Amendments to FRS 102 from January 2026

For periods commencing on or after 1 January 2026, FRS 102, the accounting standard used by most unlisted companies in the UK, is being significantly updated.  Early adoption is permitted, although we have seen very few examples of this.

The two biggest changes are in relation to lease accounting and revenue recognition, although there have also been changes to section 2: Concepts and Pervasive Principles, a new section on fair value measurement and various improvements, clarifications and consequential changes.

In this article, our audit and accounting experts explain the 2 major changes, which align UK Generally Accepted Accounting Practice (UKGAAP) more closely with International Financial Reporting Standards (IFRS), and the impact on companies’ financial statements.

Leases Now Required on Balance Sheet

The revised standard requires almost all leases to be brought onto the balance sheet for lessees.  Accounting for lessors remains largely unchanged.  The new requirement means recognising a right of use (RoU) asset in respect of a lease contract and a corresponding lease liability, being the present value of the future lease payments.

The lease liability is discounted using the interest rate implicit in the lease, or if that is not easily determined, the company’s incremental or obtainable borrowing rate.

The RoU asset needs to be depreciated over the life of the asset and the lease liability unwound as cash payments are made.

The accounting is the same as the current rules for finance leases and removes the judgmental distinction between an operating lease and a finance lease for lessees.  The only exemptions from the new requirement are in respect of short term leases (less than 12 months) and leases for low value assets, which can continue to be treated as operating leases with the rental expense being taken to the profit and loss account over the term of the lease.

The transition arrangements are relatively simple.  Preparers of financial statements need to calculate the present value of any remaining lease payments and recognise the RoU asset and the lease liability.  You do not have to calculate what the position would have been if the lease had always been recognised as a finance lease, and no prior year restatement is required – the new asset and liability are merely recognised on the transition date.

The impact on companies’ financial statements could be quite significant.  Previous off balance sheet rights and liabilities will now be recognised on the balance sheet.  Where companies rent premises or large amounts of plant and equipment, this may result in significant assets and liabilities now being shown on the balance sheet.  This will have an impact on ‘Gross Assets’, for example when considering company size, as well as increasing a company’s net debt and changing the gearing ratios.

The impact on the profit and loss account could also be significant.  The current operating lease rental is replaced by depreciation and interest.  Although, over the life of the lease the total charge to the profit and loss account is the same, the timing will change.  Operating leases are recognised on a straight line basis, while depreciation can be recognised on either a straight line basis or reducing balance, and the interest will be recognised on a constant effective interest basis as the discounting unwinds. This means costs will hit the profit and loss account earlier under the new requirements.

There is positive news for companies that measure EBITDA. The result of these changes is that EBITDA will increase as operating lease costs were deducted to arrive at EBITDA, but, by definition, interest and depreciation will be added back.

Revenue Recognition: The New 5 Step Model

The other significant change to the standard relate to how and when companies recognise income. FRS 102, and previous UKGAAP, did not include much guidance on revenue recognition. That changes with these amendments to FRS102, aligned to IFRS 15 ‘Revenue from contracts with customers’, which introduce a clear, five-step model for recognising revenue:

• Identify the contract with the customer
• Identify the separate performance obligations
• Determine the transaction price
• Allocate the price to those obligations
• Recognise revenue as each obligation is met

For most of the businesses that we work with, these changes will not actually change the amount or the timing of revenue recognition.  Those companies that may be impacted are those who provide long-term projects, staged services, or bundled goods and services.  Examples of sectors that may be impacted are telecoms, construction and professional services.

Despite this, finance teams in all companies will need to analyse their contractual relationships to ensure that there are contracts with customers, those contracts have clear performance obligations and there is an enforceable right to payment for meeting those performance obligations. If the contracts are not clear on these points, amended terms may need to be issued.

Contract terms will determine whether revenue can be recognised over time or at a point in time and may lead to changes to the way revenue was previously recognised.

Craig Burton, Audit Partner at Hawsons Chartered Accountants, comments:

“These changes to FRS102 are significant.  The revised treatment of leases will result in changes to almost every company’s balance sheet and profit and loss account – which will be significant for those companies that rent premises or large amounts of plant and machinery.  The changes to revenue recognition will not impact as many companies – most of our clients will not see any difference to the amount or timing of the recognition of revenue.  However, all companies do need to ensure that they have contracts in place which, when applied to the new 5 step model do give the result that they expect.  Finance teams need to be collecting information now, both in respect of operating leases and contracts to make sure that they are ready for the transition date – which for companies with December year ends is less than three months away”.

Next Steps for Your Company

If you haven’t already reviewed your leases and sales contracts, updated your accounting policies, and made your systems ready for these changes, then now is the time to act.

Our accounting and audit experts are always happy to answer any questions you may have accounting standards and amendments, so get in touch now!

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