The Financial Reporting Council (FRC) has announced changes to FRS102 and other financial reporting standards, affecting millions of UK companies from 1 January 2026.
The changes are designed to enhance the quality of financial reporting in the UK and consistent with international standards.
What is FRS 102 and FRS 105?
FRS 102 is the Financial Reporting Standard applicable in the UK.
FRS 105 is the Financial Reporting Standard applicable to the Micro-entities Regime, a simplified version of FRS 102 to reflect the simpler nature and smaller size of UK companies.
Check with your accountant if you’re unsure which Financial Reporting Standard you’re adopting.
What are the significant changes coming up in FRS 102?
The two headline changes relate to lease accounting and revenue recognition.
In terms of lease accounting, the changes only affect FRS 102 (not FRS 105).
Amendments to revenue recognition affect both FRS 102 and FRS 105.
Lease accounting
Almost all operating leases will be recognised on the balance sheet’ by lessees within the financial statements, bringing an asset and liability into their accounts, eliminating the distinction between operating and finance leases.
Currently, FRS 102 classifies leases as either operating or finance leases. Assets held under operating leases are not recognised on the balance sheet and the lease payments are expensed in the profit and loss account.
Assets held under finance leases are recognised on the balance sheet with a lease liability included in creditors for the lease rental payments due. Regular lease payments reduce the liability, they are not charged to the Profit and loss. Instead, depreciation and interest are recognised as an expense.
The amendment will remove operating leases from FRS 102 meaning that all leased assets will be included on the balance sheet and accounted for in the same way as finance leases.
There are some exemptions available for short term and low value leases.
Balance sheets will show more assets and liabilities. This could affect various financial ratios.
There will be some practical issues with assessing all current leases too.
In terms of profit and loss account, there will be a charge for depreciation and interest on the lease liability.
Revenue recognition
Under FRS 102, revenue is recognised with reference to the stage of completion of the transaction. This will vary depending on whether the transaction is a sale of goods, provision of services or a contract over a period of time, such as construction.
The amount and timing of revenue included within the financial statements may change as a consequence of the new five-step recognition criteria, which is a simplified version of IFRS 15 ‘Revenue from Contracts with Customers’.
Distinct goods or services promised to a customer will be recognised when they are transferred to the customer.
The five-step revenue recognition model is:
- Identify the contract with the customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to each performance obligation.
- Recognise revenue when the performance obligation has been satisfied.
There will likely be little to no impact for many companies if their revenue recognition already follows this model.
Let’s look at an example of a mobile phone company providing a mobile phone to a customer, on a two year contract.
- The contract is for the phone and the data/calls plan
- The obligation is to provide a mobile phone and two years of data/calls
- The transaction price will be the monthly cost, over the two year contract
- The transaction price is allocated between the mobile phone handset and the data/calls package
- The mobile phone revenue would be recognised on day 1, as soon as the phone is handed to the customer. The revenue from the data/calls would be recognised monthly over the life of the two year contract
How You Can Prepare for the Lease Accounting Changes Under FRS 102
Early adoption is an option, but you will have to adopt all leases at once.
It’s important to review your lease agreements. This is probably the most important and initially the most time-consuming part.
Identify which leases are short-term leases and which are ‘low-value’ assets that qualify for exemptions.
All remaining leases are “finance leases” and, if you are not already accounting for them as such, they will need to be brought onto your balance sheet from 2026.
It is crucial that you understand the impact on recognition and measurement on your financial statements if you adopt the revisions early. For example, most operating leases coming onto the balance sheet will increase assets and liabilities on your balance sheet. Your profit or loss will have an increased depreciation charge, increased interest/finance expense and decreased lease rental charge.
If you would like to discuss this further the please contact us on 01386 366741 or email here and one of our advisers will be happy to help.