Changes to FRS 102 are now in effect for accounting periods beginning on or after 1 January 2026, bringing important changes for businesses to consider when preparing their financial statements. The revised requirements apply to companies reporting under FRS 102, including small entities applying Section 1A, but do not extend to businesses using FRS 105 for micro-entities or to unincorporated entities.
For some businesses, the changes may be relatively straightforward, while others could see a more significant impact. In particular, the new requirements around lease accounting and revenue recognition may affect accounting processes, systems, bank loan covenants and financial statement disclosures. Reviewing the changes early will provide more time to identify any areas requiring attention and help make the transition as smooth as possible.
What are the key changes businesses need to be aware of?
Lease accounting
Under the revised standard, many leases previously treated as operating leases (e.g. rent of premises, car leases etc.) will now need to appear on the balance sheet. Businesses will recognise a right-of-use asset together with a corresponding lease liability.
This means the impact is more than just an accounting adjustment. Reported assets and liabilities will change, key financial ratios such as gearing may be affected, and the way lease costs are reflected in the profit and loss account will also change. Instead of a single lease expense, businesses will generally recognise depreciation on the right-of-use asset and interest on the lease liability.
Such accounting changes may impact loan agreements and related covenant calculations, so it is highly recommended these are reviewed in advance.
There are exemptions for certain short-term leases and low-value assets, but businesses with more significant leasing arrangements, particularly property, should consider the impact carefully.
Revenue recognition
The new revenue recognition requirements are another important area for businesses to consider. FRS 102’s revised section on Revenue from Contracts with Customers introduces a five-step revenue recognition model based on IFRS 15.
The model focuses on identifying the performance obligations within a customer contract and determining when those obligations have been satisfied and revenue should therefore be recognised.
While this may have little impact on a lot of businesses, there will be some that need to reassess when and how income is recognised, particularly where contracts involve multiple goods or services, specific performance obligations or longer-term arrangements.
For some businesses, this could change the timing of revenue and profit recognition, even though the underlying contract and cash flows remain unchanged. It will therefore be important to review customer contracts and understand whether existing accounting policies will remain appropriate under the revised requirements.
How can businesses prepare for the changes?
Preparation should start with understanding where the revised FRS 102 requirements could have the greatest impact on the business. For many organisations, this will mean taking a closer look at lease arrangements and revenue contracts, as well as considering whether existing accounting systems and processes are equipped to deal with the new requirements.
The changes may also have wider commercial implications, particularly where reported financial information feeds into budgets, performance measures, financing arrangements or stakeholder reporting. Reviewing these areas early can help businesses understand the full impact and put appropriate measures in place ahead of their first reporting period under the revised standard.
How can PM+M help?
The PM+M team can help you understand how the revised FRS 102 requirements apply to your organisation and support you through the implementation process. Whether you need assistance assessing the impact on your financial statements, reviewing lease arrangements, or considering the implications of the new revenue recognition model, our specialists can provide practical guidance tailored to your circumstances.
For further information or to discuss your individual circumstances, please get in touch with your usual PM+M contact or Sarah Farragher using the button below.
