What do the FRS 102 changes mean for UK businesses?
18 February 2026 | posted in Accounts preparation
The UK’s financial reporting landscape is undergoing significant changes. Following its scheduled review, the Financial Reporting Council (FRC) has released substantial revisions to FRS 102—the standard used by most medium‑sized UK businesses under UK GAAP.
These amendments apply to accounting periods starting on or after 1 January 2026 and move UK GAAP more closely in line with international reporting standards (IFRS). The two most notable areas of change are lease accounting and revenue recognition.
Lease accounting changes under FRS 102
Under current rules, many organisations treat operating leases—such as property, vehicles, and equipment—as rental costs, leaving them off the balance sheet. From 2026, this approach will no longer be permitted for most leases.
Key changes include:
- The separate categories of operating and finance leases for lessees will be removed.
- Most leases must be recorded on the balance sheet as a right-of-use asset and a corresponding lease liability.
- Lease liabilities must be calculated using the present value of future lease payments, discounted using either the interest rate implicit in the lease (if available) or the entity’s incremental borrowing rate.
- The profit and loss account will change too: instead of recording a single rental expense, businesses will recognise depreciation on the asset and interest expense on the liability, typically resulting in higher costs earlier in the lease term.
- Exemptions remain for short-term leases (12 months or less) and low-value assets.
What businesses need to do now
Start compiling complete lease data now, including terms, extension/termination options, and borrowing rates. Also be aware of the transition requirements:
- Comparative figures must not be restated. Any cumulative impact from the initial adoption of the new rules should be recognised as an adjustment to opening retained earnings. Disclosure of prior-period effects is not required.
- If IFRS 16 lease values are already used for group reporting, those figures may be carried forward as opening balances.
- If the group exemption is not applied, the right‑of‑use asset and lease liability will be equal at transition, adjusted for any prepaid or accrued lease amounts. Any cumulative adjustment should be recorded in opening retained earnings.
Revenue recognition changes under FRS 102
The updated FRS 102 replaces the traditional “risks and rewards” model with a more detailed five‑step framework, aligning the standard with IFRS 15. Revenue will now be recognised when control of goods or services transfers to the customer.
The new steps are:
- Identify the contract with the customer.
- Determine the distinct performance obligations.
- Establish the transaction price.
- Allocate the transaction price to each performance obligation.
- Recognise revenue as performance obligations are met.
These changes will be particularly significant for industries with complex arrangements—such as construction, technology, and professional services—where contracts may include multiple deliverables or span long periods. The timing of revenue recognition may accelerate or delay income, influencing reported profits and dividend capacity.
What businesses need to do now
To prepare for the changes, businesses should review customer contracts, determine performance obligations, and assess changes in revenue timing under the new model.
Transition options
Entities can choose to:
- Apply the full retrospective approach, restating the prior year’s comparatives; or
- Use the cumulative catch‑up approach, leaving comparatives unchanged and recording any cumulative effect as an adjustment to opening balances in the year of adoption, with disclosures explaining the impact.
The tax implications of the changes to FRS 102
The revised standards may create important tax considerations:
- Bringing leases onto the balance sheet could affect capital allowances and deferred tax calculations.
- Changes in revenue timing may lead to differences between accounting profits and taxable profits.
Business owners should speak with tax advisers early to manage timing differences, understand any impact on reliefs such as R&D claims, and ensure alignment with HMRC expectations.
How to prepare for changes to the FRS 102 reporting framework
This has now come into effect for accounting periods commencing on or after 1 January 2026. Businesses should begin planning immediately. Consider taking the following steps:
- Evaluate the impact: Identify leases, revenue streams, and key contracts affected by the new rules.
- Review systems: Confirm that accounting software can process the revised requirements.
- Train teams: Ensure finance, sales, and contract management staff understand the changes.
- Communicate with stakeholders: Keep auditors, lenders, and investors informed.
- Seek early advice: Professional support may be needed for tax planning, system updates, and covenant adjustments.
Running scenario analyses for both transition approaches (full retrospective vs cumulative catch‑up) can help you determine which method presents financial results most favourably within the rules.
How Moore can support you
While the updated FRS 102 reporting framework may seem complex, we can help to make sure you’re fully compliant with the changes and assess the impact on current and deferred tax.
For further advice or guidance, please get in touch with one of our accounting specialists today.
- Peterborough accountants: 01733 397300
- Corby accountants: 01536 461900
- Northampton accountants: 01604 654254