Changes to your accounts: FRS 102 and the impact on businesses

From 1 January 2026, the most substantial update to FRS 102 since its introduction more than a decade ago came into force, impacting large businesses as well as SMEs. These FRS 102 changes 2026 move UK GAAP significantly closer to international reporting practice.

The amendments, approved by the Financial Reporting Council (FRC) following its 2024 periodic review, are designed to modernise UK GAAP and bring it closer to international reporting practices – particularly IFRS 15 and IFRS 16.

Although we originally highlighted and covered the scale of the upcoming overhaul and its implementation challenges, the changes now move from planning to practice. For the full background, see our main FRS 102 hub.

This article summarises the key reforms now taking effect and what they mean for businesses.

A new revenue recognition model

One of the most significant updates is the replacement of legacy revenue rules with a model closely aligned to IFRS 15. Entities must now apply a clearer, more structured five-step approach:

1. Identify the contract

2. Identify performance obligations

3. Determine the transaction price

4. Allocate that price

5. Recognise revenue as performance obligations are satisfied.

This change impacts the timing and pattern of revenue recognition, especially for businesses with long-term or bundled contracts, selling both goods and services.

The FRC’s aim is to improve consistency and comparability, but many organisations will need to revisit contract assessments and internal policies.

Lease accounting moves on balance sheet

In a major shift mirroring IFRS 16, lessees must now bring most leases onto the balance sheet, recognising both a right of use (RoU) asset and a lease liability.

Short-term leases (less than 12 months) and low value leases remain exempt. For all other leases, lease accounting FRS 102 now requires the following:

This change will particularly impact entities in asset-intensive sectors, which traditionally employ leasing as a key financing strategy – for example retailers, hospitality businesses, and transport/logistics companies. Even service businesses which lease their offices or equipment will be impacted at some level.

Updates to fair value measurement

A new Section 2A aligns UK GAAP fair value measurement more closely with IFRS 13, replacing the previous appendix based guidance. The goal is consistency in how entities determine, document, and disclose fair value.

While the core principles haven’t drastically changed for most (fair value is still essentially market value), the methodologies and disclosures are more rigorous​. This will impact businesses that frequently measure assets or liabilities at fair value (e.g. investment property companies, private equity/venture investments, agricultural businesses).

Conceptual framework and financial instrument revisions

FRS 102 now reflects updates from the IASB Conceptual Framework, modernising fundamental definitions and recognition criteria. At the same time, the option to apply IAS 39 has been withdrawn (except where required for group alignment).

Additional disclosure requirements apply to supplier financing arrangements, increasing transparency for users evaluating liquidity and working capital management.

Small companies applying Section 1A are in scope too. FRS 102 for small companies brings expanded related party and other disclosure requirements, so smaller entities should not assume the changes pass them by.

What should businesses do now?

Across all areas, planning remains critical. In transition and implementation, our recommendation to businesses is to:

Revenue

• Review revenue streams, test them against the five steps (above) and document their assessment of recognition.
• Ensure you have robust processes, systems and controls to track and reconcile accrued/deferred revenue.
• Consider details of new and future contracts. For example, sales staff may want to agree something that makes accounting complex. Find the right balance.

Leases

• Ensure you store and capture all leases.
• Determine discount rate and calculate the present value of each lease

Generally, to revise your accounting policies, explain changes to stakeholders – including changed KPIs and reported results – and provide training to finance staff. As always, the actions required are dependent on your business’ individual circumstances. Speak with your accountant to agree next steps.

Common FRS Transition Challenges

Beyond the headline reforms, most businesses hit the same practical sticking points during the first year of adoption. Recognising them early makes the transition smoother.

Unbundling contracts under the five-step model

Long-term and bundled contracts rarely map onto a single deliverable. Deciding where one performance obligation ends and the next begins directly drives when revenue is recognised, and it is often the hardest judgement finance teams face.

Building and revising variable consideration estimates

Success fees, milestone payments and other variable consideration cannot simply be booked in full. Building a defensible estimate, and revisiting it each period, takes data and documentation many businesses do not currently hold.

Compiling a complete lease register

The most common lease hurdle is data. Lease terms, renewal options and index clauses are often scattered across spreadsheets and filing cabinets, and assembling a single register usually takes longer than expected.

Setting the discount rate for leases.

Calculating the present value of each lease means determining an appropriate discount rate, often an estimated incremental borrowing rate. This is a new calculation for many finance teams and a frequent source of error.

Applying the more rigorous fair value rules

Section 2A tightens the methodology and disclosure around fair value. Businesses that measure assets or liabilities at fair value should check their current approach holds up against the new requirements.

Managing the impact on KPIs and covenants

The lease changes in particular move EBITDA, net debt and gearing even though cash flows do not change. Where banking covenants or performance targets are tied to those figures, early conversations with lenders and stakeholders prevent surprises at year end.

Where to find FRS 102 support

The 2026 amendments to FRS 102 mark a new era of UK financial reporting – more aligned with international standards, transparent, and data focused. While the changes promise greater comparability and improved financial clarity, they bring operational challenges that organisations must navigate carefully throughout this first year of adoption.

A more detailed update on the changes and our webinar recording from last year is available to view here.

To help firms understand the practical implications of the changes to FRS 102, we will be hosting a forthcoming webinar where our experts will explore what has changed, the potential impact on borrowings, tax and profit distributions, and the steps firms should consider ahead of the next reporting cycle. If you would like to attend, please register here.

We’re here to help our clients throughout this transition. If you or your finance team have any queries, require further information or need support with the transition, please get in touch with a member of our audit or accounts team who would be happy to help.