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FRS 102 Changes in 2026: Time to Rethink Your Financial Reporting
Starting 1 January 2026, sweeping updates to FRS 102 will reshape how UK businesses recognise revenue and account for leases. These updates bring UK GAAP in closer alignment with global accounting standards—and will significantly affect balance sheets, income statements, and key financial ratios.
If you’re reporting under FRS 102, it’s time to get prepared.
A New Five-Step Model for Revenue Recognition
The traditional method of recognising revenue based on risk and rewards is being replaced by a five-step model that focuses on when control transfers to the customer. This means:
- Revenue may be recognised earlier or later depending on contract terms.
- Businesses must now track contract assets and liabilities, based on how performance obligations are fulfilled.
If you sell goods or services under complex or multi-stage contracts, your reported revenue figures could change—impacting everything from bonuses to earn-outs.
On-Balance-Sheet Lease Accounting for Lessees
If you’re currently treating leases as simple rental expenses, that’s about to end. Under the new rules:
- Lessees must record a right-of-use (ROU) asset and a lease liability on the balance sheet.
- Rent expenses will be replaced by depreciation and interest, which could boost EBITDA but inflate liabilities and finance charges.
This could materially alter your debt profile, gearing ratios, and loan covenant compliance.
Broader Business Impact: It’s Not Just Accounting
These aren’t just technical changes—they impact the way investors, lenders, and regulators view your business.
- EBITDA may rise due to lease reclassification.
- Net profit might fall as interest and depreciation rise.
- Covenants could be breached if you don’t pre-warn your lender.
- Employee incentive plans and performance-linked pay may need to be recalibrated.
If you’ve made acquisitions with contingent consideration tied to profit or revenue, it’s time to review your agreements before the new standards hit.
What You Should Do Now
- Review Your Contracts: Gather and assess all customer contracts and lease agreements. Identify which revenue streams or lease types will be impacted.
- Update Internal Systems: Switch to accounting systems or lease software that supports the new recognition rules and disclosure requirements.
- Model the Financial Impact: Run forecasts under the new rules. Simulate how changes will affect key metrics such as EBITDA, profit margins, and total assets.
- Engage Stakeholders: Speak with your bank, investors, and advisers. Prepare your board and shareholders with early impact assessments.
- Reassess Company Size: The changes could cause you to exceed size thresholds, affecting audit status or eligibility for simpler reporting frameworks like FRS 105.
Key Point: These Changes Are a Big Deal, Even for Smaller Firms
Changes in financial reporting will impact how you present cash flow, calculate capital, and determine ratios, even if your leasing and income streams are simple. Starting April 2025, new size thresholds may affect your exemption eligibility based on updated accounts. Don’t wait until the end of 2025 to act; these rules influence how your business is valued and funded. Plan, seek expert advice, and be ready to adapt confidently.