FRS 102: how 2026 changes are reshaping reporting, tax and disclosures

Significant updates to FRS 102 will take effect for accounting periods starting on or after 1st January 2026. These changes, introduced by the Financial Reporting Council (FRC), bring UK financial reporting standards closer to international frameworks, particularly IFRS 15 and IFRS 16.

While companies still have the option to adopt the amendments early, businesses are now firmly in the preparation window. With implementation approaching, it is increasingly important to assess the impact now to ensure a smooth transition and avoid disruption to financial reporting, tax positions, and commercial agreements.

The most notable updates continue to affect lease accounting and revenue recognition, altering how businesses report financial commitments and income streams. In addition, enhanced disclosure requirements around related party transactions will increase the level of transparency required in statutory accounts.

Although there is time before implementation, these changes could have a substantial effect on financial statements, key metrics, compliance, and tax positions.

In this blog we outline the key updates and what they mean for finance teams, operations, and directors.

Lease accounting – what’s changing?

A major shift in lease accounting under FRS 102 eliminates the distinction between finance and operating leases for lessees. Moving forward, businesses will need to report most leases on their balance sheets, unless they qualify for one of the following exceptions:

• Short-term leases – those with a term of 12 months or less
• Low-value asset leases – typically items such as IT equipment and office furniture

This means many businesses leasing property, vehicles, and machinery will see significant changes in how leases are recorded.

Financial statement impact

Profit and loss: Instead of a single lease expense, businesses will now recognise two items: depreciation on the right-of-use asset and interest on the lease liability. This will impact financial performance metrics such as EBITDA.

Balance sheet: Lessees must record a right-of-use asset, representing the value of the leased item, and a lease liability, reflecting the present value of future payments.

A new approach to revenue recognition

The revised standard introduces a structured five-step model for revenue recognition, aligning with IFRS 15. This model applies to all customer contracts and standardises how income is reported across different industries.

The five-step model includes:

1. Identifying the contract with a customer
2. Determining the specific obligations within the contract
3. Establishing the total transaction price
4. Allocating the price to each performance obligation
5. Recognising revenue as performance obligations are met

For some businesses, this could shift the timing of revenue recognition, leading to the recognition of new assets and liabilities on the balance sheet. Additionally, expanded disclosure requirements will require businesses to provide more details about revenue recognition policies and contract balances.

Related party transactions – increased disclosure requirements

One important area of change that directors should not overlook is the increased emphasis on related party transactions.

Under the updated FRS 102 framework, disclosure expectations are becoming more explicit. . Businesses will need to provide clearer detail around transactions with related parties, including the nature of relationships, transaction values, outstanding balances, and any non-standard terms or arrangements.

For group structures and owner-managed businesses in particular, this may result in a noticeable increase in disclosure volume within financial statements. Transactions that were previously considered routine may now require fuller explanation and greater transparency, increasing scrutiny at both board and audit level.

Five considerations for businesses

To support preparation and to help avoid challenges in financial reporting and compliance, businesses should assess:

1. Financial systems

Companies should evaluate whether their existing financial systems can handle the revised lease and revenue recognition models. Strengthening internal processes now will ease the transition.

2. Changes to key financial metrics

With modifications to lease and revenue recognition, figures such as EBITDA, total assets, and liabilities will shift. Companies must determine how these changes affect performance evaluation and reporting.

3. Potential changes to reporting thresholds

Once the new accounting treatment has been implemented, company size may change, with the potential to move some businesses into a larger reporting category. Those affected will need to prepare for additional disclosure and compliance requirements.

4. Banking agreements

Revised accounting treatments could alter financial ratios, potentially affecting loan covenants. Engaging with lenders early will help businesses manage compliance risks and avoid unforeseen consequences.

5. Tax

The tax impact of the FRS 102 changes should not be underestimated. While accounting adjustments will be reflected in financial statements, the tax treatment does not always follow the same pattern, which can create timing differences and cash flow pressures.

Transitional timing differences

For many businesses, the most immediate impact arises on transition:

• Transitional adjustments are generally brought into tax in the first period of adoption
• Lease-related adjustments are subject to specific spreading rules
• This means tax relief is often deferred over the remaining weighted average lease term rather than recognised upfront
• Revenue-related adjustments may instead hit taxable profits in full in the first affected period

This mismatch between accounting and tax treatment can create unexpected volatility in tax payments, particularly for businesses within quarterly instalment regimes.

Potential impact on cash flow and instalments

Because of the timing of these adjustments, some businesses may see an impact on tax payments as early as March 2026. This makes early forecasting essential to avoid:

• unexpected cash flow strain
• higher-than-anticipated instalment payments
• interest charges on underpaid tax

Key tax risks to consider

Corporate Interest Restriction (CIR): Changes to tax-adjusted earnings can affect interest deductibility under CIR rules. In some cases, transitional adjustments may reduce the available tax relief on finance costs. While elections exist to mitigate this, they are irreversible and require careful assessment.

Loss utilisation restrictions: Increased transitional profits may restrict the use of carried forward losses. Where profits exceed the group allowance threshold, relief may be capped, potentially creating tax liabilities even where underlying trading performance has not changed.

Wider regulatory thresholds: Changes to turnover and balance sheet size may also affect entry into other compliance regimes, including:

• senior accounting officer requirements
• country-by-country reporting
• Pillar Two
• payment practices reporting

These can introduce additional administrative burden and, in some cases, penalty exposure for non-compliance.

Preparing ahead for the transition

The upcoming revisions to FRS 102 will significantly impact how businesses manage leases, revenue, disclosures, and regulatory compliance in the UK. With related party disclosures increasing and tax implications becoming more complex, the scope of change is broader than many businesses may initially expect.

Given the scale and variability of these impacts, early planning is essential. For tailored advice on how these changes will affect your business, contact Verallo today by emailing info@verallo.com, or calling 0203 912 9933.