The FRS 102 changes are now in effect: What should businesses do now?
The revised version of FRS 102 has now come into effect for accounting periods starting on or after 1 January 2026 and it will affect how your business prepares accounts under UK GAAP.
These changes will affect how revenue and leases are accounted for and apply to most entities, including small and medium-sized businesses.
With the changes now in effect, your business must ensure your accounting systems and financial reporting are compliant.
What are the FRS 102 changes?
The most important changes to FRS 102 are to revenue recognition and lease accounting.
Revenue must now be recognised using a five-step model that focuses on when control of goods or services passes to the customer, rather than when risks and rewards transfer.
This requires businesses to reassess customer contracts, particularly those involving bundled services, variable consideration, warranties or contract modifications.
Even though the timing of revenue recognition has not changed, the level of analysis and documentation required has increased.
Lease accounting has also undergone major changes. Most leases must now be recognised on the balance sheet through a right-of-use asset and a corresponding lease liability.
Instead of recognising a single lease expense in the profit and loss account, you must now record depreciation of the asset and interest on the lease liability.
While there are exceptions for short-term leases and leases of low-value assets, many property and vehicle leases will affect your balance sheet and reported performance.
What should businesses do now?
Businesses must assess their opening balances on or after January 1 2026 and ensure they have been calculated correctly for when their accounting period begins.
This includes recognising lease assets and liabilities and making the required adjustments in retained earnings.
It is crucial you remain aware of when your accounting period starts and seek financial advice to ensure your accounts and financial reporting is in order.
Customers’ contracts and lease agreements should be reviewed in full to ensure they are being accounted for correctly.
This includes identifying any leases embedded within service contracts.
Businesses should also consider whether their existing systems and processes remain appropriate for the new requirements.
The ongoing assessment of leases, discount rates and contract changes may require more robust systems than those previously used.
In addition, the impact of the changes on metrics such as EBITDA, profit and net debt must be reviewed carefully.
This is particularly important where bank covenants, incentive arrangements or earn-out agreements are in place.
These changes also affect your lenders and investors and you must maintain clear communication throughout this process.
Even though your cash flow remains the same, financial results may differ and stakeholders should understand the reasons behind any movements.
How can you keep your finances compliant?
While some businesses may still have time to prepare, other businesses’ accounting periods may have already begun.
Businesses have a responsibility to keep their accounts and financial reporting compliant and must seek financial support if they are unsure when these requirements come into effect.
Revenue recognition and lease accounting require extensive preparation. Businesses must be proactive if they want to move forward with confidence under the new accounting framework.
We can help support your businesses through the implementation and review of your calculations and recognition policies.
Our expert team can help implement lease accounting models and ensure your financial statements include the correct disclosures.
For expert financial advice and support, contact our team today.
