FRS 102: key changes and what they mean for the real estate sector

FRS 102 has undergone an update that will take effect for accounting periods beginning on or after 1 January 2026, bringing the standard into closer alignment with IFRSs.

The amendments introduce certain fundamental changes in several areas, including revenue, leases and fair value accounting. Below is a brief overview of the main updates and points to note for preparers of financial statements under FRS 102 most relevant to the real estate sector. 

Revenue

1. Splitting a contract into performance obligations

The primary change is moving to the concept of “performance obligations”. We now need to assess the distinct parts of the contract, for example: 

• Design 
• Groundworks 
• Structure/build 
• Aftercare or warranty period 

For example, a “design and build” contract where the customer can benefit from the design on its own (e.g. take it to another contractor) recognises the design element as a separate performance obligation and accounts for it when that element has been delivered.

2. Revenue recognition “overtime” is now conditional

This will have no impact for most construction projects, however it is worth being aware of. You can now only recognise revenue over time if one of the following applies: 

1. The customer controls the asset as it’s created (e.g. building on the customer’s land). 

2. The asset is customised with no alternative use and you have an enforceable right to payment for performance to date. 

If none of these apply, you must recognise revenue at a point in time – typically when the building is handed over.

3. Retentions and bonuses

• Under the new rules, variable consideration (such as retentions or bonuses) can only be recognised if it’s highly probable there won’t be a reversal. 
• Retentions must be evaluated carefully — no more recognising the full contract value unless collection is highly certain. If you’re unsure whether the retention will be paid in full, you must exclude it from revenue initially and revisit it later.

4. Contract modifications / variations

A variation order is not just absorbed into existing revenue. Instead, we now need to assess whether it: 

• Adds new goods/services at a standalone price (i.e. is a new contract) 
• Is part of existing performance, in which case we adjust the existing contract price and obligations.

5. Introduction of new terminologies

The differences between costs incurred and amounts billed – previously described as amounts due from or due to customers for contract work, are now referred to as “contract assets” or “contract liabilities”, respectively.   

In particular, contract assets shall be clearly distinguished from trade receivables in the financial statements. 

Leases

Going forward, virtually all leases will come onto the balance sheet of lessees as a “right-of-use” (ROU) asset with an associated lease liability, effectively eliminating the traditional distinction between operating and finance leases.  

Under the new lessee accounting model, the lessee recognises a liability for the present value of future lease payments at the commencement of the lease and an equal ROU asset (subject to some adjustments). Over the lease term, the liability incurs interest (and is paid off) and the ROU asset is depreciated, resulting in what used to be a straight-line rent expense now being split into depreciation and interest expense​. 

There are two notable relief clauses – one for leases of less than 12 months and another for “low value” leases (e.g. computers / office furniture / mobile phones). 

In determining the lease liability, judgement may need to be required to assess whether any option to extend the lease is reasonably certain to be exercised, and likewise whether any option to terminate the lease is reasonably certain not to be exercised by the lessee.  These assessments affect the lease term and the future lease payments included in the calculation. 

The lease liability and the corresponding ROU asset shall be adjusted for any change in the scope or consideration of the lease (e.g. extending or shortening the contractual lease term), effective from the date when both parties agree to the modification, rather than the date on which the modification becomes effective. 

Notably, there is no real change to lessor lease accounting.

Fair value accounting

The definition of fair value now aligns closer to IFRS 13 Fair Value Measurement, specifically noting that fair value is an exit price (amount received in an orderly transaction between market participants).

Fair value hierarchy

In the context of investment properties, this is the amount that would be received when selling the property, and not: 

• Entry price (what you paid) 
• Value in use (specific to you) 
• An application of the cost model 

There is now also a fair-value hierarchy, again aligned with IFRS 13. In determining fair value, we use inputs in order of level, which prioritises “better” forms of evidence. 

• Level 1: Quoted prices in active markets 
• Level 2: Observable inputs (e.g. yields, rents) 
• Level 3: Unobservable inputs (e.g. internal assumptions) 

Enhanced disclosures

Alongside the approach, there are more prescriptive disclosure requirements. You will now need to disclose: 

• The fair value hierarchy level of each investment property. 
• A description of the valuation technique used. 
• Significant unobservable inputs (e.g. estimated rental yields, growth rates, discount rates). 
• Sensitivities to those inputs, if a change would significantly affect fair value.

Further, if the fair value was determined by a third-party valuer, you’ll need to disclose that fact and their qualifications.

If you’re unsure how the new FRS 102 requirements will impact your business, our team can help you assess the changes and prepare ahead of 2026. Get in touch today.