Key changes to FRS 102: the impact on small company thresholds and audit exemption

The recent changes to FRS 102  have been designed to modernise UK GAAP and bring its requirements more closely in line with IFRS.  

Changes to financial reporting, including a five-step revenue recognition model and an “on balance sheet” lease accounting model for lessees, will now apply in full to small businesses.  

These changes, which take effect for accounting periods beginning on or after 1 January 2026, could significantly impact the presentation of accounts. As a result, business owners will need to assess whether they still qualify for the small company provisions and can continue to claim exemption from statutory audit going forward. 

Small company thresholds  

The government has introduced legislation to increase the small company thresholds for accounting periods beginning on or after 6 April 2025. The new thresholds cannot be early adopted. 

While the government is raising the small company thresholds as indicated above, accounting changes arising as a result of the Periodic Review could increase a company’s reported figures, particularly the gross assets figure (referred to in the Companies Act as the balance sheet total). 

If these accounting changes push a company into the medium-sized category by breaching two of the three thresholds for two consecutive years, entitlement to audit exemption will be lost.  

Recommended actions 

Given that both sets of changes are soon to be effective for many companies, acting promptly to understand the impact is key. 

1. Model the impact: Perform a pro forma calculation of your profit and loss account and balance sheet as if the new FRS 102 changes have been applied.  

2. Test against new thresholds: Compare the pro forma turnover and balance sheet total against the new thresholds (£15 million turnover, £7.5 million gross assets) while also taking into consideration employee numbers.

3. Apply the two-year rule: A company generally only changes size category if it breaches (or meets) the thresholds for two consecutive financial years. This modelling should be performed for both current and prior financial years to determine if the company will be reclassified as a medium-sized entity. 

4. Plan for audit: If analysis indicates that small company status, and therefore entitlement to audit exemption, will be lost, planning for a statutory audit is important. This process can take time and should not be left until the last minute. 

How we can help 

While the government has provided relief by raising small company thresholds, accounting changes arising from the revisions to FRS 102 could counteract this benefit for many companies.  

At Moore Kingston Smith, we are already helping clients understand the impact of the revised standard. 

We provide clarity and direction by identifying how the changes affect each business, highlighting accounting policy choices and advising on disclosure requirements. For many businesses this isn’t just an accounting change, it has real commercial consequences. 

With the use of advanced, AI-based technology, we carry out impact assessments and lease contact reviews with detailed analysis.   

We also provide strategic advice and tailored training for finance teams covering the impact of the changes on KPIs and loan covenants, and advise on communication with lenders or investors regarding lease changes.   

To discuss how the changes affect your business, please contact our team who can help to reduce the burden of transitioning to the revised standard. 

Contact us for a no-obligation discussion.