At FMY Chartered Accountants, we believe preparation is the key to confidence. The Financial Reporting Council (FRC) has announced important updates to FRS 102, the most widely used accounting standard in the UK and Republic of Ireland. These changes, effective for accounting periods beginning on or after 1 January 2026, will bring UK GAAP closer in line with international standards (IFRS).
While 2026 may feel some time away, businesses should begin preparing now. The updates to lease accounting and revenue recognition in particular could significantly affect reported profits, balance sheets, and key financial metrics such as EBITDA.
What’s Changing Under FRS 102?
1. Lease Accounting – Moving On Balance Sheet
Currently, many leases are treated as “off balance sheet” operating leases, with rent simply recognised in profit and loss. Under the revised FRS 102, this distinction disappears. Almost all leases will need to be recognised on balance sheet, requiring:
- A Right-of-Use (ROU) asset in fixed assets.
- A corresponding lease liability for future payments.
This means reported assets and liabilities will increase, and instead of a rent expense, businesses will see depreciation of the ROU asset and interest on lease liabilities in their P&L.
Exceptions remain for low-value leases and those under 12 months, but most businesses will notice a tangible shift in their financial position.
2. Revenue Recognition – A Five-Step Model
The revised FRS 102 introduces a new five-step model for recognising revenue, aligning more closely with IFRS 15. The focus moves from simply transferring “risks and rewards” to assessing whether performance obligations have been satisfied.
The five steps are:
- Identify the contract with the customer.
- Identify distinct performance obligations.
- Determine the transaction price.
- Allocate the price to performance obligations.
- Recognise revenue when obligations are satisfied.
This change may accelerate or delay revenue recognition depending on contract terms. Businesses in construction, services, and long-term projects are likely to feel the greatest impact.
3. Other Key Updates
Alongside leases and revenue, the revised FRS 102 introduces further refinements:
- A new definition of fair value aligned with IFRS 13.
- Updated rules on business combinations and share-based payments.
- Guidance on uncertain tax positions.
- Clarity on whether software costs are treated as intangible assets or property, plant, and equipment.
- New disclosure requirements focused on material accounting policies.
- Simplifications for small entities under Section 1A.
Why This Matters: The Business Impact
These accounting changes don’t just affect the numbers in your financial statements — they can reshape your broader business landscape. Companies should assess how the amendments will impact:
- EBITDA & Profitability: With leases moving on balance sheet, EBITDA may increase (as rent expenses are removed). However, interest and depreciation will impact profit and cashflow differently.
- Loan Covenants: Businesses with loans linked to EBITDA, net debt, or gearing ratios may find themselves in breach of agreements unless terms are renegotiated.
- Dividends & Bonus Schemes: Shifts in timing of revenue and profit recognition could affect distributable reserves, impacting dividends and staff incentive schemes.
- M&A and Earn-Out Clauses: Changes in revenue and profit recognition may affect contingent consideration linked to acquisitions.
Practical Steps for Businesses
At FMY, we recommend businesses act now to avoid disruption later:
- Impact Assessment – Review your lease and revenue contracts to understand how the new standards affect you.
- Contract Review – Update terms and conditions where necessary to support compliant reporting.
- Systems & Data – Consider whether new software or enhanced IT systems are needed for lease tracking and revenue recognition.
- Covenants & Agreements – Speak to lenders, investors, and stakeholders early to renegotiate terms if needed.
- Internal Controls – Establish robust processes to ensure calculations, especially for leases, are accurate and auditable.
For businesses with complex lease portfolios, adopting specialised lease accounting software may be essential. Smaller businesses may manage with well-structured spreadsheets, but accuracy and compliance are critical either way.
Linking With Company Size Threshold Changes
These FRS 102 updates arrive alongside revisions to company size thresholds effective 6 April 2025. More companies may qualify as micro-entities under FRS 105, avoiding the new lease requirements altogether. However, since lease and revenue accounting changes also affect turnover and total assets — metrics used in size classification — businesses should carefully consider their future reporting framework.
How FMY Accountants Can Help
Navigating the new FRS 102 rules can be daunting, but with expert guidance, you can turn compliance into an opportunity. At FMY Chartered Accountants, we:
- Conduct tailored impact assessments for your business.
- Help you review and renegotiate contracts to avoid unintended consequences.
- Provide advice on system upgrades or process changes for seamless compliance.
- Offer ongoing support to ensure that reporting remains robust, accurate, and aligned with your business goals.
Final Thoughts
The revised FRS 102 standard represents one of the most significant shifts in UK GAAP in years. While the changes aim to improve transparency and bring consistency with international standards, they will have real consequences for balance sheets, profitability, and business decision-making.
With less than a year until the first reporting periods under the new standard, now is the time to act.
To discuss how these changes will affect your business and prepare a tailored plan, get in touch with us at info@fmyaccountants.co.uk