Changes to UK financial reporting standards

UK GAAP is changing soon!  The Financial Reporting Council (FRC) released the latest update to the Financial Reporting Standards for use in the UK and Ireland, including changes to FRS 102, the most commonly used of the standards, in September 2024.

We have some time to prepare for the changes, but it is important action starts soon.  Most of the changes are effective for accounting periods beginning on or after 1 January 2026. 

Early adoption of the revised standard is allowed on an ‘all or nothing’ basis – no cherry-picking the parts of the new standard you might like in 2025 and leaving the less desirable changes for later.

In the first of our 2025 Audit and Accounting updates, we explore an overview of the main changes.

So, what is changing?

There are two areas of current accounting that will be changing fundamentally from 2026 – leases and revenue recognition. The changes will mean that FRS 102 will be more closely aligned with international accounting standards, although some differences will remain.

Leases – the majority of leases will now be ‘on balance sheet’. Leases previously classified as operating leases, with the annual rental charge being accounted for through the income statement, will now be accounted for on the balance sheet by recognising a ‘right-of-use asset’ in tangible fixed assets, and the future lease payments as the lease liability. There are some limited exceptions to this new treatment (for low value assets, or leases of less than 12 months) but this will be a major change to entity’s balance sheets under FRS 102 (note, this change has not been made in FRS 105, for micro-entities).  This is in line with how international accounting standards treat leases (IFRS 16).

Revenue recognition – the new approach is likely to affect many businesses.  It requires revenue to be recognised in line with a five-step recognition model, considering whether performance obligations have been satisfied before recognising revenue.  This is how international accounting standards treat revenue (IFRS 15).  At present, current UK GAAP’s approach is to assess the transfer of risks and rewards from revenue transactions.  For some it will lead to minimal or no changes, but for others it will have a very significant impact on revenue recognition.  We expect many companies with construction and services contracts will end up recognising profits later under the new standard. 

Other changes

-    A new definition of fair value and guidance on measurement to align with IFRS 13;
-    Costs remunerating employees or former owners’ contingent on providing future services are excluded from a business combination’s cost (aligned with IFRS 3);
-    Share-based payment accounting includes scope changes relating to business combinations, accounting for share-based payment transactions with a choice of settlement and treatment of vesting conditions for cash-settled transactions;
-    Additional guidance on accounting for uncertain tax positions;
-    In line with IFRS, guidance on whether software costs are capitalised as an intangible asset or part of an item of property, plant, and equipment;
-    A move to requiring disclosure of material, rather than significant, accounting policies, and additional guidance on accounting estimates; and
-    Greater clarity in Section 1A Small Entities on the disclosures required to give a true and fair view.

What should you do next? 

Companies need to start to prepare for the wider business impacts of these changes, including 

1) undertaking an impact assessment on your revenue and lease accounting 
2) considering if you need to change your data and IT system requirements to track revenue and lease contracts and to satisfy new disclosure requirements
3) as profits and balance sheets could change, you may need to renegotiate key agreements which are impacted.  This could include bonus arrangements with targets linked to EBITDA, and loan covenants, such as those related to net debt, interest cover, or EBITDA 
4) consider dividend plans: where the timing of revenue recognition changes, there could be significant impacts on profits and thus distributable reserves, affecting a company’s ability to pay out dividends.

Further information

This is an ongoing series, and we'll continue looking at individual key changes in more depth throughout 2025. Check out our other articles in this series:

• Changes to UK financial reporting standards: Lease accounting
• Changes to UK financial reporting standards: Revenue recognition

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