Could FRS 102 changes affect your business valuation?

Adjustments to FRS 102 will reshape core valuation metrics (i.e., debt, net assets and EBITDA, etc.) leaving many business owners to discover that their M&A deals look markedly different under the new rules. The lease‑accounting reforms within FRS 102 revised are no mere technicality; they have the potential to shift how buyers price risk and how sellers justify value.

Our guide sets out what the lease accounting changes mean for business valuations and how firms can prepare before negotiations begin.

Why has FRS 102 changed? An overview

Recent changes have been made to the UK GAAP accounting standards to bringing them more into line with IFRS. The key changes discussed in this blog affect FRS 102 accounting periods commencing on or after 1^st January 2026.

Lease accounting changes

Per the “old” UK GAAP, finance leases and operating leases were accounted for differently. In the FRS 102 revisions, no such distinction is made.

This means that nearly all leases are now recorded on the balance sheet via a “right-of-use asset” within fixed assets, with a corresponding lease liability.

Due to now being recognised as an asset, both a depreciation expense and an interest expense is charged to the P&L – rather than the operating expense recognised under the “old” UK GAAP.

For a more comprehensive insight into the FRS 102 changes, please see our blog on FRS 102 Lease Accounting Changes: a Guide for SMEs (2026 Update).

Which business valuation methodologies are most impacted?

The following are two common methods used for private companies: 

Earnings basis

The company's "maintainable profit" is determined. This is usually based on the EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) or EBIT of recent financial years. 

Net assets basis

The most recent balance sheet is used to determine the net asset value of the company. 

How this affects an earnings valuation

Operating lease charges have historically been deducted in arriving at EBITDA – the most commonly used metric for earnings valuations.

Going forward they will no longer be treated as a cost in the profit and loss accounts above operating profit. Instead, an amount will be provided for depreciation and interest, which are not included in the calculation of EBITDA.

Therefore, reported EBITDA will be higher under the new rules.

However, the present value of the future obligations under the operating leases will be treated as a debt-like creditor in the balance sheet and therefore debt will also be higher under the new rules.

Interestingly, the effect of this change on valuation may vary depending on the lease term and valuation multiple. In simple terms:

• If the lease term is less than the multiple, the equity value increases.
• If the lease term and multiple are equal, there is no change in valuation.
• If the lease term is greater than the multiple, the equity value decreases.

This is most evident when considering property leases, which tend to be longer term.

How does this affect a net assets valuation?

Under the new lease accounting rules, a right-of-use asset and lease liability must be recognised. However, as these are generally corresponding amounts, there is no impact to the net assets valuation.

What advisers and business owners can do to mitigate this

Although lease accounting changes can affect EBITDA and a business’s value, advisers should keep in mind that these are accounting rule changes, not real changes to the business itself. There is no change to the underlying valuation drivers in the business, i.e., profitability, quality of cashflows and earning etc.

When valuing businesses under these new rules, it is important to value on a “like-for-like” basis with the previous rules. The underlying value of the business shouldn’t change simply due to how leases are now accounted for.

Maintaining adequate records to adjust for these changes in a business valuation is vital to ensure advisers have the necessary information to properly value your business. If you are contemplating a sale or acquisition, you also need to fully understand these changes to be prepared for negotiations with the other side, so as to maximise your position.

Is it time to reassess your position?

For business owners contemplating a transaction, now is the moment to take stock before the new metrics take hold. If you’re unsure of what steps to take next, Shorts’ Corporate Finance team can help. Our specialist team can investigate how the FRS 102 changes impact your business holistically and provide strategic guidance.