FRS 102 and business borrowing: How the new accounting rules could affect finance

The most significant overhaul of UK accounting standards in over a decade came into effect this year, affecting all businesses with reporting periods on or after 1 January 2026.

While the changes to FRS 102 are a financial reporting matter, they will have a far-reaching impact for business owners seeking debt finance.

Revenue recognition: timing is everything

Under the revised standard, revenue must be recognised using a new five-step model aligned to international standards. For many businesses, this will change when income is recorded – not how much you ultimately earn but how it flows through the accounts.

The practical problem is context. Lenders use historical financial data to assess income stability. 

Reporting in the first period under the changes may produce figures that look different from prior years. This is not because the business has changed, but because of the new five-step model for revenue recognition. It may leave revenue streams looking lumpy or inconsistent, and that can lead to more conservative lending decisions.

Even if the changes do not impact your formal credit score directly, the impact will almost certainly come under scrutiny when you present accounts to support a funding application.

Leases on the balance sheet: a heavier footprint

From 2026, most leases with a term of more than 12 months must be brought onto the balance sheet as a right-of-use asset and corresponding lease liability – a model similar to that already used under full IFRS.

The impact on key financial ratios can be substantial. Gearing rises as lease liabilities are added to reported debt, which may push some businesses toward or beyond the thresholds set in existing loan covenants. Breaching those covenants – even just as a result of changes to reporting – can trigger lender reviews and, in some cases, the withdrawal of facilities.

Interest cover is also affected, which is a ratio that lenders watch closely. While EBITDA improves (rent expense is replaced by depreciation and interest), the interest charge itself increases. 

As a result, the business appears more leveraged than before without any underlying change in financial health.

Crucially, because assets and liabilities must be reported on the balance sheet even for smaller companies, this change is likely to affect credit scores for a wider range of businesses than the revenue recognition adjustment.

What to do now

The key is not to let lenders encounter these changes cold. Kreston Reeves can work with business owners to model the impact of FRS 102 on their accounts, assess how key ratios will shift, and help build a clear narrative to take into any finance conversation.

For businesses whose credit position comes under pressure as a result, our Credit Confidence service can help, working proactively with credit agencies to ensure the context behind any ratio changes is properly understood.

To find out more, speak to our dedicated funding team here.