FRS 102 Changes 2026: What’s Changing and How It Affects Your Audit
FRS 102 is getting its biggest overhaul in a decade. On 27 March 2024, the Financial Reporting Council (FRC) issued amendments to FRS 102 and other FRSs following the conclusion of its second periodic review. These changes are effective for accounting periods beginning on or after 1 January 2026, and they’ll affect most UK companies that report under UK GAAP.
If your business reports under this standard – the financial reporting standard applicable in the UK and Republic of Ireland – you need to understand what’s coming. The two headline changes are a new revenue recognition model and revised lease accounting rules, but there’s more to it than that. And the impact on your statutory audit could be significant.
What are the key changes to FRS 102?
The periodic review 2024 amendments touch several sections of the standard, but two areas stand out: revenue and lease contracts. The FRC’s aim is to bring UK financial reporting standards closer to international accounting standards, specifically IFRS 15 (Revenue from Contracts with Customers) and IFRS 16 (Leases). This doesn’t mean UK GAAP becomes identical to IFRS – the FRC has kept some simplifications for smaller entities. But the gap between the two frameworks is narrowing, particularly for entities in the UK and Ireland.
Here’s what you should focus on.
Revenue recognition: the new five-step model
The amendments to Section 23 replace the old rules with a five-step model for revenue recognition, closely based on IFRS 15. Under the previous standard, revenue from the sale of goods was recognised when risks and rewards transferred. Revenue from services was recognised using the percentage-of-completion method. That approach worked, but it lacked the structure needed for more complex arrangements.
The new model introduces five clear steps:
- Identify the contract with the customer
- Identify the separate performance obligations in that contract
- Determine the transaction price
- Allocate the price to each performance obligation
- Recognise revenue when (or as) each obligation is satisfied
For many businesses, this won’t change when revenue is recorded at all. A retailer selling products over the counter, for example, will barely notice. But companies with bundled products and services, long-term contracts, or variable pricing arrangements could see real differences in when and how revenue appears in their accounts.
Construction firms, software companies, and professional services businesses are most likely to be affected. If you provide a combination of goods, installation, and ongoing support under a single contract, you’ll need to unpick those elements and recognise revenue from contracts with customers against each performance obligation separately.
The disclosure requirements are also more demanding. You’ll need to provide clearer breakdowns of revenue by category and timing, along with information about contract balances and significant judgements.
Lease changes: operating leases come onto the balance sheet
The changes to lease accounting under the amended standard are arguably the bigger story for many businesses. Section 20 has been rewritten to bring it closer to IFRS 16 Leases, and the old distinction between operating and finance leases is gone for lessees.
Under the previous rules, operating lease payments simply appeared as an expense in the profit and loss account. The underlying asset and the commitment to pay future rent were off-balance-sheet. That meant two companies with identical economic positions could look very different on paper, depending on whether they owned their premises outright or rented them.
Under the new rules, lessees must recognise a right-of-use asset and a corresponding lease liability for almost all agreements. The right-of-use asset represents your right to use the leased item for the remaining term of the lease. The lease liability represents the present value of future lease payments you’re committed to making.
Instead of a straight-line rental expense, the profit and loss account will now show two separate charges: depreciation on the right-of-use asset, and a finance charge on the lease liability. The operating lease expense is replaced by this split. It front-loads the total cost in the early years – you’ll recognise more expense in year one than you did under the old rules, even though the cash outflow hasn’t changed.
There are two practical exemptions. Short-term arrangements (12 months or less) and leases of low-value assets can still be expensed on a straight-line basis. But for most property and vehicle commitments, the new rules will apply.
What this means for your balance sheet
If your business rents offices, warehouses, vehicles, or equipment, expect your balance sheet to grow. Total assets will increase (right-of-use assets), and total debt will too (new liabilities). That changes financial ratios. Your gearing ratio will rise. Return on assets will fall. EBITDA will improve because depreciation and interest sit below the EBITDA line.
Lenders, investors, and credit agencies will see a different financial picture. If you have loan covenants tied to gearing or net debt ratios, talk to your bank now. Most lenders are aware of the changes, but you don’t want a technical breach triggered by an accounting standard update.
Other key changes in the FRS 102 amendments
Revenue recognition and lease accounting grab all the attention, but the 2024 amendments also cover several other areas:
- Financial instruments (Section 11 and 12) – Revised classification and measurement rules, including new requirements for expected credit loss provisions. Companies with significant trade debtors or loan books will need to assess impairment differently.
- Government grants (Section 24) – Simplified to remove the performance model option. All grants must now be recognised using the accrual model, which matches grant income to the related costs.
- Fair value measurement – A new Section 2A brings FRS 102’s fair value guidance closer to IFRS 13, with more detailed requirements for how fair value should be determined and disclosed.
- Business combinations – Updated guidance on intangible assets acquired in business combinations, with changes to what can be recognised separately from goodwill.
- Accounting policies and going concern – Enhanced disclosure around changes in accounting policies, particularly for the transition period. Going concern disclosures have been tightened too.
Entities applying FRS 105 – the micro-entity standard – and those using FRS 101 Reduced Disclosure Framework will also see consequential changes, though they’re less extensive.
Who is affected by the FRS 102 changes?
FRS 102 is a single financial reporting standard that applies to the accounts and financial reporting of entities including companies, LLPs, charities, and other organisations not applying adopted IFRS. In practice, that means the vast majority of UK businesses. The September 2024 edition of FRS 102 reflects the final text incorporating all the 2024 amendments.
The impact varies. A small owner-managed business with no leases and straightforward sales will notice very little. A property-heavy company with dozens of rental agreements and multi-element revenue contracts will have a lot of work to do.
Your auditor will be looking at these changes too. Areas with significant judgement – identifying performance obligations, determining rental terms, calculating discount rates for lease liabilities – are exactly the kind of estimates that attract audit attention. Expect more questions during your next audit, and more detailed disclosure in your accounts.
What are the potential tax implications?
HMRC has confirmed that the changes won’t automatically alter how corporation tax is calculated. Tax law follows its own rules on deductions and revenue timing, so the accounting updates don’t feed through directly. But there are knock-on effects to be aware of.
Deferred tax calculations will change because the accounts now include right-of-use assets and lease liabilities that weren’t there before. If your business claims capital allowances on assets, the interaction between right-of-use assets and capital allowances needs careful handling. And if revenue timing shifts, there could be temporary differences between accounting profit and taxable profit that create new deferred tax balances.
Talk to your tax adviser. Don’t assume the application of the amendments is tax-neutral.
How to prepare for the FRS 102 changes
The changes are effective from 1 January 2026, which means they apply to any accounting period starting on or after that date. For a December year-end, the first affected accounts will be for the year ending 31 December 2026. Early adoption was permitted from 1 January 2025 for entities that wanted a head start.
Here’s what you should be doing now:
Inventory your leases. Pull together a complete list of all your rental and hire agreements – property, vehicles, equipment, and any other arrangements where you’re paying for the right to use someone else’s asset. You’ll need the start date, end date, rental amount, any break clauses, and whether there’s an option to extend. This is the single biggest practical task.
Review your revenue contracts. Identify any contracts that bundle goods and services, include variable pricing, or have multi-year performance obligations. These are the arrangements most likely to change under the new requirements in FRS 102.
Update your accounting policies. Your finance team or accountant will need to redraft the revenue and lease sections in your financial statements. The transition provisions allow a modified retrospective approach – you don’t have to restate every historical arrangement from inception.
Talk to your auditor early. The significant changes mean your audit team will need to plan differently. New accounting estimates mean new audit procedures. Having that conversation sooner rather than halfway through the audit will save everyone time and money.
Check your loan covenants and contracts. If any agreements reference net debt, gearing, or interest cover, check whether the new liabilities and right-of-use assets could trigger a breach. Renegotiating a covenant definition is much easier before there’s a problem.
Can businesses adopt the FRS 102 changes early?
Yes. Early adoption was available from 1 January 2025 for entities that wanted to get ahead. If your accounting period began on or after that date and you chose to adopt early, you’ll already be applying the amended FRS 102. For everyone else, mandatory application starts with periods beginning on or after 1 January 2026.
Early adoption can make sense if you’re also reporting under IFRS at group level, or if you simply want to get the transition work done while you have capacity. But it does mean your accounts will look different from those of your peers who haven’t yet adopted, which can confuse investors or lenders who are benchmarking.
How we can help
At Audit Group, we’re already working with clients to assess the impact of the FRS 102 changes on their statutory audits and year-end reporting. As ICAEW-regulated auditors with deep experience across multiple sectors, we understand both the technical detail and the practical reality of implementing these changes.
Whether you need help with your lease inventory, want a dry-run of the new model against your revenue contracts, or simply want to understand how the amendments will affect your next audit, we’re here.
Talk to our statutory audit team about preparing for the FRS 102 changes. The earlier you start, the smoother the transition will be.
