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Simplifying FRS 102 Changes: What You Need to Know Before January 2026

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On 27 November 2024, the Financial Reporting Council (FRC) issued significant amendments to FRS 102—the accounting standard that governs financial reporting for most businesses in the United Kingdom and Ireland. These changes, which take effect for accounting periods beginning on or after 1 January 2026 with early adoption permitted, are designed to modernise the framework and bring it closer in line with international standards.

The updates aim to improve transparency, consistency and comparability in financial statements, particularly in how companies recognise revenue and account for leases. While the current rules have served businesses well, they can lead to inconsistencies that affect how financial performance is interpreted by investors, lenders and other stakeholders. By aligning FRS 102 with global frameworks such as the International Financial Reporting Standards (IFRS), the FRC is ensuring that financial reporting better reflects the realities of today’s business environment. Given the potential for these changes to materially impact financial reporting, it’s important for business leaders to begin discussions early and prepare for the transition. Indeed, our experience of implementing similar changes to accounting standards such as those in IFRS and US GAAP reminds us that companies often underestimate the lift required in such circumstances.

Understanding the Key Changes to FRS 102

Changes to Lease Accounting for Lessees

Current UK GAAP StandardRevised UK GAAP Standard
  2 Types of Lease Contracts:

1. Operating Leases (e.g. renting an office or equipment )
– Not shown on the balance sheet
– Rent is simply recorded as an expense over the lease term
– No right of use asset or lease liability (except deferred lease liability) is recognised

2. Finance Leases (e.g.  leases that transfer ownership-like risks to lessee)
– Shown on the balance sheet
– Right of use asset and lease obligations are recorded
– Depreciation and interest recognised in profit and loss account

Result:
– Many leases (especially operating leases) are off the books
– Financial statements may understate liabilities
– Harder for investors and lenders to see the full picture  		 Single Model for Leases: All leases (short-term and low value exemptions available) must be recorded on the balance sheet. Definition of lease also broadened such that more leases in contracts likely to be identified.

Right of use (ROU) Asset and Lease Liability: This means recording both the value of what you’re renting (called a “right-of-use asset”) and the amount you still owe on it (called a “lease liability”) on the balance sheet.

Your profit and loss statement will look different. Instead of showing rent as a regular expense, you’ll now show:
– Depreciation: spreading the cost of the asset over time
– Impairment: if the leased asset is no longer being used
– Interest: the cost of borrowing to pay for the lease. This change will increase your EBITDA (a key performance metric), because rent is no longer counted as an operating expense.      

Transitional Arrangements:

Group Reporting: If you’re part of a group using IFRS 16, you can use the lease values already calculated under IFRS 16 as your starting point for FRS 102. That saves time and avoids duplication.

No Restatement of Comparatives: You don’t have to go back and change your previous year’s financial statements. You’ll just start using the new rules from the transition date.

Changes to Revenue Recognition

Current UK GAAP StandardRevised UK GAAP Standard
How Revenue Is Recognised Now:
Revenue is generally recognised when risks and rewards of ownership are transferred and it can be measured reliably.

There is discretion and judgement in how and when revenue is recorded, especially for:
– Long-term contracts
– Milestone-based billing
– Subscription or staged services

Result:
– Different companies might treat similar contracts differently.
– Revenue might comparatively be recognised too early or too late, depending on interpretation. This can lead to inconsistencies and make it harder to compare businesses.  		Introducing the new Five-Step Model for revenue recognition: You’ll need to evaluate each revenue contract through the lens of the five-step model. This could lead to changes in the timing of revenue recognition.
1. Identify the contract with the customer
2. Identify what you’ve promised to deliver (known as performance obligations)
3. Determine the total price of the contract
4. Allocate the price to each promised item
5. Recognise revenue as and when each item is delivered or fulfilled

Complex Contracts: For contracts with multiple performance obligations, warranties, customer options, or significant financing components, the treatment may differ from your current practices.  

Simplifications:
– You may apply the five-step model to a portfolio of similar contracts, simplifying the recognition process.
– There are simplifications for allocating discounts, and the new disclosures align with IFRS for SMEs, ensuring transparency and consistency.   

Transitional Arrangements

You have 2 options:

  1. Update Past Figures: You can go back and adjust your previous year’s financials to match the new rules. This gives a clearer comparison across years.
  2. Start Fresh: If you don’t want to change past figures, you can just apply the new rules from the transition date. Any difference caused by the switch will be added to your opening retained earnings (basically adjusting your starting point).

What Else Is Changing?

Share Based Payments (Section 26): The updated rules now give clearer guidance on how to account for things like share options, bonuses paid in shares and awards that can be settled in cash or equity. In the past, the rules were vague, so businesses used different methods—which could lead to mistakes or inconsistencies. If your company has ever given employees share-based rewards, now is a good time to review how you’ve been accounting for them.

Income Tax (Section 29):  FRS 102 introduces guidance on how to account for uncertain tax positions—drawing from IFRIC 23. The standard now requires recognition of tax uncertainties only if it’s probable that the tax authority, with full knowledge of the facts, would accept the position. This is a shift from silence to scrutiny. If you’ve taken a position that hasn’t been challenged—but might be—this change could bring it onto or off the balance sheet. It’s a classic case of loss aversion: better to surface and manage the risk now than be forced to explain it under pressure later. 

Other Notable Changes

Several additional amendments may require updates to your disclosures, assumptions or classifications: 

  • Related party disclosures (Section 33): Now includes commitments, not just transactions. 
  • Employee benefits (Section 28): Clarifies how to apply estimates in remeasuring defined benefit plans. 
  • Borrowing costs (Section 25): Tightens the rules on which borrowing costs may be capitaliseds. 
  • Equity (Section 6): Requires dividend disclosures by share class. 

How the FRS 102 Changes Could Affect Your Business?

  • Financial Metrics: The new lease and revenue rules could change key numbers like EBITDA, profit and net debt. These are important for reporting and making business decisions.
  • Bonus and Incentive Schemes: If your team’s bonuses are tied to financial performance (like EBITDA), the changes might affect how those bonuses are calculated.
  • Dividends and Reserves: The way profits are reported could change, which might reduce the amount available for dividends. This could impact your payout plans.
  • Contracts with Variable Pricing: If your contracts include performance-based payments or flexible pricing, the new revenue rules could affect how and when you recognise income—so your forecasts might need updating.
  • Systems and Team Readiness: Your current accounting systems might not be ready for the new rules. You may need upgrades and training to make sure your team can handle the changes smoothly.

What You Can Do Now: Start by reviewing your contracts and lease agreements. Make sure you understand what’s changing, check that you’ve captured all your leases and build a plan to manage the transition without surprises.

How FD Can Help

The upcoming changes to FRS 102 are more than just technical updates—they’re strategic shifts that could reshape how your business reports performance, manages risk and communicates with stakeholders. At Frazier & Deeter, we’ve guided clients through similar transitions under IFRS and US GAAP, and we know the lift can be significant and daunting.

Whether you need help assessing the impact, updating systems, training your team or navigating the transition with confidence—we’re here to support you.

Get in touch with our accounting and advisory team today to schedule a readiness assessment or a tailored workshop for your finance team.

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