FRS 102: What the 2026 changes mean for UK businesses

The UK financial reporting framework is about to undergo its biggest overhaul in years. Following its periodic review, the Financial Reporting Council (FRC) has announced major updates to FRS 102 – the standard forming the backbone of UK GAAP for most medium-sized businesses.
Effective for accounting periods beginning on or after 1 January 2026, these changes bring UK GAAP closer to international standards. The two headline areas of impact are lease accounting and revenue recognition.

Lease accounting: operating leases come onto the balance sheet

Today, many businesses account for operating leases (such as offices, vehicles, and equipment) as rental costs, keeping them off balance sheet. From 2026, that treatment disappears for most leases:

• The distinction between operating and finance leases is removed for lessees.
• Most leases must be recognised on the balance sheet as both a right-of-use asset and a lease liability.
• Lease liabilities will be measured at the present value of future payments, discounted using the lease’s implicit rate (if known) or the business’s borrowing rate.
• Profit and loss treatment changes too: instead of a single rental expense, businesses will record depreciation on the asset and interest on the liability. This typically front-loads costs compared to today’s straight-line method.
• Exemptions apply for short-term leases (12 months or less) and low-value assets.

Action point for management:

Begin collecting complete and accurate lease data, including key terms, options to extend or terminate, and applicable borrowing rates. Please also note, as a consequence of the change there are some lease transition treatment requirements:

• Comparatives restatement is not permitted. However, should there be any cumulative impact of the initial change of treatment from applying the standard this should be dealt with as an adjustment to opening retained earnings (if any). There is also no requirement to disclose impact on prior periods
• Existing amounts already used under IFRS 16 for group reporting are permitted to be used as opening balances
• Where not applying the group exemption, the value of the asset will equal the liability on transition, adjusted by any existing prepaid or accrued amounts before transition. Per above any cumulative effect of initially applying the standard should be recorded as an adjustment of opening retained earnings (if any).

Revenue recognition: a five-step model

The revised FRS 102 introduces a new five-step model for revenue recognition, replacing the simpler “risk and rewards” approach. This brings FRS 102 in line with IFRS 15 and adds more specific and prescriptive requirements than were seen in the existing Section 23. It means rather than recognising revenue in accordance with the transfer of risks and rewards it will now be recognised by a vendor as, or when, control over the goods or services passes to the customer.

The five steps entities must now consider are:

1. Identify the contract with a customer.
2. Pinpoint distinct performance obligations.
3. Determine the transaction price.
4. Allocate that price to performance obligations.
5. Recognise revenue as those obligations are met.

This will particularly affect businesses with long-term or complex contracts, bundled services, or staged deliveries – such as construction, professional services, and technology companies. The timing of revenue recognition could accelerate or defer income, with knock-on effects for reported profits and dividend planning.

Action point for management: Review customer contracts, identify performance obligations, and assess how revenue timing will shift.

On transition entities have a choice to either:

• Include the effects of adjustments for the immediate prior period in restated comparatives (the full retrospective approach); or
• Not restate comparatives and include any cumulative effect of applying the standard as an adjustment to opening balance, meaning the effect of the revisions will be reflected in the current period and that effect should be disclosed (the cumulative catch-up approach).

Tax implications: don’t overlook the knock-on effects

These changes may also affect tax:

• Lease recognition could alter capital allowance claims and deferred tax balances.
• Shifts in revenue recognition could create mismatches between accounting income and taxable profits.

Owner-managed businesses (OMB)’s in particular should engage tax advisers early to manage timing differences, assess impacts on R&D claims or other reliefs, and ensure treatments are aligned with HMRC.

Practical steps: how to prepare now

With the first affected accounting periods commencing in 3 months’ time, planning should start today. Five steps to take:

• Assess impact: Identify leases, revenue streams, and contracts that will be affected.
• Check systems: Ensure accounting software can handle the new requirements.
• Train teams: Equip finance, sales, and contract managers with knowledge of the new rules.
• Engage stakeholders: Update auditors, lenders, and investors to avoid surprises.
• Seek advice early: Tax planning, system changes, and covenant renegotiations may all require professional support.

Some scenario planning now to compare the impact under the 2 transition approaches (cumulative catch-up or full retrospective) can ensure your numbers are presented in the most favourable, permitted, light.

How Moore South can help you

The updated FRS 102 framework may seem daunting, but our team can help OMB’s to navigate the changes successfully.

Talk to us today to understand how we can help you.