Significant changes are coming to UK financial reporting that could transform how your business accounts for leases, recognises revenue and presents its financial position.
The Financial Reporting Council (FRC) has introduced comprehensive updates to FRS 102, bringing UK accounting standards closer to international best practice, and these changes will affect businesses across all sectors.
With implementation required from 1 January 2026, now is the time to understand what’s changing and start preparing your business for the transition.
Lease accounting changes
The biggest shock for many businesses will be the transformation of lease accounting. Following IFRS 16 principles, the traditional distinction between operating and finance leases is disappearing for lessees.
The effects of the changes
This means most leases will suddenly appear on your balance sheet, which will have multiple implications:
- Additional assets and liabilities may push your business into a different company size category for reporting purposes
- Current liabilities will increase to reflect upcoming lease payments, potentially impacting your current ratio and bank covenants
- Operating lease costs will be replaced by depreciation charges and interest expenses, both of which are added back when calculating EBITDA
- Higher reported EBITDA could have unintended consequences for bonus targets, share options or contingent consideration
But there are some exceptions…
… though limited:
- Short-term leases lasting 12 months or less
- Low-value asset leases (laptops, printers, small office equipment)
And everything else will be moving onto your balance sheet, including:
- Office and warehouse leases
- Vehicle fleets
- Manufacturing equipment
- Most IT infrastructure
New revenue recognition model
The amendments introduce a rigorous five-step model adapted from IFRS 15, replacing the current patchwork of revenue recognition rules with a unified framework:
- Identify the contract with your customer
To recognise revenue, there needs to be a proper contract in place. It doesn’t always have to be written, but it must create clear rights and responsibilities for both sides.
2. Identify performance obligations within that contract
Break down what you’ve promised the client. Each deliverable (a report, a project phase, a service) is a separate “performance obligation”.
3. Determine the transaction price
Figure out the total price you expect to receive. That includes fixed fees, estimates of variable payments, discounts etc.
4. Allocate the price to each performance obligation
If the contract includes multiple promises, split the prices between them based on what each is worth.
5. Recognise revenue as you fulfil each obligation
Only recognise revenue when you’re delivered on your promises. If you’re doing something over time (like a 6-month service), spread the revenue. If it’s a one-off (like a single delivery or event), recognise it when it’s done.
The model applies to all contracts with customers and is designed to provide a clearer and more consistent framework for revenue recognition.
How to prepare your business
Audit your performance metrics
Your KPIs are about to change, possibly dramatically. With lease assets and liabilities appearing on balance sheets, core metrics could shift significantly.
Action required: Review your current performance metrics and consider whether they’ll remain relevant and meaningful under the new standards. Update board reporting, management accounts and stakeholder communications accordingly.
Have a conversation with your lenders
Banking covenants based on balance sheet metrics could be inadvertently breached when lease liabilities suddenly appear. Even though your business performance hasn’t changed, the numbers might tell a different story.
Action required: Engage with lenders proactively. Explain the upcoming changes, provide projections of how your reported figures will shift and negotiate covenant modifications where necessary.
Check your company size classification
2025 brings updated thresholds for determining company size categories. This seemingly technical change could push your business into a different reporting bracket, triggering:
- Enhanced audit requirements
- Additional disclosure obligations
- New administrative burdens
- Different filing deadlines
Action required: Review the new thresholds and assess whether your business will move categories, then plan for any additional compliance requirements.
Making the most of the changes
While these changes might seem like additional regulatory burden, forward-thinking businesses can turn compliance into competitive advantage. The new standards provide:
- Enhanced transparency that builds stakeholder confidence
- Improved comparability with international businesses
- Better decision-making data through more detailed financial reporting
- Stronger internal controls through rigorous revenue recognition processes
Your next steps
The FRS 102 updates represent the most significant change to UK financial reporting in years. With implementation still over a year away, businesses have a crucial window to prepare properly.
Need further guidance with or have any questions about your FRS 102 preparation? Get in touch today and let’s chat.
