Look, I get it (and I can hear you yawning from here). “New accounting rules” ranks somewhere between “tax code update” and “watching paint dry” on the excitement scale, but these FRS 102 changes are genuinely significant. And if you’re a director of a UK company, you need to know what’s coming.
The new rules apply to accounting periods starting on or after 1st January 2026. Which means if your year end is December, you’ll be dealing with this in your 2026 accounts. March year end? You’ve got until 2027. Either way, now’s the time to start thinking about it as it could mess with your profits and your balance sheet.
The big one: lease accounting
For most businesses, this is the headline change. And honestly, it’s a bit of a shake up.
- Under the current rules, you’ve got finance leases (on the balance sheet) and operating leases (off the balance sheet, treated as rental expenses). Nice and simple.
- Under the revised FRS 102 changes? That distinction mostly disappears.
Now, you’ll need to recognise a “right of use asset” and a corresponding lease liability for most leases. That equipment you’re renting? On the balance sheet. The office you’re leasing? On the balance sheet. Company cars through salary sacrifice? You guessed it.
Instead of a straightforward rental expense, you’ll be recognising depreciation on the asset and finance costs on the liability. The total cost over the lease term stays broadly the same, but it gets front loaded (think higher costs in the early years, lower later).
Why does this matter? Because suddenly your balance sheet looks different. Your gearing ratios change. Your EBITDA changes. And if you’ve got banking covenants tied to any of those metrics, well, you might want to have a conversation with your lender sooner rather than later.
The good news? Short term leases (under 12 months) and low value assets are exempt. So you don’t need to worry about the office coffee machine.
Revenue recognition: the five step dance
The FRS 102 changes also bring in a new model for recognising revenue. It’s based on a five step framework that sounds simple but can get complicated fast.
- Identify the contract.
- Identify what you’re actually delivering.
- Work out the price.
- Allocate that price across what you’re delivering.
- Recognise revenue when you’ve delivered it.
For businesses with straightforward “you pay, we deliver” models, this probably won’t change much. But if you’re in construction, software, consultancy, or anything with long term contracts, multiple deliverables, or performance bonuses? You’ll want to review your contracts carefully.
The timing of when you recognise revenue could shift…meaning your profit profile could change…and your finance team will need to understand the new rules.
Need help reviewing your contracts? Get in touch with us at JVCA.The earlier contracts are reviewed, the smoother the transition is likely to be. |
Here are some key questions that directors should be asking:
- Are customer contracts consistent or highly customised?
- Do contracts contain multiple deliverables that may need separating?
- Is there any variable consideration such as bonuses, rebates or performance incentives?
- Could the timing of revenue recognition change?
- Will key performance indicators be affected?
- Do accounting systems need updating?
- Have commercial and finance teams been trained on the new requirements?
Small companies face additional disclosures
If you’re thinking “We’re small, this doesn’t apply to us”, think again. The FRS 102 changes bring extra disclosure requirements for small companies too.
Areas requiring additional disclosure may include:
- Going concern assessments
- Dividends
- Deferred tax
- Share-based payments
- Leasing arrangements
- Related party transactions
- Provisions and contingent liabilities
- Revenue recognition policies.
You’ll probably need to gather information you’ve never tracked before, so you should be looking into this now.
And if you’re on FRS 105 (the micro entity standard), the lease accounting rules don’t apply to you. But the revenue recognition changes? Those absolutely do.
Other key changes
The revised FRS 102 also introduces changes across a number of technical areas, including:
Intangible assets
Further guidance clarifies the treatment of assets containing both tangible and intangible elements, particularly software-integrated assets.
Uncertain tax positions
New guidance requires companies to assess whether tax positions would be accepted if reviewed by HMRC, potentially increasing recognised tax liabilities in some situations.
Supplier finance arrangements
New disclosures will be required where businesses utilise supplier finance or reverse factoring arrangements.
What should you do now?
Although it may feel far enough away that you are tempted to stick your head in the sand and avoid it, we know from experience that the businesses who leave the preparation until the last minute end up facing unnecessary cost and disruption.
Our advice? Don’t delay; don’t wait until your accountant’s preparing next year’s accounts to start thinking about this.
Instead:
- Review your leases. Work out what’s going to land on your balance sheet and how it affects your ratios.
- Review customer contracts. Determine whether revenue may need to be recognised differently under the new rules (especially anything complex or long term).
- Check your banking covenants. If the numbers are going to shift, your bank needs to know before it becomes a problem.
- Review internal systems. Establish whether accounting software, reporting processes or charts of accounts structures need updating.
- Train key staff. Commercial, operational and finance teams should understand the impact of the new requirements.
- Talk to your accountant early. Seriously. The earlier you start planning, the smoother this will be (that’s if you want to reduce cost, disruption, and implementation risk).
Almost every company reporting under FRS 102 will be affected by the 2026 amendments in some way. For businesses with significant leasing arrangements, complex customer contracts, supplier finance arrangements or uncertain tax positions, the impact could be substantial. So begin the preparation now!
Understanding the areas affected, reviewing contracts and engaging with advisers early will help ensure a smooth transition and avoid surprises when the first accounts under the revised standard are prepared.
| Want help getting ready for the FRS 102 changes? Looking for an accountant with helpful advice, not just doing the job of adding up your accounts? Get in touch! We’ll walk you through what’s changing and what it means for your business. |
