The Financial Reporting Council (FRC) has completed its periodic review of FRS 102 – The Financial Reporting Standard applicable in the UK and Republic of Ireland. These are the most significant changes since the standard was introduced almost a decade ago. The amendments will apply to accounting periods beginning on or after 1 January 2026, with early adoption permitted.
While some businesses may view the changes as a technical update, they will have a wide-ranging impact on how financial results are reported, how stakeholders interpret performance, and even how businesses manage contracts and financing arrangements. Now is the time to understand what is changing and begin planning.
Why is FRS 102 being updated?
The FRC’s goal is to ensure that UK GAAP remains relevant, consistent and proportionate. Since the last major review, international standards have evolved significantly. These amendments therefore bring UK standards closer to international best practice, particularly in two key areas: lease accounting and revenue recognition.
In addition, the changes aim to strike a balance between useful information for users of accounts and practicality for preparers. The result is a package that should enhance transparency and comparability, while still being less onerous than full IFRS.
The Headline Changes
1. Leases – most will come onto the balance sheet
Currently, under FRS 102, many leases are treated as “operating leases” with rental costs simply expensed to the profit and loss account. From 2026, this distinction largely disappears.
- On balance sheet model: Almost all leases will be recognised as a “right-of-use asset” with a corresponding “lease liability”.
- Impact: Businesses will show higher assets and liabilities, with lease costs split between depreciation and interest. This may significantly affect reported gearing and EBITDA.
- Who is most affected? Retailers, manufacturers, logistics firms, and any business with substantial property or equipment leases.
2. Revenue recognition – a five-step model
Revenue recognition is shifting towards the principles of IFRS 15. The new model requires businesses to follow a five-step process:
- Identify the contract with a customer
- Identify the distinct performance obligations
- Determine the transaction price
- Allocate the price to the performance obligations
- Recognise revenue as performance obligations are satisfied
- Impact: Greater judgment will be needed, especially where contracts are long-term, include multiple elements, or have variable consideration.
- Who is most affected? Construction, technology, and service businesses with complex customer contracts.
3. Small entity disclosures
For smaller businesses, new requirements will apply around related party disclosures. This means more transparency will be required where transactions involve directors or related parties.
4. Interaction with FRS 105
For the smallest businesses, there is the option to apply FRS 105 (the micro-entities regime) instead of FRS 102. With the additional complexity in the revised FRS 102, some may be tempted to switch. However, this comes at the cost of reduced disclosure and transparency, which may not be welcomed by lenders, suppliers or investors. Careful analysis will be needed before making this decision.
Key Takeaway
The FRS 102 changes are more than a technical adjustment — they will affect how your business reports performance and how others view it. Planning early will help you manage the transition smoothly.
Need Support?
If you would like to discuss how the FRS 102 changes could affect your business, please get in touch with your local business champion here.
Frequently Asked Questions (FAQs)
- Do these changes affect all businesses?
- What’s the biggest change I need to prepare for?
- How will this affect my financial statements?
- Will this impact my bank loans or covenants?
- What about charities and not-for-profits?
- Should my business consider switching to FRS 105?
- When should I start preparing?
- What practical steps should I take?
- Where can I find more guidance?
Do these changes affect all businesses?
Not all. If you report under FRS 105 (micro-entities regime), you are not directly affected. Most SMEs using FRS 102 will need to comply.
What’s the biggest change I need to prepare for?
Two areas stand out:
- Leases: If you rent property, vehicles, or equipment, you’ll now need to show these on your balance sheet. Please note there are some minor exemptions.
- Revenue: If you have complex or long-term contracts, the timing of when you recognise revenue may shift.
How will this affect my financial statements?
Your balance sheet may show higher assets and liabilities. Profit and EBITDA may look different due to lease costs being split between depreciation and interest.
Revenue may move between periods, affecting reported results.
Will this impact my bank loans or covenants?
Potentially, yes. Changes to gearing and EBITDA could affect covenant calculations. Early discussions with your bank or lender are recommended.
What about charities and not-for-profits?
Grant income recognition and related disclosures may need review. Trustees should consider how results will be presented to funders and regulators.
Should my business consider switching to FRS 105?
Possibly, if you qualify as a micro-entity. However:
- FRS 105 has fewer disclosures, which some lenders and investors may not accept.
- You may lose flexibility and transparency.
It’s important to weigh the benefits and drawbacks before deciding.
When should I start preparing?
Now! Assessing contracts, leases, and covenants early will avoid last-minute disruption. Early adoption is also an option.
What practical steps should I take?
- Review leases and long-term contracts
- Model the potential impact on your accounts
- Update accounting systems if needed
- Train your finance team
- Speak to your advisers to plan ahead
Where can I find more guidance?
We will be publishing blogs, sector-specific guides, and hosting webinars over the next year. Our team can also provide tailored advice for your business.
