Understanding the Upcoming Changes to FRS 102 – What Businesses Need to Know

Why is it relevant?

From January 2026, updates to revenue recognition and lease accounting could significantly impact your financial statements. These changes bring UK accounting standards closer to international financial reporting standards (IFRS) and will have a significant impact on how businesses present their financial statements.

What are the changes?

The two main changes to FRS 102 involve revenue recognition and lease accounting, with other modifications being less significant. The revenue recognition changes align UK accounting standards with international financial reporting standards by introducing a five-step model requiring detailed contract analysis to identify and allocate values to different performance obligations within contracts.

This change demands that businesses scrutinise their revenue streams and contract components to understand potential impacts on their financial reporting.

For lease accounting, the change is substantial: operating leases will no longer be recorded as a rent expense through the profit and loss account (P&L). Instead, companies must recognise a right-of-use asset and a corresponding lease liability on the balance sheet for the entire lease term.

This adjustment will significantly affect both the balance sheet and P&L, replacing the rent charges with amortisation of the right-of-use asset and a finance charge from the unwinding of the discounted lease liability.

Other changes:

• Small entities applying Section 1A will have expanded related-party disclosures
• Additional disclosure updates include changes to financial instruments, business combinations, and share-based payments
• Starting in 2025, statement of cashflows require additional disclosure in respect of supplier finance arrangements

What do you need to know?

The changes will notably alter key financial metrics such as EBITDA, influencing how investors, lenders, and other stakeholders may perceive company financials.

Though these changes only apply from the accounting year ending 31 December 2026, early adoption is permitted and businesses will need to start thinking now about how 2026 management information is presented to avoid discrepancies and surprises when the year-end financial statements are produced.

Key Points: 

• Two major changes in FRS 102: revenue recognition and lease accounting
• Revenue recognition adopts a five-step model aligning with international standards
• Lease accounting now requires recognising right-of-use assets and lease liabilities
• Significant impact on profit and loss, affecting EBITDA and financial metrics
• Consider early adoption to align management accounts with year-end statements
• Importance of early conversations with accountants, auditors, and investors

What should you do next?

Early engagement with accountants, auditors, investors, and lenders is crucial to manage expectations, ensure compliance and address any issues arising early, particularly where financial covenants may be impacted by the changes.

Contact us

If you have questions or wish to seek advice to assess the impact of these changes on your financial statements, we strongly encourage you to speak with your usual Blick Rothenberg contact, Marc or Julia using the form below.