UK GAAP and FRS 102 changes for 2026

UK GAAP changed for accounting periods beginning on or after 1 January 2026, following an update of Financial Reporting Standards in September 2024 by the Financial Reporting Council (FRC), and in particular, FRS 102 has now changed.

What are the main FRS 102 changes?

There are two areas of accounting that have changed fundamentally: leases and revenue recognition. The changes mean that FRS 102 is now 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). UK GAAP’s approach has been to assess the transfer of risks and rewards from revenue transactions. For some, the change will have minimal or no effect, but for others it has a very significant impact on revenue recognition.

Many companies with construction and services contracts, for example, will now have to recognise profits later under the new standard.

Additional changes to UK financial reporting standards

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.

How to prepare for the new FRS 102 requirements

Companies should already have been preparing for the wider business impacts of these changes, including

1) undertaking an impact assessment on your revenue and lease accounting
2) considering the need to change 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, key agreements which are impacted may have needed to be re-negotiated. This could cover bonus arrangements with targets linked to EBITDA, and loan covenants, such as those related to net debt, interest cover, or EBITDA
4) consider the impact on dividends: 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.

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