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Big changes took effect from 1 January 2026 on UK financial reporting, following updates to FRS 102.
29 January 2026
The UK’s financial reporting landscape has undergone significant change, and owner-managed businesses need to be alert to the implications. Updates to Financial Reporting Standard (FRS) 102 came into force for accounting periods beginning on or after 1 January 2026.
The update aligns the UK’s reporting framework more closely with international standards. The revisions affect how businesses account for leases, recognise revenue, and handle tax implications, meaning directors must ensure they understand the implications on their financials and key stakeholders are well informed
One of the most material changes is to lease accounting. Previously, operating leases could remain off the balance sheet, but that is no longer the case.
Since the beginning of 2026, nearly all leases, with the exception of certain short-term or low-value leases, have to be accounted for on the balance sheet. This means 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 have had to review their terms and have engaged with lenders to ensure any changes were 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 have shifted. 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 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 change 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, here are five practical steps to help navigate the changes:
• 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 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 complies with the changes.
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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