normally depreciated over the lease term, while interest is recognised on the outstanding lease liability.
The actual rental payments do not change merely because the accounting treatment changes. What changes is how those payments are presented in the financial statements.
Which Healthcare Leases Could Be Affected?
Healthcare businesses should not assume that only large property leases need reviewing.
The revised requirements may affect a wide range of arrangements, including:
Practice premises: A dental surgery, GP practice, private clinic or pharmacy operating from leased premises may have a significant right-of-use asset and lease liability.
Clinical equipment: Long-term arrangements for scanners, imaging equipment, laboratory machinery and other specialist equipment may require assessment.
Vehicles: Vehicles leased by a healthcare company for business operations may fall within the new model.
Treatment rooms: A practice renting dedicated rooms within another healthcare facility should review whether the agreement gives it control over the use of an identified asset.
Combined service contracts: Some contracts include equipment, maintenance, servicing and other services in one monthly payment. The business may need to identify which parts relate to a lease and which relate to services.
A contract does not become a lease simply because it involves regular payments. The important question is whether it gives the business the right to control the use of an identified asset for a period of time in exchange for payment.
How Will the Accounting Entries Work?
Consider a private clinic that enters into a five-year equipment lease.
The agreement gives the clinic the right to use a specified diagnostic machine for the contractual period. The lease payments are fixed, and the arrangement meets the definition of a lease under the revised standard.
At the commencement of the lease, the clinic will generally recognise a right-of-use asset and a corresponding lease liability, measured using the relevant requirements of FRS 102.
The basic accounting structure is:
| Transaction | Debit | Credit |
|---|---|---|
| Initial recognition | Right-of-use asset | Lease liability |
| Depreciation | Depreciation expense | Accumulated depreciation |
| Interest | Finance cost | Lease liability |
| Lease payment | Lease liability | Bank |
The initial measurement is not necessarily equal to simply adding together every future rental payment. The liability is generally based on the present value of qualifying future lease payments, using the applicable discount rate.
The right-of-use asset may also require adjustments for items such as payments made before commencement, lease incentives, initial direct costs and certain restoration obligations.
This means that an accurate lease calculation requires more than entering the monthly rental amount into accounting software.
The Two Main Recognition Exemptions
The revised standard provides exemptions for certain leases.
Short-term leases
A business may elect to apply the short-term lease exemption where the lease term is 12 months or less, subject to the standard's conditions.
Low-value assets
An exemption is also available for leases of low-value assets. FRS 102 provides a wider accommodation for low-value assets than IFRS 16, provided the most economically significant leases are recognised on the balance sheet.
This exemption should not be used as a general way of avoiding recognition of expensive clinical equipment or other significant arrangements.
The correct accounting treatment depends on the asset, the contract and the applicable standard.
How Will the Changes Affect Profit and Financial Ratios?
One of the biggest practical consequences is that the profit and loss account will look different.
Under the previous operating lease approach, the rental expense was generally recognised over the lease term.
Under the revised model, the business will normally recognise depreciation and interest instead.
This can affect several financial measures:
EBITDA: Operating rental expenses may be replaced by depreciation and finance costs, potentially increasing reported EBITDA.
Total assets: Right-of-use assets increase the reported asset base.
Total liabilities: Lease liabilities increase reported borrowing-like obligations.
Gearing: The business may appear more highly leveraged.
Interest cover: Finance costs may increase.
Current ratio: The current portion of lease liabilities can affect short-term liquidity ratios.
For example, a clinic applying for finance to open another location may find that its reported liabilities have increased even though it has not taken out a new bank loan.
Lenders, investors and potential buyers should therefore understand the accounting change before comparing financial performance across different periods.
Does the New Accounting Treatment Change the Tax Deduction?
This is an important distinction.
A change in financial reporting does not automatically mean that the business receives a different tax deduction.
HMRC guidance explains that the revised accounting treatment does not, by itself, change the commercial rental payments or the underlying tax treatment. Most rentals remain revenue in nature, subject to the relevant lease rules, including the rules for long funding leases.
The legislation also contains provisions dealing with the tax consequences of adopting the new accounting standard.
Healthcare businesses should not simply assume that the depreciation charge on a right-of-use asset is automatically deductible for tax purposes. The tax computation may require adjustments depending on the type of lease and the relevant statutory provisions.
The accounting records and corporation tax computation should therefore be reviewed together.
What About VAT on Leased Equipment and Premises?
The FRS 102 accounting change does not automatically change the VAT liability of the underlying lease.
VAT treatment depends on the nature of the supply and the contract.
For example, equipment leasing and commercial property rentals can have different VAT treatments. Property leases may be exempt or subject to VAT where an option to tax has been exercised.
Healthcare providers also need to consider their own VAT recovery position. A practice making both taxable and exempt supplies may be partially exempt, meaning it cannot necessarily recover all the VAT charged on lease-related costs.
Businesses should avoid treating the appearance of a right-of-use asset in the accounts as evidence that VAT can be reclaimed.
A Practical Checklist for Healthcare Practice Owners
Before preparing accounts under the revised standard, practice owners should:
Collect every property, equipment and vehicle lease agreement.
Identify the start date, end date and renewal options for each contract.
Review agreements that combine equipment rental with maintenance or servicing.
Identify contracts that may contain an embedded lease.
Calculate qualifying future lease payments.
Establish an appropriate discount rate.
Assess whether any short-term or low-value exemptions apply.
Prepare right-of-use asset and lease liability schedules.
Review the effect on bank covenants and financial ratios.
Check the tax and VAT treatment separately.
Good bookkeeping for healthcare practices makes this process considerably easier because the business already has organised contracts, payment records, supplier information and supporting documentation.
Frequently Asked Questions
Do all healthcare businesses have to apply the revised FRS 102 lease rules?
No. The requirements apply to entities reporting under FRS 102, subject to the relevant provisions and exemptions. Businesses reporting under other accounting frameworks must consider their own requirements.
Will the monthly lease payment increase?
No. The accounting change does not alter the contractual rental amount. It changes how the lease is recognised and presented in the financial statements.
Will every equipment lease appear on the balance sheet?
Most qualifying leases will, but short-term and low-value lease exemptions may be available. The contract must be assessed before deciding the treatment.
Does the change affect tax relief?
The accounting change does not automatically change the tax treatment. Lease taxation must be considered separately under the relevant HMRC rules.
Final Thoughts
The revised FRS 102 lease requirements are an important change for healthcare organisations with long-term property, equipment and vehicle commitments.
The main risk is not simply recording a new asset and liability. It is failing to identify all relevant contracts, calculate the opening balances correctly or understand how the changes affect financial performance and tax reporting.
Healthcare practices should review their lease arrangements before their first set of accounts under the revised requirements is prepared. Accurate lease schedules and regular management accounts for healthcare practices can help owners understand their true financial commitments and make better decisions about future expansion and investment.
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