FRS 102: Major accounting changes on the horizon
UK businesses face substantial accounting reforms that will reshape financial reporting across all sectors. The Financial Reporting Council (FRC) has rolled out extensive revisions to FRS 102, aligning UK standards more closely with international practices.
These changes take effect from 1 January 2026, giving businesses a critical window to understand the implications and prepare for implementation.
Lease accounting changes
The most dramatic shift will be in lease accounting treatment. Adopting IFRS 16 methodology, the conventional separation between operating and finance leases will be eliminated for lessees.
What this means for your business
Most leases will now be recognised on your balance sheet, creating several key impacts:
- New assets and liabilities could shift your business into a different size classification for reporting requirements
- Current liabilities will rise to reflect forthcoming lease payments, potentially affecting your current ratio and banking agreements
- Operating lease expenses will transform into depreciation and interest costs, both excluded from EBITDA calculations
- Enhanced EBITDA figures might trigger unexpected outcomes for performance bonuses, equity schemes or earn-out arrangements
Limited exemptions apply
Only a narrow range of leases escape these requirements:
- Short-term arrangements of 12 months or fewer
- Low-value items (computers, printers, minor office kit)
Everything else moves onto the balance sheet:
- Property leases (offices, warehouses)
- Vehicle fleets
- Plant and machinery
- IT infrastructure
Revenue recognition changes
The updates introduce a comprehensive five-step approach based on IFRS 15, replacing the existing fragmented revenue rules with a single, coherent system:
Step 1: Identify the customer contract
A valid contract must exist, creating enforceable rights and obligations (written documentation isn’t always essential).
Step 2: Identify performance obligations
Determine what you’ve committed to deliver. Each distinct promise represents a separate performance obligation.
Step 3: Establish the transaction price
Calculate total expected consideration, including fixed amounts, variable components and applicable discounts.
Step 4: Allocate pricing across obligations
For multi-element contracts, distribute the total price based on standalone selling prices of each component.
Step 5: Recognise revenue upon delivery
Revenue should be recognised when control transfers to the customer, either at a point in time or over the performance period.
This framework applies universally to customer contracts, delivering greater consistency and clarity in revenue recognition.
Preparation requirements
Review your key metrics
Financial KPIs will likely shift substantially. Balance sheet changes from lease recognition could dramatically alter your core ratios and performance indicators.
Engage your banking partners
Loan agreements tied to balance sheet metrics risk inadvertent breach when lease liabilities appear, despite unchanged business performance.
Assess size classification impact
Updated 2025 thresholds for company size categories could push businesses into different reporting tiers, potentially triggering:
- Mandatory audit requirements
- Enhanced disclosure obligations
- Increased administrative duties
- Modified filing deadlines
Business benefits
Rather than viewing these changes as purely regulatory burden, astute businesses can leverage compliance for competitive benefit:
- Greater transparency enhances stakeholder trust
- International alignment improves comparability with global peers
- Richer reporting data supports better strategic decisions
- Robust processes strengthen internal financial controls
Implementation timeline
These FRS 102 revisions mark the most significant UK financial reporting transformation in recent memory. With implementation over a year away, businesses have valuable time to prepare thoroughly and turn regulatory compliance into strategic advantage.
Want to know how to stay ahead of the changes? Get in touch today.
