Unit4 Financial Planning and Analysis (FP&A)
Author: Bob Elliott December 16, 2025 4 min read

Preparing for IFRS 16 Under FRS 102: Simplifying Compliance and Financial Impact with Unit4 FP&A

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Are you ready to adopt IFRS 16 under FRS 102? With financial years commencing on or after January 1, 2026, businesses reporting under FRS 102 must adapt to new lease accounting standards. 

While the requirements for IFRS 16 under FRS 102 are somewhat simplified compared to full IFRS, they still introduce complexity. From recognizing operating leases on balance sheets to reconciling pre- and post-adoption impacts, the transition can be very challenging. Add legacy systems and manual processes and those challenges may become unmanageable. 

Complications increase significantly for organizations with a portfolio of property leases, due to the impact on cash flows of variables such as variations, break points, asset retirement obligations, indexation etc. Complexity escalates even more if there are sub-leases and/or sale and lease-back assets.

This blog is your guide to addressing the issue. We’ll highlight key changes, the financial impact of IFRS 16, and How Unit4 FP&A can provide a smooth transition and future-proof compliance.

Keep reading:

Key IFRS 16 Changes Under FRS 102

IFRS 16 introduces a fundamental shift for lessees by requiring almost all leases to be recognized on the balance sheet. Previously, operating leases were treated as simple operating expenses. Under the new standard, companies must now account for:

  • Right-of-Use (ROU) Assets – The derived asset value based on discounted cash flows.

  • Lease Liabilities – Reflect the obligation to make lease payments over time treating the leases as financing with short- and long-term elements including notional interest.

This change aims to provide greater transparency for stakeholders, but it also means modifying financial reports, implementing new systems, and ensuring compliance across lease agreements.

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Impact of IFRS 16 

To better understand the impact of IFRS 16, let’s explore its key implications.

Impact on Balance Sheets

Previously, operating leases have been off-balance sheet. Now, they must be recorded as if they are owned assets and their attendant liabilities.

The result? Generally, assets and liabilities increase, though this may reduce net assets if the lease liability exceeds the ROU asset value.

Income Statement/Profit and Loss (P&L) Changes

Instead of recording lease expenses as a single operating cost item (e.g. rent), costs are now split into two categories of finance costs (“below the line”):

  • Depreciation of the ROU asset.

  • Interest on the lease liability.

This approach will initially reduce net income because of the front-loading of interest on a declining balance, but EBITDA improves because the relevant operating costs shift below EBITDA to financing costs.

Cash Flow Effects

Lease payments will now be split as follows:

  • Interest payments: Operating cash flows or financing cash flows (depending on accounting policy).

  • Principal repayments: Financing cash flows.

This split improves operating cash flow figures but will affect key financial ratios which may alter investor perceptions.

Key Financial Ratios

IFRS 16 directly influences several financial metrics:

  • Gearing Ratio: Increased liabilities drive this higher.

  • EBITDA Margin: Removal of rent expenses means this improves.

  • Return on Assets (ROA): A larger asset base reduces ROA.

Stakeholder and Covenant Implications

The impact on key financial ratios can affect loan covenants, especially those tied to metrics like EBITDA or leverage. Transparent communication with lenders, investors, and other stakeholders is crucial. Renegotiation of contracts may also be required.

A proven IFRS 16 application will provide all the tools to provide clear explanations of the before and after picture. The ability to deliver a reconciliation of extant data under pre and post IFRS 16 should be considered a fundamental prerequisite for any IFRS 16 application.

How Unit4 Can Make IFRS 16 Compliance Effortless

Adopting IFRS 16 under FRS 102 may seem like a challenge, but with the right approach and tools, you can turn it into an opportunity for greater transparency, compliance, and efficiency. That’s where Unit4 comes in. Our IFRS 16 application simplifies everything:

  • Configure assumptions:
    • Relevant interest rates
    • Inflation assumptions
    • Indexation
    • Exchange rates
    • Low value thresholds
  • Load/reload lease data.
  • Within a workflow process, manage:
    • Lease amendments
    • Impairments
    • Remeasurements
  • Calculate ROU values and derive all the relevant interest calculations and journal adjustments.
  • Automatically post adjustment journals back to the ledger.
  • Generate reconciliation reports (pre and post IFRS 16), disclosure reports, and other relevant supporting outputs.

With Unit4, you gain accurate consistent calculations, streamlined reporting, and the confidence to transition seamlessly to IFRS 16. 

Don’t wait—ensure your organization is ready for January 2026 and beyond. Visit our website to explore how Unit4 FP&A can support your compliance efforts, talk to sales, or get a demo of the solution – today!

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