The amendments to FRS 102 will bring significant changes to how many UK businesses account for revenue, leases and financial statement disclosures. With the effective date approaching, now is the time to understand the practical impact and plan ahead.

At a glance: the main changes affect revenue recognition, lease accounting and mandatory disclosures for small companies. Businesses should review contracts, lease data, systems and stakeholder reporting before the first affected accounting period. Contact us before your year end to discuss how the FRS 102 changes will affect your business and build a practical, tailored plan for a smooth transition.

The upcoming amendments to FRS 102 are one of the most significant changes to UK GAAP in recent years. They apply for accounting periods beginning on or after 1 January 2026, with early adoption permitted where the relevant conditions are met. For many businesses, the changes will affect more than just the year-end accounts: they may change reported revenue, bring lease liabilities onto the balance sheet and alter key measures such as EBITDA, profit, reserves, and covenant calculations.

In this article, we outline the main areas affected, the likely practical impact and the steps management teams should be taking now to prepare with confidence.

Key takeaways

• Revenue: a new five-step model will apply, based on recognising revenue when performance obligations are satisfied.
• Leases: most operating leases will move onto the balance sheet through a right-of-use asset and lease liability.
• Small companies: Section 1A accounts are expected to contain more mandatory disclosures, including going concern, related party transactions, full tax note required including tax charges, reconciliation and details of unused losses, lease information and dividends note.
• Business impact: reported profit, reserves, EBITDA, loan covenants, bonus arrangements and systems may all need to be reviewed.
• Action: businesses should start reviewing contracts, leases, data capture and stakeholder communications ahead of the first affected reporting period.

Revenue recognition: a new five-step model

The revised revenue rules introduce a new model based on the principles of IFRS 15. Rather than focusing primarily on the transfer of risks and rewards, businesses will need to consider when control of goods or services passes to the customer. This will be assessed using a five-step approach: identifying the customer contract, identifying the performance obligations, determining the transaction price, allocating that price to the performance obligations and recognising revenue when, or as, those obligations are satisfied.

This could affect the timing of revenue recognition, particularly where businesses have long-term contracts, construction or installation arrangements, professional service engagements, licences, retainers, variable consideration, discounts or bundled supplies of goods and services. Finance teams should review customer contracts early so that the accounting treatment, supporting evidence and system requirements are clear before the first reporting deadline.

Leases: most operating leases move onto the balance sheet

For lessees, the distinction between operating leases and finance leases is being removed for most arrangements. Instead, businesses will generally recognise a right-of-use asset and a corresponding lease liability on the balance sheet. This means that many leases previously disclosed only as future commitments will now affect both the balance sheet and the profit and loss account.

The lease liability will normally be measured by reference to the present value of future lease payments, discounted using an appropriate rate. The right-of-use asset will then be depreciated, and interest will be recognised on the lease liability. As a result, the expense profile may change, with lease costs replaced by depreciation and finance costs.

Exemptions are available for short-term leases and leases of low-value assets, but these should be applied carefully. There is no single monetary threshold for low-value assets, and some common arrangements, such as property and vehicle leases, are unlikely to qualify. Businesses should also consider whether contracts that look like service arrangements may contain an embedded lease.

The disclosure requirements for leases will also increase. Management should therefore compile a complete list of leases and relevant contract terms, including renewal options, break clauses, variable payments and discount rate assumptions.

Small company accounts: more mandatory disclosures

Small companies applying FRS 102 Section 1A introduces a number of additional mandatory disclosures. In practice, many small company accounts are likely to become longer and more detailed.

One important change is the requirement to disclose the going concern basis of preparation and the key judgements made by management. Where material uncertainties exist, these will need to be explained clearly. If the accounts are not prepared on a going concern basis, that fact and the reason for it will also need to be disclosed.

Other areas requiring greater attention include related party transactions, provisions and contingencies, share-based payments, lease arrangements, taxation reconciliation (explaining key differences in tax charge) and revenue recognition policies.

Small companies should ensure they capture the information needed to support these disclosures, including comparative information where required.

What could this mean for your business?

The accounting changes may appear technical, but the commercial consequences can also be significant. Revenue may be recognised earlier or later than under the current model, and lease accounting may increase reported assets and liabilities. EBITDA may also increase because lease expenses are replaced by depreciation and finance costs, even though the underlying cash flows have not changed.

Businesses should consider the potential impact on bank covenants, management accounts, budgets, bonus schemes, earn-outs, dividend capacity and stakeholder reporting. Lenders and investors may need early communication so that any accounting-driven movements can be understood and, where necessary, covenant definitions can be revisited.

Systems and processes may also need to change. For example, businesses may need to retain more detailed contract data, track performance obligations, calculate lease liabilities and record the judgements used in preparing the accounts.

How to prepare

We recommend that management teams start by preparing an impact assessment. This should identify material revenue streams, review customer contracts, compile lease data, assess disclosure gaps and consider whether any opening reserve adjustments may be required on transition. The earlier this work is undertaken, the easier it will be to avoid last-minute issues when the first affected accounts are prepared.

Speak to us

Hardcastle Burton LLP can help you assess how the FRS 102 amendments may affect your accounts, systems and wider business reporting. If you would like support with your transition planning, contract reviews or disclosure requirements, please contact our corporate partners Kristi Johnson or Denise Lindsell.