Are you prepared for FRS 102?
In this webinar the panel discussed the major upcoming changes to FRS 102. These changes aim to align FRS 102 more closely with international financial reporting standards, affecting financial metrics and potentially borrowing capabilities. The panel covered revenue recognition, including the five-step model, lease accounting, disclosure requirements and the commercial impacts of the changes.
Key takeaways:
- FRS 102 is undergoing its biggest update in years.
The changes take effect for accounting periods beginning on or after 1 January 2026. These updates aim to align FRS 102 more closely with international accounting standards (IFRS), improving comparability for UK businesses.
The transitional requirements are different for some of the changes compared to others. For example, for revenue recognition, there is an option to either restate the comparatives or adjust for the impact of the transition at the date of transition. For leases, the impact is accounted for on the date of transition – restating the comparatives is not permitted.
- Revenue recognition will follow a new five-step model.
Businesses must identify contracts with customers, the performance obligations in the contract, and the transaction price, allocate that price across the performance obligations, and recognise revenue as obligations are fulfilled. Contract details are crucial—two companies doing similar work may recognise revenue at different times depending on contract terms.
- Lease accounting for lessees changes fundamentally.
For lessees, almost all leases must now be recognised on the balance sheet, recognising a lease liability and an asset representing the right to use the leased asset, impacting EBITDA, interest expense, and financial ratios.
Accounting for lessors is largely unaffected.
- EBITDA will be inflated in early years.
Under the new lease requirements, the charge to profit or loss is front loaded because the interest charge on the lease liability will be higher towards the beginning of the lease. However, EBITDA is inflated because operating lease rentals will no longer impact EBITDA. This changes how stakeholders interpret financial health and may affect loan covenants and borrowing capacity.
- Covenant and borrowing implications require attention.
Changes to EBITDA, net assets, and interest cover may trigger breaches or reduce headroom in loan covenants. Early dialogue with lenders is recommended as renegotiations may be required.
- Disclosure requirements increase, especially for small entities.
More information is now mandatory in small company accounts, including going concern, related party transactions, share-based payments, and provisions. Additional detail is also required for all companies about leases and revenue recognition, though less is required for small companies than larger entities.
- Commercial contract review is essential.
Businesses should assess and possibly renegotiate contracts to manage revenue timing, bonus arrangements, dividend payments, and tax liabilities. The timing of recognising profits may change with a consequent impact on the ability to declare dividends.
- Stakeholder management is critical.
Finance Directors must communicate with both internal (board, leadership, HR, finance teams) and external (banks, shareholders, auditors, HMRC, regulators, suppliers) stakeholders to ensure clarity and avoid misinterpretation.
- System and process updates may be required.
Internal systems, controls, and management accounts may need updating to cope with new requirements and ensure accurate reporting. Consider whether your software and teams are ready for the changes.
- Plan and prepare now—don’t leave it until the last minute.
The increased admin burden and complexity mean businesses should start assessing impacts, upskilling teams, and planning communications well ahead of December 2026 year ends. The impact on the opening position at the date of transition (e.g. 1 January 2026 for a company with a December year end) will also need to be considered. Early preparation will help avoid surprises and ensure a smooth transition.
If you or your team require support to ensure you’re compliant, get in touch.
