For UK accountants, the year 2026 has undoubtedly changed their professions onto their heads. Statutory accounts now follow a rulebook than was completed different from what it was twelve months ago. Among the changes, FRS 102 is questionably the biggest change to arrive during accounting periods beginning on or after 1 January 2026. While the amendments have been on the cards since March 2024, it’s only when the Financial Reporting Council finalised them. As a result of this amendment, over 3.4 million businesses across the UK and Ireland see themselves transition to the FRS 102 accounting standard update.
To get an idea of the scale of this change, picture moving house without moving a single thing you own. Same furniture, same debts, same customers. What changes is which room each item gets filed in, and how visible it becomes to anyone reading the accounts. A leased warehouse that was previously a passing thought, now sits on the balance sheet as both an asset and a liability. These changes to accounting practices make these changes substantially more significant for businesses.
However, what actually changed, why did the FRC bother, how do the new revenue and lease rules work once you’re staring at the numbers, and what should you be doing before your next year end? This blog seeks to answer all of these questions in large detail.
What exactly are the changes in FRS102?
Before getting into the details of the changes lets first understand the backdrop of FRS. On 27 March 2024, the FRC issued amendments to FRS 102 and the wider suite of UK standards, following its second periodic review. Introduced in the year 2013, this Periodic Review was the biggest rewrite of the standard, giving preparers a long runway. It essentially entailed nearly two years between publication and the principal effective date, which is accounting periods beginning on or after 1 January 2026.
| Area | Before 2026 | From 2026 | Likely business impact |
|---|---|---|---|
| Revenue | Risk-and-reward model | Five-step model | Revenue timing may change |
| Operating leases | Generally off balance sheet | Generally recognised on balance sheet | Higher reported assets and liabilities |
| Lease expense | Generally straight-line rental expense | Depreciation + interest | Changes profit profile over the lease term |
| Lease data | Contract information often sufficient | Detailed lease data required | Lease register becomes more important |
| Revenue contracts | Less emphasis on performance obligations | Performance obligations explicitly identified | More contract-level analysis |
| Small-company disclosures | More limited | Expanded in several areas | More work during accounts preparation |
| Systems | Existing nominal ledger may suffice | New ROU asset/liability and depreciation/interest accounts may be required | Accounting systems may need updating |
| Covenants | Lease liabilities may not have been reflected in the same way | More liabilities appear on balance sheet | Covenant calculations may need review |
If you have a 31 December year end, your first accounts under the new rules cover the year ending 31 December 2026. Early adoption was allowed from 1 January 2025, but only on an all-or-nothing basis.
Crucial to the Periodic Review were two major changes.
- A five-step revenue recognition leases FRS102 in Section 23,
- A balance sheet lease accounting for lessees in Section 20.
Both bring UK GAAP updates 2026 to their IFRS cousins, IFRS 15 and IFRS 16, while keeping a handful of simplifications that full IFRS reporters never get to use. The table below showcases changes and effective dates to FRS 102 changes standards.
| FRS 102 change | Effective from | Relevant section | What businesses need to know |
|---|---|---|---|
| Supplier finance disclosures | 1 January 2025 | Section 7 | Additional disclosures for supplier finance arrangements |
| Revenue recognition model | 1 January 2026 | Section 23 | Five-step model based broadly on IFRS 15 |
| Lessee lease accounting | 1 January 2026 | Section 20 | Most leases move onto the balance sheet |
| Expanded small-entity disclosures | 1 January 2026 | Section 1A | Additional disclosure requirements for qualifying small entities |
| Conceptual framework changes | 1 January 2026 | Section 2 | Revised concepts and principles |
| Fair value measurement guidance | 1 January 2026 | Section 2A | New/expanded fair value guidance |
| Adapted-format presentation amendments | 1 January 2027 | Presentation requirements | Applies to entities choosing to use adapted formats |
Why has the FRC rewritten the standard now?
FRS 102 gets reviewed roughly every five years. The first attempt, the Triennial Review 2017, took effect in January 2019 and kept its changes fairly contained. However, this one is different in scale.
The FRC’s aim on this occasion was to bring UK GAAP updates 2026 closer to international standards where that genuinely improves the quality and comparability of what businesses report, without dumping the full weight of IFRS onto smaller unlisted companies.
How does the new five-step revenue recognition model work?
The previous Section 23 relied on a risk-and-reward test, under which revenue was recognised broadly when significant risks and rewards of ownership were passed to the customer. That approach worked reasonably well for a straightforward sale of goods but became much harder to apply to contracts that were bundled, sold on subscription or delivered across several separate obligations.
A detailed look at the five steps
The revised Section 23 replaces that with a five-step model that follows IFRS 15 closely, subject to simplifications appropriate for FRS 102 reporters.
| Step | What it requires |
|---|---|
| 1. Identify the contract | Establish that a contract with a customer exists and creates enforceable rights and obligations |
| 2. Identify the performance obligations | Break the contract down into the distinct goods or services being promised |
| 3. Determine the transaction price | Work out the total consideration the entity expects to receive, including variable elements |
| 4. Allocate the transaction price | Split that price across the separate performance obligations, usually by standalone selling price |
| 5. Recognise revenue | Recognise each portion as its performance obligation is satisfied, either over time or at a point in time |
The underlying question now is when the risks and rewards transferred to when control transferred and in respect of which part of the contract.
Which businesses feel the revenue recognition leases FRS102 shift most?
The contracts most affected are those involving bundled goods and services, warranty obligations, loyalty schemes or variable consideration. Depending on how the performance obligations fall, revenue may be recognised earlier than before in some cases and later in others. Three sectors tend to see the effect more clearly than the rest.
Retailers with loyalty schemes
A retailer operating a loyalty points scheme now treats those points as a distinct performance obligation with a portion of the transaction price allocated to them, rather than as a marketing cost recognised when incurred. That allocated amount is carried as deferred revenue recognition leases FRS102 until the customer redeems the points.
Construction and long-term contractors
Businesses recognising revenue recognition leases FRS102 over the life of a project need to reassess how contract margins are measured and when each obligation is treated as satisfied. Reviewing contract margins under the new model is one of the first exercises a construction finance team should schedule.
Professional services firms
Firms that bill for a combination of advisory work and ongoing support face the question of where one obligation ends and the next begins. A single engagement letter can contain two or three distinct promises that now have to be identified and accounted for separately.
What’s changing in lease accounting under FRS 102?
Perhaps the biggest change to FRS 102 has to do with lease accounting. This is because it brings numbers onto the face of the balance sheet instead of leaving them tucked away in a note.
The old Section 20 split leases into operating and finance leases. Operating leases stayed off balance sheet. You expensed the rent through the P&L and disclosed the future commitment in a note.
Under the revised Section 20, that split no longer exists for lessees. With two narrow exceptions, every lease now produces a right-of-use asset and a matching lease liability, both of which sit on the balance sheet.
| Feature | Old FRS 102 (pre-2026) | Revised FRS 102 (2026 onwards) |
|---|---|---|
| Operating vs finance lease distinction | Retained for lessees | Abolished for lessees |
| Operating leases | Off balance sheet, rental expensed | On balance sheet as ROU asset and lease liability |
| Income statement impact | Straight-line rental expense | Depreciation on the ROU asset plus interest on the lease liability |
| Short-term lease exemption | Not applicable in the same form | Available for leases with a term of 12 months or less |
| Low-value asset exemption | Not applicable in the same form | Available; no fixed monetary threshold, judged on an absolute basis per asset |
| Transition method | N/A | Modified retrospective only, no restatement of comparatives |
Those two exemptions earn their keep in practice.
- A lease is short-term if, at commencement, its term is 12 months or less and there’s no purchase option baked in.
- A lease is low-value if the underlying asset, taken new and judged on an absolute basis regardless of how material it is to you, is genuinely low in value.
FRS 102 does not prescribe a fixed monetary threshold for low-value assets. The assessment is made by considering whether the underlying asset is genuinely low in value when new, on an absolute basis. The exemption is therefore a matter of judgement rather than a simple £ or $ cut-off.
Discount rates work down a hierarchy. Start with the interest rate implicit in the lease. When that isn’t readily determinable, and honestly it usually isn’t, you fall back on the incremental borrowing rate, or on the obtainable borrowing rate; a UK-specific simplification IFRS 16 doesn’t offer. The obtainable borrowing rate is just the rate you’d pay to borrow, over a similar term, an amount similar to the lease payments. FRS 102 also lets you apply one discount rate across a portfolio of leases with reasonably similar characteristics. A fleet of vans on comparable terms, for instance. That single concession takes a lot of pain out of the calculation for a business with dozens of small leases rather than one big one.
Transition is where FRS 102 parts company with IFRS 16 most obviously. IFRS 16 gave adopters a choice: full retrospective restatement, or a modified retrospective approach. FRS 102 permits modified retrospective only. No choice. In plain terms, you don’t restate the prior year comparatives at all. You measure the lease liability at the date of initial application as the present value of the remaining lease payments, set the right-of-use asset at broadly the same figure (adjusted for any prepayments or accruals already sitting on the balance sheet), and any difference goes to opening reserves rather than through this year’s P&L. One useful shortcut: where a subsidiary already reports right-of-use assets and lease liabilities under IFRS 16 for group consolidation, it can carry those numbers straight across. No second calculation needed.
Case study: a dental group with premises leases and patient payment plans
Riverside Dental Practices Ltd runs four surgeries across the South East. Each sits on a 10-year property lease, and there’s a portfolio of leased imaging equipment on top. Under the old rules, the surgery leases were operating leases. Rent expensed monthly, a note at the back disclosing £875,000 of committed but unpaid rentals as at 1 January 2026, the date of initial application for its December year end.
Under revised Section 20, the finance team had to bring those leases on. Riverside borrows at 6%, and with no rate readily implicit in the leases, it used that as the obtainable borrowing rate to discount the £875,000 of remaining committed rentals to present value. A lease liability landed on the 1 January 2026 opening balance sheet, and a right-of-use asset of broadly the same size next to it, with the small difference tidied up through opening reserves. No restating of the 2025 comparatives. Gross assets jumped. The finance director rang the bank early, because the loan covenant tested gearing against a fixed ratio that had been set back when those leases were nowhere near the balance sheet.
The imaging equipment told a more mixed story. Some of it was short and individually cheap. Two printers and a small autoclave qualified for the low-value exemption and stayed off balance sheet, expensed as before. A leased X-ray unit didn’t come close to qualifying, being neither low-value nor short-term, so it went through the full right-of-use treatment.
Then the revenue side. Riverside sells a patient dental plan: a set number of check-ups, hygienist visits, and a discount on any restorative work, all paid by monthly direct debit. Under the old risk-and-reward approach, the practice had mostly recognised each monthly fee as revenue when it hit the account. The five-step model doesn’t allow that shortcut.
The team had to identify each element of the plan as a separate performance obligation, estimate the standalone selling price of the check-ups, the hygienist visits, and the restorative discount, allocate the annual fee across them, and then recognise each slice only as the patient actually receives that service. For anyone who doesn’t use up their full quota of visits in the year, that shifts when revenue gets recognised and parks a contract liability on the books for the unused portion. A balance that simply didn’t exist on Riverside’s accounts before.
What does FRS 102 accounting standard update in revenue and leases?
Clients who assume the 2026 amendments are confined to leases and revenue will be caught out. Several other areas require attention, and small companies applying to Section 1A carry out the largest share of the additional work.
| Area | What changes under revised FRS 102 |
|---|---|
| Related party disclosures | Expanded requirements apply to relevant related party transactions, subject to the specific exemptions and conditions in FRS 102 and company law |
| Dividends | Additional information may be required, including information relating to dividends depending on the circumstances and share classes |
| Statement of compliance | Small entities are required to make the relevant statement regarding compliance with FRS 102 |
| Directors’ remuneration | The disclosure requirements interact with company law and the related-party requirements; there is not a blanket new requirement to disclose directors’ remuneration in every small company |
| Going concern | Additional information concerning going concern and significant judgements may need to be disclosed |
| Share-based payments | Additional information about arrangements may be required |
| Supplier finance | Additional disclosures apply to relevant supplier finance arrangements |
Section 1A and the directors’ remuneration question
The FRC has resolved a point that had caused real confusion among ICAEW members. Paragraph 1AC.35 requires small entities to apply the related party disclosures in paragraphs 33.9 and 33.14 but not paragraph 33.7, which is the one calling for disclosure of total key management personnel compensation. The two paragraphs are intended to be complementary rather than duplicative, and so there is still no explicit statutory requirement for a small UK company to disclose directors’ remuneration as such. Where a director does something other than draw remuneration, for example renting a property to the company, that arrangement still has to be disclosed as a related party transaction.
How the size thresholds interact with the changes
A further point worth raising with clients is the change to the company size thresholds themselves, which increased for accounting years commencing on or after 6 April 2025. The turnover threshold rose from £10.2 million to £15 million and the balance sheet total from £5.1 million to £7.5 million, with the average employee count unchanged at 50.
| Small-company test | Before 6 April 2025 | From 6 April 2025 |
|---|---|---|
| Turnover | £10.2m or less | £15m or less |
| Balance sheet total | £5.1m or less | £7.5m or less |
| Average employees | 50 or fewer | 50 or fewer |
| Qualification | Meet at least 2 of 3 | Meet at least 2 of 3 |
More businesses now qualify as small, which brings more of them within the expanded Section 1A disclosures set out above. Pulling in the opposite direction, recognising leases on the balance sheet increases gross assets, which matters for any relief measured against a gross-assets test. Enterprise Investment Scheme relief is capped at £15 million of gross assets and the Seed Enterprise Investment Scheme at £200,000, so a company that previously sat comfortably below those ceilings could find its new right-of-use assets moving it closer to the limit.
What is the tax angle to FRS 102
The accounting change does not automatically mean the entire tax effect is recognised in one year. UK tax legislation contains spreading rules for transitional adjustments arising from the adoption of right-of-use accounting, with the adjustment generally spread over the relevant average remaining lease period. Businesses should assess the tax treatment separately from the accounting transition. How should UK companies prepare before the end of next year?
The business that sails through this are the ones that started early. Not the ones that left it to the final quarter before year end.
Build a complete lease register.
Every rental and hire agreement, property, vehicles, equipment, hire purchase. Capture start date, end date, payment amounts, break clauses, and any renewal or extension option you’re reasonably certain to take, because those extension periods count toward the lease term.
Comb your revenue contracts for bundled or variable elements.
Flag anything with multiple deliverables, warranty commitments, loyalty mechanics, or performance-linked pricing. These are the contracts where revenue timing moves under the five-step model.
Decide and document your discount rate approach.
Work out whether the rate implicit in each lease is readily determinable, and where it isn’t, settle on an obtainable or incremental borrowing rate method, plus whether any class of asset gets a portfolio rate.
Model the balance sheet and covenant hit early.
Right-of-use assets and lease liabilities both swell the balance sheet. Run the numbers before year end so the covenant conversation with your lender happens ahead of filing, not after.
Update the accounting system and chart of accounts.
You’ll usually need separate nominal codes for the short-term and low-value leases that stay off balance sheet, alongside new codes for right-of-use assets, lease liabilities, and the related depreciation and interest.
Refresh disclosure checklists and accounts templates.
Build the Section 1A related party, dividend, and going concern disclosures into your standard templates now. Reconstructing them mid-filing season is nobody’s idea of fun.
Consider early adoption.
It was allowed from 1 January 2025, as long as every amendment goes in together. That can suit a business already tearing up its systems for other reasons.
Frequently Asked Questions
The principal effective date is accounting periods beginning on or after 1 January 2026. A December year end company’s first affected accounts run to 31 December 2026. Supplier finance disclosures went live earlier, from 1 January 2025, and a further narrower set of amendments aligning FRS 102 with IFRS 18 presentation changes applies from 1 January 2027.
No. Micro-entities reporting under FRS 105 aren’t touched by the new lease accounting or revenue recognition rules. FRS 102 covers entities too large for FRS 105 but not reporting under full IFRS.
No. FRS 102 doesn’t set a figure. The test is applied on an absolute basis per underlying asset, considering the asset when new, and it holds regardless of how material the lease is to the business.
No. Unlike IFRS 16, revised Section 20 allows the modified retrospective approach only. Comparatives aren’t restated, and the cumulative transition adjustment goes to opening reserves.
In most cases, yes. Related party transactions, dividends, going concern judgements, and share-based payment arrangements all carry expanded disclosure from 1 January 2026, even though the core exemption from full FRS 102 disclosure still stands for small entities.
Getting ready takes time, and the lease inventory and contract review are the parts that eat the most of it. Most businesses find the transition easier alongside a finance team that has already run a few clients through it. If your year end falls under the new rules, start the impact assessment now, rather than waiting for the accounts deadline to make the decision for you.
