Sweeping Change: FRS 102
From January 2026, UK companies reporting under FRS 102 will confront one of the most sweeping shifts in UK GAAP for a decade. The Financial Reporting Council’s 2024 Periodic Review has re-engineered key parts of the standard, drawing it much closer to IFRS – especially in leases and revenue – while also tweaking foundational concepts, disclosure regimes and measurement options.
The scale of the change is significant. The amendments apply to accounting periods starting on or after 1 January 2026 (though some disclosures – notably in supplier finance – kick in from 1 January 2025). For many mid-market companies, the 2026 financial statements will be their first under this new regime.
What’s new (versus old FRS 102)
Leases: now on the balance sheet
Under the current standard, only finance leases sit on the balance sheet; operating leases are off-balance sheet and expensed through the income statement. The 2026 amendments eliminate that distinction for lessees: most leases (excluding short-term and low-value leases) will now create a right-of-use (ROU) asset and a corresponding lease liability. The prior “rental expense” is replaced by depreciation (on the ROU asset) and interest (on the liability).
That shift can be seismic: it will increase both reported assets and liabilities, alter key ratios (net debt, gearing), and change how EBITDA is viewed (interest becomes a cost, pushing more of the lease burden below the line). Transition is made simpler by not requiring restatement of comparatives – the cumulative effect is taken to opening retained earnings.
Revenue: first principles come to FRS 102
Perhaps the most profound shift lies in revenue accounting. The old FRS 102 model was rooted in “risks and rewards” transfer. The revision introduces a fully fleshed five-step model – drawn from IFRS 15 – requiring entities to:
- identify contracts
- identify performance obligations
- determine transaction price (including variable consideration)
- allocate the price, and
- recognise revenue when or as obligations are satisfied.
That means more rigorous contract review, unbundling of goods/services, estimation of incentives, judgments on when control passes, and greater judgment overall.
For many companies — especially those in services, long-term contracts, software, construction, or bundled offerings – timing and amounts of recognised revenue may shift materially. There is optionality on transition: companies can restate comparatives or simply adjust opening retained earnings for cumulative effect.
Other changes & consequential edits
Beyond the headline two key points, amendments also include:
- A refreshed Concepts & Pervasive Principles (Section 2) realigned to the IASB’s Conceptual Framework.
- A new fair value measurement section to clarify when fair value is appropriate and how to apply it.
- Removal of the option to newly adopt the IAS 39 recognition/measurement model under certain provisions (unless for group consistency).
- Enhanced disclosures, especially around supplier finance arrangements, which must be disclosed (key terms, carrying amounts, payment ranges) — with effect from 1 January 2025 for some entities.
- Clarifications around business combinations (e.g. contingent consideration vs remuneration), uncertain tax positions, and going concern disclosures.
What you should be doing now
If your company produces accounts under the FRS 102 standard, here’s a playbook you can deploy now:
1. Perform a diagnostic / impact assessment
Map existing lease and customer contract portfolios. Identify which contracts will shift under the new regime and model the quantitative effects (e.g. changes in EBITDA, net debt, gearing, covenant impacts).
2. Engage auditors and advisers early
Conversations with external auditors, technical accountants, or your firm should begin now – to flag potential contentious judgments (e.g. lease vs service elements, modifications, discount rates).
3. System, process & data readiness
Assess whether your accounting system can handle the new requirements (e.g. lease modelling, variable consideration) or whether a specialist lease / revenue engine is needed. Gather contract metadata: service periods, payment terms, options, modifications, performance obligations.
4. Policy & transition elections
Decide whether to restate comparatives or apply the cumulative catch-up method to opening reserves. Draft accounting policy text.
5. Stakeholder management & covenant review
Inform lenders, investors, and board members of the likely effect of restated metrics. Review whether existing debt covenants might be breached under the new standard and plan proactive renegotiations.
6. Training & change management
Equip your finance and commercial teams (sales, legal, contracts) with knowledge of the new standard so they can flag contract terms or structures that could be troublesome under the new model.
7. Disclosure planning
Prepare enhanced disclosure templates (especially for leases, supplier finance, revenue judgments) to ensure transparency in the first year of adoption.
In summary: this is not a dress rehearsal
The 2026 FRS 102 changes are structural, not cosmetic. They recast how balance sheets look, how revenue is judged, and how business viability is perceived.
Tags: FRS 102
