Amendments to FRS 102: how will this impact the professional services sector?
(nb-see upcoming Webinar links below)
The current amendments to FRS 102 will introduce significant changes to lease accounting and revenue recognition for accounting periods beginning on or after 1 January 2026. While professional services firms may not face the same level of complexity as sectors such as construction or manufacturing, assessment of any potential changes should not be overlooked.
Accountancy practices, legal firms, consultancies, architects, engineers, recruitment businesses and other professional service providers will still need to assess the effect on their financial reporting, particularly where they operate from leased premises, use leased equipment or enter into long-term client engagements.
For many firms, the challenge is less about technical complexity and more about ensuring processes, systems and contract assessments are fit for purpose ahead of implementation.
Why professional services firms should pay attention
Professional services businesses often generate revenue through retainers, project-based work, fixed-fee engagements and ongoing service contracts. They may also operate from leased offices and make extensive use of leased IT equipment and vehicles.
While the overall implications may be less dramatic than in lease-heavy sectors, the revised FRS 102 could still affect:
• Revenue recognition policies
• Timing of profit recognition
• Lease liabilities and balance sheet presentation
• EBITDA and financial KPIs
• Partner and management reporting
Early preparation can help firms avoid unexpected adjustments and ensure a smooth transition to the new requirements.
Lease accounting: office leases move onto the balance sheet
One of the most significant changes under the revised FRS 102 is that most leases will be recognised on the balance sheet, subject to limited exemptions such as those that are short-term and those for low-value assets.
For professional services firms, this is most likely to affect:
• Office leases
• Serviced office arrangements
• Vehicle leases
• IT and technology equipment leases
Instead of recognising rental costs as operating expenses throughout the lease term, businesses will generally record:
• A right-of-use asset
• A corresponding lease liability
For firms with long-term office leases, this could result in a noticeable increase in both assets and liabilities.
A key first stage is to ensure there is actually a lease for a specific asset. This sounds obvious but in a lot of hire agreements the supplier has the right to substitute an asset through the term-if so there is no identified asset. In addition the lessor must, throughout the period of use, have the right to direct the use of the asset.
Understanding the impact on financial metrics
Although lease payments themselves will not change, the presentation of costs will.
Rental expenses will largely be replaced by depreciation and interest charges, often resulting in:
• Higher EBITDA
• Increased reported debt
• Changes to gearing ratios
• Different profit profiles over the life of a lease
Firms with lending facilities or performance metrics linked to financial results should assess the impact carefully.
Revenue recognition: reviewing client contracts
Alongside lease accounting changes, the revised FRS 102 introduces a new five-step revenue recognition model based on identifying and satisfying performance obligations.
For many professional services firms, there may be limited changes to day-to-day accounting in relation to revenue recognition. However, contracts should still be reviewed to ensure revenue is recognised appropriately under the new framework. Even where the accounting outcome remains unchanged, firms may need additional documentation to support their conclusions.
Fixed-fee and project-based engagements
Professional services contracts often involve fixed-fee assignments delivered over several months.
Businesses will need to assess:
• When control of services transfers to clients
• Whether revenue should be recognised over time or at a specific point
• How performance obligations are identified within individual engagements
For some firms, using the revised criteria this may alter the timing of revenue recognition and project profitability reporting.
Retainers and ongoing service agreements
Many firms operate recurring fee arrangements, particularly in legal, accountancy and consultancy sectors.
Under the revised model, revenue will need to be recognised in line with the delivery of services, requiring businesses to ensure existing policies and processes remain appropriate.
Multi-service contracts
Some engagements include multiple service elements, such as consultancy, implementation, training and ongoing support.
The revised standard may require firms to identify separate performance obligations and allocate revenue accordingly, potentially changing how income is recognised throughout the contract lifecycle.
The impact beyond compliance
While the technical accounting challenges may be less significant than in some sectors, professional services firms should not underestimate the wider business implications.
The revised lease accounting requirements may increase EBITDA while adding liabilities to the balance sheet. At the same time, revenue recognition changes could alter the timing of reported income and profitability.
Together, these amendments could influence:
• Management reporting
• Partner profit-sharing arrangements
• Banking covenants
• Business valuations
• Financial forecasts
• Stakeholder communications
Understanding these effects now will help firms avoid surprises when the changes become mandatory.
Preparing for 2026
The most successful transitions will be those that start early.
Professional services firms should consider:
• Reviewing office and equipment leases
• Assessing client engagement terms
• Identifying contracts with multiple deliverables
• Evaluating current revenue recognition policies
• Modelling the impact on financial statements and KPIs
• Ensuring finance teams understand the new requirements
Historical lease information and customer contract data may be required to support the transition process and prepare comparative information where necessary. Taking proactive steps now can make implementation far more manageable.
How Moore South can help
Although the amendments to FRS 102 may be less complex for professional services firms than some other sectors, they still require careful assessment and planning.
At Moore South, our audit and advisory specialists can help you understand the implications of the revised lease accounting and revenue recognition requirements, assess their impact on your business and develop a practical implementation roadmap.
For those interested in learning more about the changes before deciding they need 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
If you’d like to discuss how the FRS 102 amendments could affect your professional services firm, contact our team today.