The Financial Reporting Council (FRC) has issued amendments to FRS 102, the UK’s financial reporting standard, with the aim to align closer to international accounting standards. These changes take effect from 1 January 2026, but businesses can choose to adopt them earlier if they apply all the updates at the same time.
The key areas affected are:
While it may seem that there is still a significant period of time to consider the changes to FRS 102, the impact on a business can be significant and we would encourage businesses to start considering these at the earliest available opportunity.
Similar to IFRS 16, the distinction between operating and finance leases for lessees has been removed. This means that, unless a lease meets one of the following exceptions, it must now be recorded on the lessee’s balance sheet:
Therefore, most operating leases of land and buildings, vehicles and machinery will be treated differently going forward.
On the balance sheet, the lessee will recognise a right-of-use (fixed) asset, which is equivalent to the present value of future lease payments, along with any directly attributable costs of obtaining the lease. An equivalent lease liability will also be recorded, split between current (short-term) and non-current (long-term) liabilities.
In the profit and loss account, the operating lease expense will be replaced by two separate items: depreciation of the right-of-use asset and interest on the lease liability. This change results in an improvement in EBITDA.
As introduced in IFRS 15, a five-step model for revenue recognition is now being applied to all contracts with customers. This model uses the same principles for recognising revenue, regardless of the type of underlying transaction.
The five steps are:
The model can be applied to a portfolio of similar contracts if the entity believes that the results would not differ materially from applying the model to a portfolio of contracts individually.
Once a revenue contract has gone through the five-step model, the timing of revenue recognition may differ from the current treatment under FRS 102. This could lead to the recognition of contract assets and/or liabilities on the balance sheet that did not exist previously.
Additionally, the disclosure requirements for revenue have been expanded. There is now a greater focus on providing more detail about the methods used for revenue recognition (including those for revenue recognized over time, where applicable), year-end balances, and any unsatisfied performance obligations.
The impact of the FRS 102 amendments will vary from business to business depending on exposure to the affected areas. However, failing to plan for them could have wide-ranging consequences.
As businesses prepare for upcoming changes to accounting standards, it’s crucial to understand the broad impact these amendments may have on key operational and financial areas. Below are several critical considerations that organizations should evaluate to ensure a smooth transition:
With significant changes to key figures such as EBITDA, finance costs, depreciation, and gross assets/liabilities, businesses may need to re-evaluate their KPIs. It is important to determine whether existing KPIs remain relevant under the new accounting standards, as shifts in financial reporting could affect performance measurement and strategic decision-making.
The amendments could potentially put a business in breach of banking or other financial covenants, even if the underlying performance has not changed. Early identification of how the amendments might impact covenant compliance - and proactive discussions with lenders - can help mitigate risks and avoid surprises, ensuring financial stability and maintaining strong lender relationships.
Alongside the amendments, there will be an increase in company size thresholds for financial reporting in 2025. Businesses should assess whether they will move into a larger size bracket as a result of these changes, as this could lead to additional reporting requirements and compliance obligations, impacting administrative workloads and regulatory oversight.
Businesses should evaluate whether their current financial reporting systems and controls are adequate to meet the requirements of the amendments. This includes ensuring that systems are capable of handling the new standards and that internal controls are robust enough to maintain compliance. Upgrading systems or enhancing controls may be necessary to align with the new reporting framework.
Changes in accounting treatment under FRS 102 can lead to variations in taxable profits or losses, which might affect the company’s tax position. Businesses should work closely with tax advisors to evaluate whether the amendments will alter their tax liabilities, tax credits, or eligibility for certain reliefs. A proactive approach can help optimise tax outcomes and prevent unexpected liabilities.
These are just a few examples of the areas that need to be considered when assessing the potential impact of the amendments on a business. While there is still time to plan for implementation, it’s important for businesses to begin this process sooner rather than later to allow a smooth transition and maintain regulatory compliance.
The upcoming changes to FRS 102 will have a significant impact on lease accounting and revenue recognition. While businesses have until January 1st, 2026, to prepare before the changes, it’s essential to start planning now to understand the effects on financial statements, KPIs, and disclosures.
Hall Morrice has been closely monitoring developments in this area and is available to assist with your transition process. Whether you need guidance on how to approach the transition independently or are looking for comprehensive support throughout the process, please reach out to Paul Archibald at p.archibald@hall-morrice.co.uk for expert advice and tailored assistance.
