FRS 102 changes effective from 1st January 2026

The upcoming FRS 102 changes effective from 1 January 2026 will reshape how many UK businesses report under UK GAAP, particularly in relation to revenue recognition and lease accounting. As the revised standard brings FRS 102 closer to IFRS 15 and IFRS 16, organisations should start assessing how the changes could affect financial statements, key metrics and internal processes.

In this article, our Audit team outline the main amendments, key implementation dates and the practical steps businesses can take now to prepare with confidence.

Key takeaways

• Revenue: New five-step model aligned to IFRS 15
• Leases: Most leases brought onto the balance sheet
• Other areas: Disclosure, estimates, financial instruments, business combinations
• Impact: Profit, reserves, EBITDA, covenants, KPIs, systems and contracts
• Action: Identify affected contracts, assess impact early, plan transition

What the latest updates mean for your business

The latest amendments to FRS 102 represent one of the most significant changes to UK GAAP in recent years and are set to affect more than just year-end reporting. For many businesses, they may change the timing of revenue, introduce new liabilities to the balance sheet and alter key performance metrics such as EBITDA, profit and reserves. This could have knock-on effects for lender covenants, bonus arrangements, tax and the wording used in customer and lease contracts.

The extent of the impact will vary by sector and contract type; however almost all organisations will need to revisit systems, processes and documentation to ensure compliance and avoid surprises.

Key dates in the FRS 102 timeline:

• December 2022 – the FRC published FRED 82 for consultation
• 27^th March 2024 – the FRC issued the final amendments to FRS 102 as part of the 2024 Periodic Review
• Amendments become mandatory for accounting periods beginning on or after 1^st January 2026, with early adoption permitted in some areas.

For example, a company with a 31^st March year-end will first apply the changes in its 31^st March 2027 financial statements, with a date of initial application of 1^st April 2026.

Key changes

Revenue recognition

The revised revenue rules introduce a new five-step model based on the principles of IFRS 15, with revenue recognised when control of goods or services passes to the customer. This replaces the current approach, which is generally based on the transfer of risks and rewards or stage of completion.

Businesses will need to review contracts carefully, particularly where they involve:

• Multiple goods or services in one arrangement
• Variable consideration, rebates or rights of return
• Warranties or customer options
• Significant financing components
• Bespoke or modified contracts

The overall result may be a change in the timing or pattern of revenue recognition, although for some businesses the review may confirm that no accounting change is needed once contracts have been properly assessed.

Revenue initial application

On initial application, entities have a choice either to:

• Restate comparatives (full retrospective approach); or
• Not restate comparatives, with any cumulative impact recognised in opening retained earnings (modified retrospective approach).

There are also practical expedients available, including additional use of hindsight for areas such as contract modifications and variable consideration.

Lease accounting

The new lease accounting model is broadly aligned to IFRS 16, which means many lessees will now be presented on the balance sheet by recognising:

• A right-of-use asset; and
• A corresponding lease liability.

This will change how lease costs appear in the profit and loss account, with the corresponding expense typically presented as depreciation and interest rather than a single operating lease charge. As a result, businesses may see movement in EBITDA and other key performance metrics.

There are, however, still exemptions for:

• Short-term leases; and
• Leases of low-value assets

FRS 102 also includes some practical simplifications compared with full IFRS 16, including the use of an obtainable borrowing rate rather than an incremental borrowing rate in certain cases, simplified guidance on low-value assets, fewer reassessments of discount rates following some lease changes, and a simpler approach to sale and leaseback transactions.

Lease initial application

For leases, there is no choice, and a modified retrospective approach is applied:

• Comparative figures do not need to be restated;
• Where an entity already reports into a group applying IFRS 16, existing carrying amounts may be used as opening balances; and
• In other cases, the right-of-use asset will generally equal the lease liability on transition, with any adjustment recorded in opening retained earnings.

Other changes to be aware of

While revenue and leases are likely to attract the most attention, the 2024 Periodic Review also includes other important amendments, including:

• Increased disclosure requirements for some small entities applying Section 1A;
• New and updated guidance on fair value, going concern disclosures, and accounting estimates;
• Changes affecting financial instruments, business combinations, intangible assets, share-based payments, income taxes and related party disclosures; and
• Disclosure requirements for supplier finance arrangements, effective for reporting periods beginning on or after 1^st January 2025.

Why do the FRS 102 changes matter?

These changes are not just a year-end reporting issue. They may affect:

• Reported profits and reserves;
• EBITDA and other KPIs;
• Lender covenants and stakeholder expectations;
• The wording of customer and lease contracts;
• Finance systems, processes and internal controls; and
• The volume and complexity of disclosures in financial statements.

The common theme is simple: do not underestimate the time required. Early planning, clear documentation and the right advice will make the process far smoother.

What actions should businesses take now?

We recommend that businesses start by:

1. Identifying affected revenue contracts and lease arrangements.
2. Assessing whether revenue timing or lease accounting will change.
3. Considering transition choices and practical expedients early.
4. Reviewing any impact on KPIs, covenants, bonus arrangements and tax.
5. Preparing robust documentation to support judgements, calculations and disclosures.

At PKF Smith Cooper, our specialist Audit team is here to support you through these changes, from assessing the impact on financial statements and KPIs to helping you navigate transition choices with confidence.

Get in touch with our experts to discuss how the FRS 102 changes will affect your business and build a practical, tailored plan for a smooth transition.