The way that companies account for leases and recognise revenue is changing from January, and you need to consider how this will affect your business. Whilst these aren’t the only changes being brought in, they are expected to be the most significant.
The amendments will bring Financial Reporting Standard (FRS) 102 more in line with international accounting standards, improving the quality of UK financial reporting and enhancing comparability and consistency across different companies.
The changes will also impact disclosures in your financial statements from previous years and will provide more information to the readers of your accounts, so you’ll need to factor this into your stakeholder communications plans.
What is changing in FRS 102?
In 2024, the Financial Reporting Council (FRC) carried out a periodic review of FRS 102 and provided new amendments to the accounting standards affecting accounting periods starting on or after 1 January 2026.
The two major changes that will reshape your accounts
The two major changes affect how you’ll account for leases and recognise revenue:
1. Accounting for leases – The end of operating vs finance lease distinctions
The most significant change eliminates the current system where businesses classify leases as operating leases (renting an asset) or finance leases (recognising an asset and liability).
Instead, companies will be required to recognise a ‘right of use asset’ and a corresponding liability for all leases. There are exemptions in place for low-value or short-term (less than 12 months) leases.
So, instead of a rental charge hitting your profit and loss each period, it will be replaced by depreciation on the right of use asset and an interest charge relating to the liability.
2. Revenue recognition – The five-step model arrives
The new revenue recognition rules introduce a five-step model that aligns UK standards more closely with International Financial Reporting Standards (IFRS).
The five-step model applies to any contracts with customers, and you’ll need to:
- Identify the contract or contracts with a customer
- Identify the goods or services promised in the contract – the performance obligations
- Determine the transaction price for each promise
- Allocate the transaction price to the performance obligations in the contract based on the individual selling price of each element
- Recognise revenue in your accounts as or when a good or service is provided to the customer
Who’s most affected? Companies selling bundles of products or services within a contract. For example, a product with a maintenance package.
Getting ready for the transition
Different transition rules apply to each amendment, so make sure you understand and plan in good time for each one.
- For leases: There is no requirement to restate the comparative period. The entity simply recognises the right to use the asset at the date of transition. This will be the amount equal to the present value of future cash outflows.
- For the revenue recognition change: The entity has a choice of applying a full restatement or considering the impact on the date of transition and adjusting through opening reserves.
Three essential reviews
We recommend reviewing:
- The current leases you’re contracted to and considering the impact of capitalising these onto the balance sheet
- Your revenue streams and considering adopting the five-step model to understand what revenue streams or contracts will be most affected and planning how to account for these
- Other amendments to the standard to see if any will impact your company
Additional changes on the horizon
Beyond leases and revenue, several other amendments require your attention:
- Financial instruments: New measurement requirements that could affect how you value investments and hedging instruments on your balance sheet
- Business combinations: Changes to accounting for acquisitions, specifically around contingent consideration, which may affect deal structuring and post-acquisition reporting
- Share-based payments: New rules for equity compensation in business combinations that could impact M&A transactions and employee incentive schemes
- Software costs: Clearer guidance on capitalisation criteria that will affect tech investments and how IT expenditure flows through your financial statements
- Supplier finance arrangements: Enhanced disclosure requirements for supply chain financing (effective from 1 January 2025 – note this earlier deadline)
While these may seem secondary to the lease and revenue changes, they could have material impacts depending on your business model and transactions.
Small companies will be affected by very specific increased disclosure requirements under FRS 102A. You can learn more about this significant change in our article FRS 102: What small businesses need to know.
When will these changes affect your business?
The amendments affect accounting periods starting on or after 1 January 2026. So, if your financial year end is 31 December, this first applies for the 31 December 2026 year end. If your financial year end is 30 April, your first period will be the financial year end 30 April 2027.
While this may seem far off, these changes will impact how your management accounts and management information is presented.
The good news is that early adoption is permitted if all the amendments are adopted at the same time – and this could bring a competitive advantage.
Review your management reporting
If you prepare management accounts or reports for stakeholders throughout the year, you should align these with your statutory accounts. We recommend implementing any accounting changes in your management reports so they match the treatment in your statutory accounts.
Your next steps
Now is the perfect time to start thinking about these changes. Businesses that plan ahead will find the transition smoother and can even use improved financial presentation as a strategic advantage.
Whether you need help understanding how these changes affect your specific business, implementing new systems, or communicating with stakeholders about the transition, professional advice now prevents problems later.
Be ready for what’s coming
Begin preparing for the transition now by:
- Performing an impact assessment to understand how the new standards will affect financial metrics, loan covenants, and internal processes
- Reviewing contracts related to revenue and leases to evaluate the impact of the changes
- Updating systems to capture the necessary data for the new accounting models and disclosures
- Training staff on the new requirements and implementation
- Communicating changes to stakeholders
Need help navigating the FRS 102 changes?
To understand what these changes mean for your business, get in touch with us and we’ll guide you through this transition.
