Balance Sheet Shock for Some Irish Businesses – Part 2

Balance Sheet Shock for Some Irish Businesses – Part 2

by | Aug 13, 2025 | Blog, News

In this second of two blogs, we look at the impact of the leasing changes to FRS 102 coming soon. Last week we looked at the main balance sheet impact. This week we look at the P&L impact.

The familiar rent expense in the P&L will largely disappear and will be replaced by:

  • Depreciation of the ROU asset, along with an
  • Interest expense for the lease liability.

The impact of these changes will often result in a higher EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation) as lease costs move from operating expenses to depreciation and finance costs.

The other impacts will be:

  • Businesses, not for profit entities and charities with loan agreements tied to financial covenants (e.g., debt-to-EBITDA ratios, interest cover) will need to carefully assess the potential impact of these changes. The sooner they start having conversations with lenders the better.
  • An increase in reported assets could push some businesses over the audit exemption size thresholds, potentially triggering the requirement for a statutory audit.

Work to be done:

The preparatory work to be done in advance of 1 January 2026 will include:

  • Identifying all affected lease contracts
  • Identifying leases ‘hidden’ within service agreements
  • Obtaining detailed information from lease agreements so as to have an accurate calculation of the ROU asset and lease liability along with the payment schedules, extension options, and an appropriate discount rate.

This change in Irish GAAP lease accounting is a significant one, promising more transparency but also requiring advance preparation. The sooner the changes are understood, the sooner businesses and charities/not for profit entities can plan to ensure effective compliance by the application date.

For audit cold file reviews and tailored training sessions explaining more about various topics like AML, Audit, FRS 102, please send a mail to john@jmcc.ie.

For more on engagement and representation letter templates and a variety of CPD webinars on money laundering and other accounting/audit related topics, please go to our website for:

ISQM TOOLKIT, or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard. We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements.  Please contact John McCarthy FCA by email at john@jmcc.ie.

Balance Sheet Shock for Some Irish Businesses

Balance Sheet Shock for Some Irish Businesses

by | Aug 13, 2025 | Blog, News

In this first of two blogs, we look at the impact of the leasing changes to FRS 102 coming soon.

For accounting periods commencing on 1 January 2026, lease liabilities for most entities will now be on the balance sheet at 31 December 2026 and could spell trouble for EBITDA, loan covenants, and audit thresholds. The changes do not apply to micro entities (if they qualify to apply FRS 105).

Heretofore many businesses in Ireland have enjoyed the relative simplicity of ‘off-balance sheet’ accounting for their operating leases where a rent expense hit the P & L account, and for a multitude of entities, that was the end of the matter.

However, there is a significant change coming soon for Irish Generally Accepted Accounting Practice (known as Irish GAAP) under the Financial Reporting Standard (FRS) 102, bringing the treatment of lease accounting more in line with the international standard, International Financial Reporting Standard (IFRS) 16 Leases.

The good news is that there is some time to prepare, but not too long as there needs to be advance preparation but only four months at this stage.

The main change is that FRS 102 introduces the concept of the ‘right-of-use’ (ROU) model for lessees, largely based on IFRS 16 and virtually all leases will come on balance sheet. Businesses and charities will soon be required to recognise:

  • A Right-of-Use (ROU) Asset: This asset represents the lessee’s right to use the leased asset over the lease term. It will appear on the balance sheet, typically alongside property, plant and equipment; and an equivalent
  • A lease liability: This liability represents the obligation to make lease payments over the lease term. It will also be recognised on the balance sheet, divided into current and non-current portions.

Impact on financial statements

The impact of this change will be significant for many businesses and not for profit entities, particularly those with a substantial portfolio of operating leases. Examples include:

  • Retailers with multiple leases,
  • Manufacturers leasing machinery and
  • Logistics firms with rolling fleet contracts.

These businesses can expect their balance sheets to grow, with an increase in both assets (ROU assets) and liabilities (lease liabilities). This will change key financial ratios, such as

  • leverage and
  • debt-to-equity.

More on this topic next week.

For audit cold file reviews and tailored training sessions explaining more about various topics like AML, Audit, FRS 102, please send a mail to john@jmcc.ie.

For more on engagement and representation letter templates and a variety of CPD webinars on money laundering and other accounting/audit related topics, please go to our website for:

ISQM TOOLKIT, or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard. We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements.  Please contact John McCarthy FCA by email at john@jmcc.ie.