Amendments to FRS 102: how will this impact the hospitality and leisure sector?
The hospitality and leisure sector has faced significant challenges in recent years, from rising operating costs and staffing pressures to changing customer expectations. Now, another major change is on the horizon. The amendments to FRS 102, effective for accounting periods for most entities beginning on or after 1 January 2026, will introduce a new lease accounting model and a revised approach to revenue recognition, bringing UK GAAP broadly closer to IFRS 16 and IFRS 15.
For hotels, restaurants, pubs, holiday parks, gyms, cinemas and other leisure operators, the impact could be substantial. Many businesses in the sector operate from leased premises and manage a variety of customer contracts, memberships, loyalty programmes and advance bookings. As a result, these changes are likely to affect not only financial reporting but also key performance metrics, banking covenants and business decision-making.
Why hospitality and leisure businesses should pay attention
Hospitality and leisure businesses are often leasehold-heavy, making them particularly exposed to the new lease accounting requirements. Many operators have multiple leased sites, long-term property commitments and rent structures that include fixed and variable elements.
At the same time, revenue streams can be complex. Gift vouchers, membership schemes, customer deposits, advance bookings and bundled packages may all need to be reassessed under the new revenue recognition rules.
For finance teams, the challenge extends beyond compliance. The changes could influence reported profitability, EBITDA, net debt and other metrics relied upon by investors, lenders and management teams.
Lease accounting: bringing property commitments onto the balance sheet
One of the most significant changes under the revised FRS 102 is the requirement for most leases, subject to certain exemptions such as short-term leases and leases of low-value assets, to be recognised on the balance sheet.
Under the current standard, many property leases are classified as operating leases, with rental costs recognised through the profit and loss account over the lease term. Under the new rules, businesses will generally recognise:
• A right-of-use asset
• A lease liability
For hospitality and leisure businesses with extensive property portfolios, this could lead to a significant increase in reported assets and liabilities.
The impact on EBITDA and banking covenants
While lease payments themselves do not change, the way they are reported does.
Rental expenses will largely be replaced by depreciation and interest charges. As a result, many businesses may see an increase in reported EBITDA, even though underlying cash flows remain unchanged.
While this may appear favourable, the corresponding increase in lease liabilities could affect:
• Net debt calculations
• Gearing ratios
• Covenant compliance
• Lending arrangements
• Business valuations
This will be the case particularly where financing agreements have not been amended to neutralise the accounting effects of lease recognition. Organisations with external financing should engage with lenders early to understand how revised accounting measures may affect existing agreements.
Property portfolios will require detailed review
Hospitality and leisure operators should begin identifying all lease arrangements across their business. This includes not only hotels, restaurants and leisure venues but also equipment leases, vehicle leases and other contractual arrangements that may fall within the scope of the new requirements.
Businesses will also need to consider:
• Lease extension options
• Break clauses
• Variable rent arrangements
• Service charge components
• Data collection and lease management processes
For operators managing multiple sites, compiling this information could represent a significant implementation exercise.
Revenue recognition: a more detailed approach
Alongside lease accounting, the revised FRS 102 introduces a new five-step revenue recognition model focused on performance obligations within customer contracts.
While many day-to-day transactions will remain straightforward, some common hospitality and leisure arrangements may require more detailed assessment.
Memberships and subscription-based services
Many leisure businesses operate membership models, including gyms, health clubs and entertainment venues.
Under the new framework, businesses will need to carefully assess when services are delivered and when revenue should be recognised. Revenue may need to be recognised over the period services are provided rather than at the point payment is received.
Gift vouchers and customer credits
Gift cards and vouchers are widely used across the sector, particularly by hotels, restaurants and leisure attractions.
The revised guidance requires businesses to consider when performance obligations are satisfied, which may impact the timing of revenue recognition and the treatment of unredeemed balances.
Advance bookings and deposits
Hospitality businesses often receive payments in advance for accommodation, events and holiday bookings.
The new model reinforces the need to align revenue recognition with the delivery of goods and services rather than simply the receipt of cash, potentially requiring changes to existing revenue processes and controls.
Bundled offerings and packages
Many operators sell packages combining accommodation, meals, spa treatments, activities or membership benefits.
Many hospitality businesses operate customer loyalty schemes that provide future discounts, free nights, complimentary meals or other rewards. Under the revised framework, businesses may need to assess whether these arrangements create separate performance obligations and whether a portion of revenue should be deferred until rewards are redeemed or expire.
Under the revised standard, businesses may need to identify separate performance obligations and allocate revenue between them, affecting when and how revenue is recognised.
Looking at the bigger picture
While lease accounting and revenue recognition are often discussed separately, hospitality and leisure businesses should assess the combined impact of both changes.
The lease amendments may increase EBITDA and balance sheet liabilities, while the revenue recognition changes may alter the timing of income and profit recognition. Together, these adjustments could affect:
• Financial KPIs
• Management reporting
• Funding arrangements
• Profit forecasts
• Investor communications
• Strategic planning
Early planning will allow businesses to understand these impacts before the new requirements become mandatory.
Preparing for 2026
Although the implementation date may still seem some way off, businesses should start preparing now.
Key actions include:
• Reviewing lease portfolios
• Assessing customer revenue streams
• Evaluating existing systems and processes
• Modelling the financial impact of the changes
• Reviewing banking covenants and financing agreements
• Communicating expected impacts to stakeholders
Businesses that start early will be in a stronger position to manage the transition efficiently and avoid last-minute surprises.
How Moore South can help
The upcoming changes to FRS 102 are more than an accounting exercise. For hospitality and leisure businesses, they could have significant implications for financial reporting, EBITDA, debt metrics and strategic decision-making.
At Moore South, our financial reporting specialists can help you assess the impact of the new lease accounting and revenue recognition requirements, identify areas of risk and develop a practical implementation plan tailored to your business.
If you’d like to understand how the FRS 102 amendments could affect your hospitality or leisure business, contact our team today.
For those interested in learning more about the changes before deciding to request support in dealing with the transition, our London office are putting on three Webinars in September (including one on leases and one on revenue) to give an in-depth update including practical examples encountered to date:
Leases-8th September
Webinar – FRS 102: Lease accounting – advanced insights
Revenue Recognition-15th September
Webinar – FRS 102: Revenue recognition – advanced insights
Section 1A & other changes-22nd September
Webinar – FRS 102: Section 1A and other changes – advanced insights