Significant changes to FRS 102 are now in effect for accounting periods beginning on or after 1 January 2026.
For many businesses, these are some of the most important changes to UK accounting standards in recent years. While they are designed to improve transparency and bring UK GAAP closer to international accounting standards, they could also affect your financial statements, key performance indicators and banking arrangements.
Here is an overview of the key changes and what they could mean for your business.
Why is FRS 102 changing?
The latest amendments form part of the Financial Reporting Council’s periodic review of UK accounting standards.
The aim is to improve consistency and transparency in financial reporting while bringing UK GAAP more closely into line with International Financial Reporting Standards (IFRS).
While there are several updates within the revised standard, the most significant changes relate to lease accounting and revenue recognition.
The key FRS 102 changes
Lease accounting
This is expected to be the most significant change for many businesses.
Previously, leases were generally classified as either operating leases or finance leases. Under the revised standard, that distinction has largely been removed.
Most leases must now be recognised on the balance sheet through:
- A right-of-use asset
- A corresponding lease liability
This means businesses with property leases, vehicle fleets or equipment leases may see both assets and liabilities increase.
The way lease costs are reported will also change. Rather than recognising rental payments as an operating expense, businesses will generally record depreciation and interest costs.
As a result, measures such as EBITDA may improve, while gearing ratios and reported liabilities could increase.
Revenue recognition
FRS 102 now introduces a more structured approach to revenue recognition through a new five-step model:
- Identify the contract
- Identify performance obligations
- Determine the transaction price
- Allocate the transaction price
- Recognise revenue when obligations are satisfied
The key principle is that revenue should be recognised when control of goods or services passes to the customer.
For some businesses, this could change the timing of when revenue is recognised, particularly where contracts are more complex.
This may be especially relevant for sectors such as:
- Construction
- Software and technology
- Engineering
- Professional services
- Consultancy
Increased disclosures for small companies
Small businesses reporting under Section 1A of FRS 102 will also see increased disclosure requirements.
The revised standard places greater emphasis on ensuring accounts provide a true and fair view of a company’s financial position.
As a result, businesses may need to include:
- Additional related party disclosures
- More supporting information within their accounts
- Greater overall transparency in financial reporting
Other changes to be aware of
While leases and revenue recognition are the headline changes, the revised standard also includes updates relating to:
- Share-based payments
- Tax accounting
- Additional disclosure requirements
- Sector-specific guidance, including charities
Overall, the direction of travel is clear: greater transparency, consistency and alignment with international accounting standards.
What could this mean for your business?
These changes are more than just an accounting exercise.
Depending on your circumstances, they could affect:
- Banking covenants
- Financial ratios and KPIs
- Business valuations
- Lending decisions
- Internal performance reporting
For businesses with significant lease commitments or complex revenue arrangements, the impact could be particularly noticeable.
What should businesses do now?
Although the changes are now in effect, many businesses are still assessing their impact.
Practical steps include:
- Reviewing all lease agreements, including any embedded leases
- Assessing the impact on financial statements and key metrics
- Reviewing revenue recognition policies and customer contracts
- Considering the effect on banking covenants and lender reporting
- Seeking professional advice where required
The sooner businesses understand the impact of the changes, the easier it will be to adapt reporting processes and avoid unexpected issues.
If you would like to discuss how the FRS 102 changes could affect your business, our team can help you understand the requirements, assess the impact and ensure your reporting remains compliant. Get in touch with us on 0330 1070 873 or email info@smh.group.
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