The accounting landscape is about to shift significantly for small companies. Following the FRS 102 Period review changes in 2024, new accounting treatment and disclosure requirements will affect small companies preparing accounts under Financial Reporting Standard (FRS) 102a for accounting periods starting on or after 1 January 2026.
While these changes might seem like distant technical adjustments, they will fundamentally alter how your financial statements look and could impact key business metrics that banks, investors, and stakeholders rely on. Understanding these changes now, rather than when they become mandatory, gives you time to prepare and plan effectively.
When will these changes hit your business?
The amendments become mandatory for accounting periods beginning on or after 1 January 2026. So, if you have a 31 March year end, the first period affected will be your accounts for the year ending 31 March 2027.
However, the impact extends beyond your statutory year-end accounts. You’ll need to consider how the changes will affect your management accounts as well as your statutory year end accounts. Early adoption is permitted, but only if you apply all amendments simultaneously – you can’t pick and choose which changes to implement.
The three changes that will reshape your accounts
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 either operating leases (renting an asset) or finance leases (recognising an asset and liability).
What’s changing: All leases will require recognition of a ‘right of use asset’ and a corresponding liability on your balance sheet. The only exceptions to the new rule are low value leases or short-term leases (meaning less than 12 months).
Financial impact: Instead of a rental charge hitting the profit and loss each period, this will be replaced by depreciation on the right of use asset, and an interest charge relating to the liability. This fundamentally changes how your accounts look and affects key performance indicators.
Why this matters: Your EBITDA (earnings before interest, taxes, depreciation and amortisation) will be significantly higher than under the old standards. While this might sound positive, banks and investors familiar with the old treatment will need education about these changes when reviewing your performance.
Real-world example: A manufacturing company with £500,000 annual property and equipment leases will see a new assets and liabilities recorded on the balance sheet that weren’t previously recorded. The EBITDA will increase by roughly £500,000 but will also show higher depreciation and interest expenses.
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). This affects any business with customer contracts but particularly impacts companies selling bundled products or services.
In the five-step model, you will need to:
- Identify the contract or contracts with a customer
- Identify performance obligations – the goods or services promised in the contract
- Determine the transaction price for each ‘promise’
- Allocate the transaction price to the performance obligations 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 will need to separate each component as it is delivered. For example, if you sell a product with a three-year maintenance package, you’ll need to allocate the price between the equipment (recognised immediately) and maintenance (recognised over three years).
The complexity factor: This isn’t just about changing when you recognise revenue – it requires detailed analysis of your contracts and potentially new systems to track performance obligations over time.
3. Related party transactions – Full disclosure becomes mandatory
Unless group exemptions apply, all transactions with related parties will now need to be disclosed. This includes all transactions with directors, shareholders and their family members.
What requires disclosure:
- All transactions with company directors
- Transactions with shareholders and their families
- Dividends declared and paid during the year
- Loan, guarantees, and other financial arrangements
Many small business owners value privacy around their personal financial arrangements with their companies. These new disclosure requirements will make such transactions visible to anyone who can access your filed accounts.
If you regularly use your company for personal transactions or have complex director loan arrangements, now is the time to review these structures with your accountant.
Additional changes on the horizon
Several amendments have been made to provide more detailed disclosure around share-based payments, provisions and contingencies, going concerns and taxation. While less dramatic, these amendments require more comprehensive notes for those reading financial statements.
From 1 April 2027, all small companies must file complete profit and loss accounts at Companies House. This means your financial performance will become public information – a significant change for businesses that currently file reduced accounts.
Getting ready for the transition
Although preparing the first set of accounts that will be affected might seem a way off yet, it is important to understand the impact now along with how it will affect your management reporting. While the changes don’t take effect until 2026, businesses crossing audit thresholds or seeking investment will likely face questions about these changes much sooner.
Start planning your management reporting: Consider how these changes will affect the financial information you use to run your business. Your board reports and management accounts may need adjustment to remain meaningful.
Review your systems: Lease accounting changes may require new tracking systems or software modules. The earlier you identify these needs, the more time you have to implement solutions cost-effectively.
Consider your stakeholders: If you have bank facilities, investors, or other stakeholders who rely on financial ratios, start the conversation about these changes now. Proactive communication prevents misunderstandings later.
The bigger picture
These FRS 102 changes reflect the ongoing alignment of UK accounting standards with international practices. While this creates short-term complexity, it should eventually make UK financial statements more comparable globally.
For growing businesses, these changes arrive at a time when financial transparency is increasingly important for accessing capital and demonstrating credibility. Understanding and implementing them effectively can become a competitive advantage rather than a compliance burden.
Your next steps
Don’t wait until 2026 to start thinking about these changes. The businesses that plan 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.
The landscape of small business accounting is changing. Make sure you’re ready for what’s coming.
