FRS 102 changes: What creative, media and technology businesses need to know

The latest amendments to FRS 102 represent the most substantial update to UK financial reporting in recent years. Effective for accounting periods beginning on or after 1 January 2026, the revisions introduce some fundamental changes to accounting, including:

• A new revenue recognition model – Which requires firms to analyse contracts much more carefully and in much more detail and recognise revenue only as specific performance obligations are met 
• A revised lease accounting framework – Which removes the distinction between operating and finance leases, requiring almost all leases to be recognised on the balance sheet

For businesses operating in the Creative, Media and Technology (CMT) sector, these two developments are particularly important. Below we explain why each of these changes matter, explore what is changing, and how CMT businesses are specifically affected.

Revenue recognition: A fundamental shift of focus

Why the change matters

The change likely to require the most careful consideration in the CMT sector is the introduction of a new five-step revenue recognition model, drawn from IFRS 15. This is as the sector is characterised by complex contracts, bundled services, intellectual property and subscription models which could result in material changes in accounting under the new revenuestandard.

What is changing

There has been a key shift of focus away from the previous concept of the transfer of ‘risks and rewards’ to a focus on the transfer of control. The five-step model requires companies to rethink revenue recognition with a focus on transfer of control with respect each distinct contact offered to customers as follows:

1. Identify the contract with the customer 

2. Identify the distinct performance obligations within that contract 

3. Determine the transaction price 

4. Allocate the transaction price to each performance obligation 

5. Recognise revenue as each obligation is satisfied

How CMT businesses are specifically affected

Companies in the CMT sector frequently enter into contracts that combine multiple deliverables, and therefore potentially multiple distinct performance obligations. Examples include:

• Software licences bundled with maintenance and support 
• Media production contracts covering development, production and distribution 
• Advertising arrangements with performance-based elements 
• Subscription platforms offering tiered services 
• IP licensing agreements with royalty components

Under previous FRS 102 rules, revenue was often recognised based on invoicing milestones or general performance completion with respect to the contract as whole. The revised model requires a much more granular analysis of what distinct goods and services have actually been promised and delivered within a contract.

For example, a technology company providing a fixed term software licence alongside ongoing support may need to separate (or ‘unbundle’) those elements and recognise the revenue from each distinct performance obligation revenue over different timeframes. This could also involve needing to determine separate transaction prices for each contract element for the first time.

Another example is a media company licensing intellectual property with usage-based royalties where there may be variable consideration. Under the new standard there needs to be a careful assessment as to whether such variable consideration is deemed to be ‘highly probable’ before this can be recognised. This is a much higher barrier to recognition as compared to the previous standard.

For many CMT companies the result of rethinking about revenue recognition under the new standard may be a significant change in the timing of revenue recognition. In some cases, revenue may be deferred compared to previous practice; in others, it may be accelerated.

It’s equally important to highlight that even if it is determined that there is no change in the accounting for revenue recognition from this change there is still a significant amount of work to be done to be able to reach this conclusion. Including ensuring that this conclusion applies to each and every distinct contact offered to customers.

Lease accounting: Bringing leases onto the balance sheet

Why the change matters

While a potentially less complex area of accounting than the revenue, standard change the requirement for almost all leases to be recognised on the balance sheet, drawn from the accounting approach in IFRS 16, is likely to have a significant impact on most CMT companies. This is as many CMT companies have leased working/creative spaces the expenses for which were previously simply expensed as operating leases through the profit & loss account.

As the key changes detailed below demonstrate this will have a significant impact on the look of many companies’ financial statements. Which in turn could also result in significant changes to key performance indicators that may have a real world impact with stakeholders.

What is changing

Other than for a few exceptions (discussed further below) all leases must be recognised on the balance sheet, in practice this means the following accounting adjustments for each lease in place:

• The recognition of a right-of-use (ROU) asset on the balance sheet 
• The recognition of corresponding lease liability on the balance sheet 
• The removal of operating lease rental expenses from the profit & loss 
• Addition of depreciation charge from the ROU asset in the profit & loss 
• Addition of lease interest expense from the lease liability in the profit & loss

Exceptions to this requirement:

• Short-term leases – leases with a term of 12 months or less (any leases with 12 months or less at the transition date to the new standard can also be accounted for as short-term leases)  
• Low-value leases – leases deemed to be of a low absolute monetary value (includes items such as laptops, small office furniture, phones etc)

How CMT businesses are specifically affected

CMT businesses often rely heavily on leased assets, including:

• Office space and creative studios 
• Production facilities 
• Data centres and server infrastructure 
• Specialist equipment 
• Broadcasting or transmission facilities

Although capitalising such leases this does not change the underlying economics of the business, it does significantly affect financial reporting and therefore the look of the financial statements. Several key performance indicators will shift including:

• A substantial increase in the value of total assets and liabilities 
• Net debt may increase due to recognised lease liabilities 
• Gearing ratios may rise 
• Return on assets may change 
• ‘Front loading’ of lease costs in the earlier years of a lease, reducing profit in earlier years 
• EBITDA will substantially increase, as lease costs are now captured in depreciation and interest rather than in operating expenses

These changes could have serious implications for banking covenants, earn-out calculations, investor reporting and performance-based remuneration structures. Therefore, early engagement with stakeholders impacted by this is crucial.

What actions need to be taken?

Practical steps that CMT businesses should be undertaking right now include:

• Reviewing each distinct contact offered to customers for individual performance obligations, especially where there are bundled services 
• Considering processes for estimating and revising variable consideration 
• Compiling a comprehensive lease register 
• Reviewing banking covenants and incentive arrangements to estimate the potential impact

These changes will have a significant impact on many businesses in the CMT sector, but our team at Kreston Reeves is ready to support you through the transition. If you have any questions or would like any assistance, please do get in touch.