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Big changes are coming to UK financial reporting. Updates to FRS 102 take effect from 1 January 2026, and businesses need to be prepared.
23 June 2025
The UK’s financial reporting landscape is undergoing a significant change, and owner-managed businesses need to be alert to the implications. Updates to Financial Reporting Standard (FRS) 102 will come into force for accounting periods beginning on or after 1 January 2026.
The update aims to align the UK’s reporting framework more closely with international standards. The revisions will affect how businesses account for leases, recognise revenue, and handle tax implications, meaning directors must act now to ensure they understand the implications on their financials and key stakeholders are well informed
One of the most material changes is to lease accounting. Currently, operating leases can remain off the balance sheet, but that will no longer be the case.
From 2026, nearly all leases, with the exception of certain short-term or low-value leases, will need to be accounted for on the balance sheet. This will mean recording a 'right-of-use' asset and a corresponding lease liability, which will directly affect reported assets, liabilities, and gearing ratios.
The implications extend far beyond the accounts. Businesses with bank covenants based on financial ratios will need to review their terms and engage with lenders to ensure any changes are properly communicated and understood. The impact on budgeting, cash flow forecasting, and performance measures could be significant, especially in sectors like retail, manufacturing, and logistics, where leasing is commonplace.
The new FRS 102 also introduces a five-step model for revenue recognition, replacing the simpler risk-and-reward approach previously used. Now, businesses must identify performance obligations in a contract, determine the transaction price, and recognise revenue as those obligations are satisfied.
This change will particularly affect businesses that deliver goods or services over time, operate under complex contracts, or offer bundled services. Construction firms, professional services, and tech companies will need to review contracts and possibly amend their accounting policies. Importantly, the timing of revenue recognition may shift. In some cases, this could either accelerate income or defer it, affecting reported profits and dividend policies, for example.
Changes in lease accounting and revenue recognition also may have implications for tax. For example, bringing leases onto the balance sheet could affect capital allowance claims and deferred tax positions. Similarly, revenue recognised earlier or later than before could lead to mismatches between accounting income and taxable profits. This has the potential to increase tax liabilities in certain periods unless proactively managed.
Therefore, owner-managed businesses need to engage with their tax advisers early on to assess how the changes might affect tax payments, R&D claims, and other tax reliefs. It will also be important to ensure that tax treatments are properly communicated to HMRC.
While compliance is the priority, these changes also present an opportunity. They offer a chance to modernise systems, streamline internal reporting, and build closer alignment between finance, operations, and tax functions.
Management can also use this transition to refresh conversations with key stakeholders such as lenders and shareholders, ensuring that everyone understands the reasons behind changes in reported figures and the underlying performance of the business.
For owner-managed businesses, the journey to 2026 starts now. Here are five practical steps to help navigate the journey:
• Conduct a financial impact assessment to identify key leases, revenue streams, and contractual arrangements affected by the changes.
• Engage with software providers to ensure your accounting system can handle new reporting requirements.
• Train your finance and sales team on the new rules, particularly those responsible for preparing and reviewing management accounts and negotiating contracts.
• Update stakeholders, including auditors, banks, and investors, on the potential impact to ensure there are no surprises.
• Speak to your advisors early. Expert guidance will be essential for tax planning, system implementation, or covenant renegotiation.
The updated FRS 102 framework may seem daunting, but with proactive planning, owner-managed businesses can navigate the changes successfully and even find new value in enhanced transparency and modernised financial practices.
At a time when financial clarity is more important than ever, understanding these changes is not just about ticking a compliance box; it’s about future-proofing your business.
Now is the time to seek advice where appropriate. Professional advisors can help you take practical steps to ensure your organisation is ready well ahead of the 2026 deadline.
At Bishop Fleming, we support owner-managed businesses to plan, adapt, and protect your business, ensuring you stay ahead of regulatory change while building a resilient and future-focused enterprise. Prepare for the future with confidence. Talk to our specialists for owner-managed businesses today.
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