FRS 102: What’s Changing and How It Affects Your Business

FRS 102 is getting its biggest shake-up since 2015. This is the primary accounting standard used by most UK companies. If your company files accounts under it, these changes could significantly impact how your business appears on paper – and not just to your accountant.

The Financial Reporting Council has been listening to feedback from businesses and accountants about what’s working and what isn’t with the current standard. 

The result? A revamped FRS 102 that fixes some long-standing issues while bringing UK accounting closer to international standards.

What FRS 102 Is and Why It Matters

FRS 102 is the main accounting standard used by most UK companies that aren’t large enough to use international standards or small enough to use the simplified micro-entity rules. 

If you’re a limited company preparing annual accounts, there’s a good chance you’re using FRS 102 whether you realise it or not.

The standard sets out the rules for:

• How you record transactions
• When you recognise income and expenses
• What information you need to disclose in your accounts
• Everything from basic revenue recognition to complex financial instruments

It’s designed to ensure that accounts prepared by different companies are comparable and reliable. 

What makes these upcoming changes particularly important is their scope – the amendments touch on fundamental aspects of how businesses account for two of their most common activities: generating revenue and using leased assets.

The Two Major Changes Coming Your Way

While the updated standard includes numerous amendments across different areas, two changes stand out as having the potential to fundamentally alter how most businesses report their financial performance and position.

1. Lease Accounting Rewritten

Currently, most businesses use operating leases to access assets without recording the related liabilities on their balance sheets. So if you lease your office space, hire equipment, or rent vehicles under operating leases, those commitments don’t appear on your balance sheet. You simply record the monthly payments as rental expenses.

As of 2026, this arrangement will no longer apply to most leases. The new rules eliminate the distinction between operating and finance leases for lessees, requiring almost all leases to be recognised on the balance sheet as both a right-of-use asset and a corresponding lease liability.

When you sign a five-year office lease, you’ll immediately recognise:

• An asset representing your right to use that office space
• A liability representing your obligation to make the lease payments

The asset gets depreciated over the lease term, while the liability is unwound through interest charges.

There are some exemptions for lower-value leases. But for everything else – office leases, warehouse space, company vehicles, major equipment – they’ll show on the balanc sheet when they might not have done before. 

What This Means for Your Business

Your balance sheet will look dramatically different:

• Assets increase because you’re showing rights to use leased properties and equipment
• Liabilities increase because you’re showing what you owe in future lease payments
• For businesses with substantial lease portfolios this could mean millions appearing on the balance sheet

Your profit and loss account changes too. Instead of simple rental expenses, you’ll show depreciation on the asset and interest on the liability. The total cost over the lease term stays the same, but the timing changes – costs are typically higher at the start and reduce over time.

Key metric changes:

• EBITDA will increase because lease payments are no longer operating expenses
• Gearing ratios may worsen as lease liabilities appear on your balance sheet
• Interest cover ratios could fall as lease finance costs become interest
• Return on assets may decline as your asset base increases

These changes could affect bank covenants, performance bonuses tied to EBITDA targets, and business valuations based on asset multiples.

2. Revenue Recognition Uses a Five-Step Model

Currently, FRS 102 uses a straightforward method based on transferring risks and rewards to customers.

This is being replaced with a much more detailed five-step model:

1. Identify the contract with your customer
2. Identify what you’re promising to deliver (performance obligations)
3. Work out the total price of the contract
4. Split that price between the different things you’re delivering
5. Recognise revenue as you fulfil each promise

The new rules are much more prescriptive about when you can combine multiple promises, how to handle variable pricing, contract modifications, and warranties.

The new model affects businesses that:

• Bundle products and services together
• Offer extended warranties
• Have contracts with variable pricing
• Provide ongoing services alongside one-off deliveries

Examples of changes:

• Software with implementation and support: Previously you might recognise all revenue when software was delivered. Now you must separate these elements and recognise revenue for each component as delivered
• Equipment with extended warranties: You’ll allocate part of the selling price to the warranty and recognise that revenue over the warranty period
• Variable pricing arrangements: Performance bonuses, volume discounts require complex calculations to estimate total consideration

For some businesses, this means recognising revenue earlier than before. For others, it might be later. The key is understanding how the new rules apply to your specific contracts and business model.

When The FRS 102 Changes Take Effect

Understanding the timeline isn’t just about compliance – it’s about strategic planning and making sure you’re not caught off guard.

Key dates:

• 1 January 2025: New supplier finance disclosure requirements start
• 1 January 2026: Main changes become effective for most companies
• Early adoption permitted: But you must adopt all changes together

Other Important Changes to Consider

Beyond the headline changes to lease accounting and revenue recognition, there are a few other updates worth knowing about:

• More disclosure requirements – You’ll need to provide more detail in your accounts about contracts, leases, and how you’ve assessed whether your business can continue operating
• Supplier finance rules – If you use reverse factoring or supply chain finance, new disclosure requirements start in 2025 (a year earlier than everything else)
• Business combination updates – Additional guidance for complex mergers and acquisitions

The lease and revenue changes are still the big ones that will affect most businesses. These other changes mainly add more paperwork and disclosure requirements rather than changing how you actually account for transactions.

Preparing Your Business for the Changes

With main changes not taking effect until 2026, you might think there’s plenty of time. However, the complexity means that smart businesses are starting their preparations now rather than waiting until the last minute.

Here are some key steps to consider:

• List all your leases – office space, equipment, vehicles – and work out which ones will need to go on your balance sheet
• Review your main customer contracts to identify bundled services, warranties, or variable pricing that could affect revenue timing
• Calculate the impact on key ratios like EBITDA and gearing that might affect bank covenants or bonus schemes
• Talk to your bank if you have lending covenants that reference balance sheet figures or financial ratios
• Check if your accounting software can handle the new lease calculations or if you’ll need upgrades
• Plan staff training so your finance team understands the new requirements before they take effect

The earlier you start, the smoother the transition will be when 2026 arrives.

Getting Professional Support Through the Transition

We’re already helping clients understand and prepare for these changes. From detailed impact assessments to full implementation support, we can guide you through every aspect of the transition to ensure you’re ready when the new requirements take effect.

The key is to start your preparation early, rather than waiting until the last minute. With proper planning and professional support, what might seem like a daunting set of changes can be managed smoothly and efficiently.

These FRS 102 amendments represent a major change in financial reporting, but they also provide an opportunity to modernise your financial reporting and align with international best practices. Don’t let these changes catch you unprepared – start planning now to ensure a successful transition.

Contact Double Point today to discuss how these changes will impact your business and what you can do to prepare effectively.