FRS 102 reporting standards: Changes coming in 2026

Significant updates to FRS 102 will take effect for accounting periods starting on or after 1^st 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 have the option to adopt the amendments early, it’s essential to begin assessing the impact now to ensure a smooth transition.

The most notable updates affect lease accounting and revenue recognition, altering how businesses report financial commitments and income streams.

Although there is time before implementation, these changes could have a substantial effect on financial statements, key metrics, and compliance. In this blog we’ll be outlining the key changes to the standard, as well as how these changes may impact both finance and operations.

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 – While the standard does not specify a threshold, these typically cover 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 2 items: depreciation on the right-of-use asset and interest on the lease liability, which will impact financial performance metrics like 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.

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 to change reporting thresholds

Once the new accounting treatment has been implemented, the 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. Tax

Changes in accounting treatment may affect taxable profits or losses, influencing tax liabilities. Consulting with tax advisors, such as Verallo, in advance can help mitigate potential issues.

5. 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.

Preparing ahead for the transition

The upcoming revisions to FRS 102 will significantly impact how businesses manage leases, revenue, and regulatory compliance in the UK. Although there’s time before the changes come into effect, starting preparations early will help businesses adapt smoothly and avoid any disruptions as the deadline approaches.

For tailored advice on how these changes will affect your business, contact Verallo today by emailing info@verallo.com, or calling 0203 912 9933.