FRS 102 Overhaul – Key changes and implementation challenges

What changes are being made to FRS 102?

The UK’s Financial Reporting Council (FRC) has approved sweeping amendments to FRS 102 (and related standards) as a result of Financial Reporting Exposure Draft 82 (FRED 82). These changes aim to more closely align UK GAAP with the International Financial Reporting Standards (IFRS), notably the new revenue and lease accounting rules​. The amendments, effective from 1 January 2026 (with early adoption permitted)​, represent the most significant update to UK SME accounting since FRS 102’s inception.

Listen to our panel of experts discuss the changes to FRS 102 and their impact

In this article, we critically discuss the key changes, notably the new IFRS 15-aligned revenue recognition model and IFRS 16-style lease accounting, and we explore the challenges finance teams face during first-time implementation. We seek to highlight what finance teams should be doing in the immediate term to prepare for these changes, in the event they have not begun to do so already, leveraging our learnings on IFRS 15 and IFRS 16 implementation. Finally, we summarise other important (if less high-profile) revisions in the FRS 102 update. 

New Revenue Recognition Model (FRS 102 Section 23)

FRS 102’s revenue section is completely revamped to mirror IFRS 15’s “five-step model” for revenue from contracts with customers​. This model introduces a more structured approach to revenue, requiring accountants to individually:  

• Identify the contract,  
• Identify the performance obligations in the contract, 
• Determine the transaction price,  
• Allocate that price to the performance obligations, and  
• Recognize revenue when or as each performance obligation is satisfied​. 

Financial statement impact

For straightforward transactions (e.g. retail cash sales), the impact may be minimal. However, more complex multi-element arrangements could see significant changes in timing and amount of revenue recognised​. All entities will need to carefully evaluate their contract terms to identify all performance obligations (deliverables). In particular, if any of the following items form part of your product offering, you will likely need to account for them as separate performance obligations. 

• Installation services 
• Customer support 
• Extended product warranties 
• Rights to future purchase discounts 
• Product customisations 
• Training packages 

Preparation challenges – IFRS 15 insights

The transition to a five-step model is a sizable leap for many SMEs. IFRS adopters’ experience with IFRS 15 offers a cautionary roadmap. A common challenge was identifying all distinct performance obligations in a contract – a task that often proved more complex than anticipated! Entities transitioning to IFRS 15 had to comb through contracts line-by-line (sometimes discovering embedded promises like “free” add-on services that needed separate accounting). Many found they needed to educate sales and legal teams to avoid inadvertently creating accounting complexity in customer contracts​. They also struggled with the ability of their existing data and systems to capture the new information required to properly account for revenue under the new standard. Changing these systems often took significant time and was accompanied by conforming changes to processes. Disclosures under IFRS 15 became much more extensive, and compiling the required information (e.g. disaggregated revenue streams and remaining performance obligations) was not an easy task.​ 

SMEs adopting the FRS 102 changes will face similar issues: contract reviews, systems updates, and staff training will be necessary to apply the new model correctly and produce the required disclosures. Many commentators have noted that the impact of transition to IFRS 15 on recognition of revenue varied widely by sector, with each company needing to perform its own analysis. Adopters of FRS 102 in the UK must be aware that the effects of the updated standard can be more complex than they initially appear.

Changes to lease accounting (FRS 102 Section 20)

The second headline change is a new single model for lessee accounting, mirroring the changes brought about by IFRS 16 Leases. Under the extant FRS 102, operating leases are off-balance sheet with rental payments expensed. 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 this new model, the lessee recognizes 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 asset is depreciated, resulting in what used to be a straight-line rent expense now being split into depreciation and interest expense​. There are limited exemptions, crucial for practicality. Short-term leases (maximum 12 months) and low-value asset leases can be kept off balance sheet by policy choice​. FRS 102 doesn’t set a strict monetary threshold for “low value,” however these will be items such as personal computers, small office furniture and phones. All other leases (on items such as property, vehicles, or machinery) will be required to follow the new treatment.  

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.  

Financial statement impact

Bringing leases onto the balance sheet can substantially inflate reported assets and liabilities. Gearing (debt-to-equity) ratios will rise with the recognition of lease liabilities​. Profit metrics will also shift, with EBITDA increasing, since rent expense is replaced by depreciation and interest, the rent is no longer in operating expenses​. Net Profit may dip in early years of a lease due to the natural front-loading of interest caused by lease amortization. Key ratios like interest cover may weaken due to higher interest expense​. Critically, SMEs with debt covenants based on financial ratios should take care – covenant terms might need renegotiation to neutralise the effect of changes in ratios due to accounting, rather than financial position or performance of the business. 

FRS 102 will require a modified retrospective transition for leases (no restatement of prior year) in most cases, meaning the first year of adoption will show a one-time balance sheet uplift and different expense profile, while comparative figures remain on the old basis​. As such, year-on-year figures won’t be directly comparable for the transition year. 

Preparation challenges – IFRS 16 insights

IFRS adopters have flagged that the complexity in implementing the changes in lease accounting is often underestimated and it was noted, even for small entities, that the effort was greater than expected. A major hurdle, particularly for entities with many leasing arrangements, is the availability of the necessary data to apply the accounting. Organizations must in effect scrutinise every lease contract to capture information on payments, lease length, renewal options, index clauses, etc. Many private companies were caught off guard by how scattered and decentralized their lease data was, often stored in disparate spreadsheets or filing cabinets. Best practice is to establish a centralised lease register as early as possible​ 

IFRS reporters often deployed lease management software to calculate the amortization schedules and handle ongoing tracking. SMEs with smaller portfolios might manage with spreadsheets, but caution is warranted – the calculations (e.g. handling modifications, variable rents, discount rate changes) can be complicated. There are further complexities in the determination of an appropriate discount rate to use for leases (often requiring estimating an incremental borrowing rate) and consideration of policy elections like how to account for non-lease components. All of this requires education – many controllers and finance teams used to the simplicity of operating lease accounting will need training on the new approach. They must learn to “speak the language” of ROU assets and lease liabilities.

Other notable changes in FRED 82 amendments

While revenue and leases steal the spotlight, FRED 82 introduced several other important changes to FRS 102 and related standards which should not be overlooked: 

Fair value measurement (IFRS 13 Alignment)

A new Section 2A Fair Value Measurement has been added, adopting the IFRS 13 definition of fair value​. This means fair value is framed as an exit price from an orderly transaction, and the guidance introduces concepts like the principal market, highest and best use for non-financial assets, and fair value hierarchy disclosures.  

While the core principles of measuring fair value haven’t drastically changed for most (fair value is still essentially market value), the methodologies and disclosures may become more rigorous​. Companies that frequently measure assets or liabilities at fair value (e.g. investment property companies, private equity/venture investments measured at fair value, agricultural businesses with biological assets at fair value) should pay attention.  

Government grants

While the fundamental accounting for government grants under FRS 102 section 24 (adopting the Performance model or the Accrual model) remains largely intact, FRED 82 did incorporate some minor improvements. For instance, it clarifies the scope of what constitutes a government grant versus other forms of government assistance and further clarifies that grants (under the Performance model) that are received before the performance-related conditions are satisfied are recognised as a liability. Entities in sectors reliant on grants, such as technology startups (R&D grants), agriculture (farming subsidies), or not-for-profits, should review the updated section 24 to ensure compliance with the clarified requirements. 

Conceptual framework update

The FRS 102 framework (Section 2) is revised to align with the IASB’s 2018 Conceptual Framework​. This update refreshes definitions of assets and liabilities (focusing on “present economic resource” and “present obligation” concepts) and other principles. While largely theoretical for day-to-day accounting, it can influence judgment calls. For example, the new definitions emphasize control in the context of assets and could affect how one judges whether certain items meet the definition of an asset or liability.  

Income tax (Uncertain tax treatments)

Amendments to Section 29 Income Tax bring in guidance similar to IFRIC 23 (Uncertainty over Income Tax Treatments)​. Companies must consider if they have uncertain tax positions (e.g. an aggressive deduction that might be challenged) and account for tax liabilities or assets assuming the tax authorities will examine those uncertainties with full knowledge. This could affect sectors where tax incentives or complex arrangements are common. In practice, if an SME has a material uncertain tax position, it should now assess the probability of the tax outcome and possibly recognize an additional tax liability if it is not probable that the tax treatment will be accepted. The change promotes more prudent and transparent accounting for tax risks. 

Business combinations and goodwill

There are targeted improvements to Section 19 to incorporate some IFRS 3 concepts​. Importantly, there is new guidance on identifying the “acquirer” in a business combination – which is crucial in transactions relating to mergers or group restructuring.  

There is also clarification on how to distinguish between payments made to former owners and payments made to employees. For example, an earn-out payment tied to an ex-owner’s future employment might be treated as compensation expense rather than additional purchase price – the revised FRS 102 now mirrors IFRS 3’s approach to this question.  

Other sector-specific updates

Section 34 Specialised Activities has been refined. Entities receiving donations or funding (non-exchange transactions) – such as charities and public benefit entities – get clearer direction on when to recognise such income and how to measure any related assets​. For example, guidance on what qualifies as a “heritage asset” or how to value donated assets is improved, which is particularly relevant for museums, educational institutions, and charities. Agricultural businesses see clarification on the cost of a biological asset when using the cost model (aligning with IAS 41’s concepts)​.  

While these changes affect narrower sectors, for those in scope the impact may be significant. Charities using FRS 102 (under the Charities SORP) will need to consider the non-exchange income guidance alongside any SORP updates. Small agricultural entities will welcome clearer instructions on accounting for livestock or crops if not at fair value.

Key implementation priorities:

Adopting these new requirements will be a significant one-time project for most entities. Some key challenges and how to address them include: 

• Contract reviews & data gathering: Both revenue and lease changes demand a thorough review of existing agreements. Entities will need to identify all customer contracts (for revenue) and all lease or service contracts (for leases) well in advance. Hidden complexities, for example service contracts that include the use of an asset (an embedded lease) or sales contracts that include a future discount option, will need time to be addressed. Experience from IFRS 15/16 rollouts shows that assembling a complete contract inventory can take longer than anticipated and may involve departments beyond finance​. 
• Quantifying impact: It is crucial to perform an impact assessment early​. This means simulating the new accounting on representative contracts to see where revenue or lease accounting will materially differ. For revenue, identify which contract types might accelerate or defer revenue under the five-step model (e.g. does a typical contract with customers contain distinct promises not previously separated?). For leases, estimate the scale of assets/liabilities that will come onto the balance sheet. This helps avoid surprises and allows management to understand the forthcoming changes to key metrics​. It also feeds into investor or lender communications about what to expect in the financial statements. 
• Systems and process changes: The new standards will likely require capturing of additional data and performing new calculations periodically. For entities with only a handful of revenue streams and leases, simple tools may suffice. But for entities with more customer contracts with multiple performance obligations, the existing accounting software may not be able to handle the allocation of transaction prices and tracking of remaining obligations. It may be necessary to enhance revenue recognition accounting modules or even implement specialized software, as some larger companies did for IFRS 15​. For leases, even SMEs might find value in using dedicated lease accounting software or at least a robust spreadsheet model, especially to handle items such as lease modifications over time. These calculations aren’t a one-off; they’ll recur each reporting period. 
• Training and team readiness: Both finance teams and other stakeholders need training on the new accounting rules​. Finance teams will need to ensure they are up to speed on concepts like “performance obligations in a contract” and how to determine a lease’s discount rate. There is an abundance on content available on transition within the IFRS standards, which is equally applicable to the FRS 102 transitions on Revenue and Lease accounting. Workshops and external seminars by professional bodies (e.g. the ICAEW or ACCA), are ongoing and provide a valuable source of information. Don’t neglect departments like sales, procurement, or operations – they need to be aware of the accounting implications when entering contract negotiations and preparing data. For example, sales staff should understand that structuring a deal with, say, an upfront fee and ongoing service has accounting implications under the five-step model. Likewise, procurement should be aware of what constitutes a lease under the new definition, so they can flag contracts that will need accounting attention. Cross-functional communication was a “lesson learned” in many IFRS 15/16 projects​. 
• Consultation and support: Given the complexity, SMEs shouldn’t shy away from seeking professional advice. Engaging auditors or advisors early to review proposed approaches can provide valuable feedback and avoid costly mistakes. IFRS adopters often leaned on external consultants for tricky areas (like complex multi-element revenue deals or nuanced lease arrangements) – SMEs can similarly benefit, especially if internal resources are thin.  
• Stakeholder communication: It’s important to start informing stakeholders about the impending changes before they see them in the accounts. Owners, boards, investors, and lenders should be educated on why revenue or lease figures will shift. This includes potentially renegotiating covenants or adjusting performance targets which will be impacted​. Early communication can prevent adverse reactions and help stakeholders focus on real economic performance rather than accounting differences. 
• Policy elections and transition choices: The amended FRS 102 allows for certain transition options. For revenue, companies can choose between full retrospective application (restate prior year as if the new rules always applied) or a cumulative catch-up (adjust opening equity in year of adoption)​. This choice will affect comparability and the workload of implementation. Many may opt for the cumulative approach for simplicity but should weigh that against the benefit of trend comparability from full restatement. For leases, the modified retrospective method is mandated (i.e. no full restatement)​, which simplifies implementation but means one-time effects flow through retained earnings. Also consider the practical expedients on transition: for example, FRS 102 (like IFRS 16) permits not revisiting whether existing contracts are or contain leases – previous conclusions can in some instances be grandfathered to ease the burden. There is also an expediency in using a single discount rate for a portfolio of leases with similar characteristics, etc.​ Taking advantage of these reliefs can significantly reduce workload. Each entity should plan and document which expedients it will use. 

The FRS 102 changes ushered in by FRED 82 amount to a “second wave” of IFRS 15/16 adoption – this time for UK private entities that had so far been under different rules​. The alignment will ultimately enhance comparability and improve the quality of financial reporting by SMEs, giving users of their accounts more useful information that better reflects economic reality (e.g. liabilities for leases that were previously off-balance sheet)​. However, accountants will need to navigate the learning curve and potentially significant system and process changes. The good news is that they need not do so in a vacuum – the experiences of IFRS reporters in 2018–2019 provide a rich repository of lessons on what to do (and what pitfalls to avoid). Chief among those lessons: start planning early, involve the right people across the business, and don’t underestimate the size of the task.  

The FRC and professional bodies are providing resources such as Q&As and example disclosures​, which can assist companies in benchmarking their approaches. By focusing now on the contracts, systems, and training requirements, SMEs can ensure a smoother transition when the mandatory adoption date arrives​. Finance and operational leaders should treat this not just as an accounting compliance exercise, but as an opportunity to upgrade financial management – for instance, cleaning up contracts, investing in better lease tracking, and educating teams on revenue drivers. With thoughtful preparation, entities will be well-positioned to tell their story under the new FRS 102 in a way that stakeholders understand and appreciate, maintaining trust and confidence through the change. 

Our recent webinar covered the key changes to FRS102. If you would like to speak with one of our experts directly, please do get in touch with a member of our team, who will be happy to guide you through the changes and how they may effect you.