Why your EBITDA might look ‘better’ under FRS 102

You may have noticed a drop in your operating costs under the new FRS 102 rules, making EBITDA look much better.

However, in this article we’ll set out why this isn’t necessarily good news and explain how new FRS 102 rules are causing such a sudden shift in numbers for your organisation.

READ MORE: FRS 102 Lease Accounting: Your Guide To The Changes

Why your EBITDA looks better under new FRS 102 rules – everything you need to know and why this isn’t necessarily a good thing

What is EBITDA?

EBITDA, which stands for ‘Earnings Before Interest, Tax, Depreciation and Amortisation’, is a common measure of business performance.

Put simply, it shows how much profit a business generates from its day-to-day operations before taking these costs into account.

This can give you a clearer picture of how your organisation is performing, removing the impact of things like:

• Interest – The cost of borrowing money.
• Tax – Corporation Tax and other taxes on profits.
• Depreciation – The accounting cost of assets losing value over time.
• Amortisation – The accounting cost of spreading the value of intangible assets over their useful life.

Why a higher EBITDA under FRS 102 isn’t necessarily good news

With your EBITDA likely looking much better under FRS 102, you may come to wonder if your business has really turned a corner.

Before you start uncorking any champagne bottles, it’s worth checking something first – how leases are being accounted for.

The Change

Under the updated lease accounting rules in FRS 102, which were adopted for accounting periods on or after January 1, 2026, many leases that used to sit on your profit and loss statement as a single ‘rent’ expense are now split into two separate components:

• Depreciation of a right-of-use asset
• Interest on the associated lease liability

That might sound like a minor technical footnote, but it has a real effect on EBITDA. Because lease rent, which used to be deducted in full, has been reclassified into interest and depreciation; both of those pieces now sit below the EBITDA line instead of above it.

This means that the cash cost or business performance hasn’t changed – only the label assigned to these costs.

Why this EBITDA change matters for you

This kind of change requires a lot of scrutiny, especially if your management team, investor decks, or bank covenants lean heavily on EBITDA.

An improvement driven by a change in accounting classification is not the same as one driven by a rise in trade. This can sometimes paint an inaccurate picture.

The covenants that may get worse, not better

 

How AAB can help

Changes to FRS 102 can have a significant impact on how your organisation’s financial performance looks on paper. A higher EBITDA may seem like good news, but it’s important to understand what is driving the change.

Our Office of the CFO services can help you look beyond the headline numbers. Our team can help you assess the impact of the new lease accounting requirements, understand what the changes mean for your EBITDA, and ensure you’re comparing performance on a like-for-like basis.

We can also help you consider the wider implications for areas such as banking covenants, business valuations, management reporting, and financial decision-making.

If you have any questions or need help making sense of the numbers, please reach out to Ian Chapman, Andy Stephen, another member of the Office of the CFO team, or your usual AAB contact.