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FRS 102 Overhaul: What the New Revenue and Lease Rules Mean for Your Business

Financial Reporting Standard 102 (FRS 102) serves as the cornerstone accounting framework in the UK and Republic of Ireland for entities that do not apply IFRS, FRS 101, or FRS 105.

What is Changing?

From accounting periods beginning on or after 1 January 2026, significant revisions to FRS 102 will take effect, bringing it more closely in line with international standards. The most notable updates relate to revenue recognition and lease accounting.

Even smaller entities applying Section 1A of FRS 102 will be affected, so early preparation is essential. For subsidiaries of IFRS-reporting groups, the alignment will ease the consolidation process by reducing the need for adjustments between local and group reporting frameworks.

Revenue Recognition

The revised FRS 102 adopts a five-step model for revenue recognition, closely aligned with IFRS 15. The focus shifts from the traditional transfer of risks and rewards to the concept of performance obligations and the transfer of control.

Key Changes Include:

  • Contracts must be analysed into distinct performance obligations, with revenue allocated to each based on their standalone selling prices.
  • Revenue is recognised when, or as, performance obligations are fulfilled – either over time or at a point in time – depending on how control transfers.
  • Bundled goods or services, variable consideration, warranties, customer incentives, and financing components must all be reassessed.
  • Construction contracts are no longer addressed separately (as they are under old FRS 102); instead, they fall under the general five-step revenue model, which may result in different timing of revenue recognition.

Implications

  • While most businesses may see limited impact, those with more complex contracts may need to rethink how and when revenue is recognised.
  • Overall the new model is more prescriptive and detailed, reducing flexibility but increasing consistency.

Lease Accounting

Lease accounting will undergo a significant overhaul, following the principles of IFRS 16 with certain simplifications.

Key Changes Include:

  • Virtually all leases will now be brought onto the balance sheet.
  • Lessees must recognise a Right of Use (RoU) asset and a corresponding lease liability.
  • Lease payments will be separated into depreciation and interest expense.
  • Only short-term leases and low-value assets may qualify for exemption.

Implications

  • The revised lease accounting requirements are expected to impact key financial indicators, including EBITDA, gearing ratios, and interest coverage. There may be various implications including for staff incentives based on EBITDA and loan covenants – companies should review existing agreements and discuss with lenders.
  • Tax consequences may arise, particularly where tax follows the accounting treatment for leases.

How to Prepare

To ensure a smooth transition and be fully prepared for 2026, we recommend:

  • Reviewing lease and revenue contracts now to identify areas of impact.
  • Engaging expert support early is essential to navigating these fundamental changes in accounting standards. With the right guidance, your business
    can interpret the new requirements confidently and transition smoothly.
  • With the introduction of on- balance sheet lease accounting, companies close to the audit exemption thresholds – particularly on the gross asset basis – should carefully reassess their eligibility.
  • Updating internal systems to ensure compatibility
    with new requirements.
  • Training finance teams on revised models and terminology.

Early adoption of the revised FRS 102 is permitted, provided all amendments are applied simultaneously. Although restatement of comparative figures is not required, entities should prepare for potential changes in the timing of revenue and lease recognition, along with increased disclosure requirements.

How can we help?

At Simmons Gainsford, we don’t just keep up with change – we stay ahead of it. As updates to FRS 102 approach, our team is already on top of the evolving standards, ensuring you are not only prepared but positioned to thrive.

We are here to help you cut through the complexity and understand exactly what these changes mean for your business. If you would like a tailored assessment of how the FRS 102 updates could impact your financial reporting and tax position, please get in touch today.