Financial Reporting Standard 102 (FRS 102) has long been the primary accounting framework for UK entities not adopting International Reporting Standards (IFRS), FRS 101, or FRS 105. However, as accounting standards continue to evolve, major revisions to FRS 102 are scheduled to take effect from 1 January 2026.
Understanding these upcoming changes is crucial for businesses to prepare effectively and ensure compliance.
In this article, we explore the key amendments to FRS 102, focusing particularly on the new lease accounting requirements and revenue recognition criteria, and what these changes could mean for your business.
When will the changes take effect?
The amendments to FRS 102 become mandatory for accounting periods starting on or after 1 January 2026. If your company’s financial year ends on 31 March, the first set of accounts impacted by these changes will be the financial statements for the year ending 31 March 2027.
What changes are being made to FRS 102 and why?
The updates to FRS 102 include several key revisions, including:
- A new model for revenue recognition, closely aligned with IFRS 15 Revenue from Contracts with Customers, but with some simplifications.
- A comprehensive update to lease accounting for lessees, aligned with IFRS 16 Leases, but with certain practical exemptions.
The changes are designed to enhance consistency, comparability, and alignment to international accounting standards.
Key changes in lease accounting
One of the most significant shifts under the FRS 102 overhaul relates to lease accounting. The revised standard adopts principles similar to IFRS 16 but includes certain simplifications.
What’s new?
- Almost all leases will be brought onto the balance sheet. Leases must recognise a Right of Use (RoU) asset along with a corresponding lease liability for lease obligations.
- Lease liabilities are measured at the present value of lease payments, discounted at the relevant interest rate. These calculations can be complex and should be assessed on a lease by lease basis.
- Lease payments are split between depreciation of the RoU asset and interest expense incurred on the lease liability calculations. This may be different to the interest payments previously included in profit and loss.
- Only short-term leases (typically under 12 months) and low-value leases qualify for exemption.
What does this mean for your business?
- These changes could influence compliance with existing loan covenants. Companies should review these arrangements and consider discussions with lenders.
- Key financial metrics such as EBITDA (earnings before interest, taxes, depreciation, and amortisation), gearing ratios, and interest coverage could be affected.
- Staff incentive schemes and other plans linked to EBITDA may need to be reviewed.
- The change could fundamentally alter the monthly journals needed to account for leases for management accounts purposes.
- There could be tax implications, particularly where tax treatment follows accounting treatment of leases.
How to prepare?
- Start reviewing your lease contracts now to identify how they will be impacted.
- You will need to get all your paperwork in order – copies of all existing lease agreements will be needed to calculate the changes.
- Businesses close to audit exemption thresholds (especially on the gross asset basis) should reassess their status due to potential asset increases from capitalising leases.
- Update internal systems and processes to handle the new lease accounting requirements.
- Provide training for finance teams on new terminology and accounting models.
Note: lessor accounting will be largely unaffected.
Important changes to revenue recognition
The revision to FRS 102 introduces a new, more structured five-step model for recognising revenue, closely aligned with IFRS 15. The focus shifts from the traditional “transfer of risks and rewards” approach to one centred on performance obligations and the transfer of control.
Key points include:
- Contracts must be analysed into distinct performance obligations.
- Revenue must be allocated to each obligation based on standalone selling prices.
- Recognition of revenue occurs when, or as, each performance obligation is satisfied—either over time or at a point in time.
- Areas such as bundled goods and services, variable consideration, warranties, customer incentives, and financing components require reassessment.
- Construction contracts will no longer be addressed separately (as they are under old FRS 102); instead, they fall under the general five-step revenue model, potentially changing revenue recognition timing for such businesses.
What will be the impact?
- Many businesses with straightforward contracts may see limited impact.
- Those with more complex or bundled contracts may need to rethink revenue recognition timing and methodology.
- The new model is more prescriptive and detailed, reducing flexibility but increasing consistency and comparability across industries.
Note : For companies with long-term contract arrangements such as property, construction and engineering businesses, these changes may be particularly significant, potentially affecting reported revenue and profitability timing. For more detail on how the changes will affect property and construction businesses read our previous article here.
Final thoughts: what should businesses do now?
While early adoption of the revised FRS 102 is permitted if all amendments are applied together, most entities will need to prepare for implementation in 2026. It’s important to note:
- There is no requirement to restate comparative figures, but businesses should be ready for changes in revenue and lease recognition timing.
- In the first set of accounts post conversion, companies are required to adjust opening balances of retained earnings at the conversion date (being year ends from 31 December 2025 onwards)
- The review process should therefore begin at the next financial year end.
- Disclosure requirements will increase, meaning finance teams will need to update reporting processes.
- Even smaller entities applying Section 1A of FRS 102 will also be affected, so this is not just a concern for larger companies.
- For subsidiaries within IFRS-reporting groups, the increased alignment will ease consolidation by reducing the need for adjustments between local and group reporting frameworks.
Need help navigating FRS 102 changes?
The FRS 102 overhaul represents a fundamental shift for some businesses. At Cowgills, we understand the complexity these changes bring and are here to help you. Whether you want to understand the impact on your financial reporting, tax position, or business operations, our expert team can provide tailored guidance to ensure a smooth transition.
If you would like to discuss how the updated FRS 102 standards might affect your business, please get in touch at enquiries@cowgills.co.uk.
Early preparation will help you stay ahead and confidently navigate the new accounting landscape.
Stay informed and prepare now to ensure your business thrives under the new FRS 102 framework in 2026 and beyond!
