FRS 102 changes: What Manufacturing businesses need to know

The latest amendments to FRS 102 represent one of the most significant updates to UK financial reporting in recent years. Effective for accounting periods beginning on or after 1 January 2026, the changes introduce a new revenue recognition model and a revised lease accounting framework.

For businesses operating in the Manufacturing sector, these developments are particularly important. The sector is characterised by substantial leased assets, complex contracts and bundled services which are all areas directly affected by the revised standard.

Below, we explore what is changing, why it matters, and how Manufacturing businesses are affected.

Lease accounting: Bringing leases onto the balance sheet

The change likely to have the most impact on the Manufacturing sector is the adoption of an IFRS 16-style lease accounting model. Under the revised FRS 102, lessees must recognise most leases on the balance sheet.

This means recording:

• A right-of-use (ROU) asset 
• A corresponding lease liability 

Previously, many operating leases were simply expensed through the profit and loss account. From 2026 onwards, most leases (other than short-term or low-value leases) will appear on the balance sheet.

Manufacturing businesses often rely heavily on leased assets, including:

• Factories and warehouses 
• Specialist plant and machinery 
• Office space 
• Vehicles

Capitalising these leases will increase reported assets and liabilities. Although this does not change the underlying economics of the business, it does significantly affect financial statements.

Several key performance indicators will shift:

• EBITDA will increase, as lease costs are split into depreciation and interest rather than operating expenses 
• Net debt may increase due to recognised lease liabilities 
• Gearing ratios may rise 
• Return on assets may change

These changes could have implications for banking covenants, earn-out calculations, investor reporting and performance-based remuneration structures.

Early engagement with lenders and stakeholders may be advisable where covenant thresholds could be affected.

Revenue recognition: A fundamental shift

The second major change is the introduction of a new five-step revenue recognition model, closely aligned with IFRS 15. While many larger listed groups are already familiar with this approach, its application under FRS 102 will be new territory for many UK businesses.

The five steps require companies to:

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 

Companies in the Manufacturing sector frequently enter into contracts that combine multiple deliverables.  

Examples include:

• Bundled contracts covering manufacturing as well as:  
• Distribution or installation 
• Servicing or maintenance 
• Training, support or software 
• Arrangements with extended warranties 
• Volume-based rebates 
• Multi-phase production

Under previous FRS 102 rules, revenue was often recognised based on invoicing milestones or general performance completion. The revised model requires a much more granular analysis of what has actually been promised and delivered.

For example, a manufacturer supplying a product alongside ongoing maintenance may need to separate those elements and recognise revenue over different timeframes. A manufacturer supplying goods with volume-based rebates will need to carefully assess how and when variable consideration can be recognised.

The result 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.

What actions need to be taken?

Practical steps that businesses should be undertaking now include:

• Compiling a comprehensive lease register 
• Reviewing banking covenants and incentive arrangements 
• Reviewing major customer contracts for performance obligations, especially where there are bundled services 
• Considering processes for estimating and revising variable consideration

These changes will have a significant impact on some businesses in the Manufacturing sector, but our team is ready to support you through the transition.

To help firms understand the practical implications of the changes to FRS 102, we will be hosting a webinar. If you would like to attend, please register here.

Alternatively, if you have any questions or would like any assistance, please do get in touch.