The Financial Reporting Council (FRC) has introduced major amendments to FRS 102, effective for accounting periods beginning on or after 1 January 2026, with early disclosure requirements for supplier finance arrangements required for periods commencing on or after 1 January 2025. These changes align UK GAAP more closely with IFRS and will significantly impact revenue recognition, lease accounting, and other areas such as fair value measurent and the accounting treatment for uncertain tax positions.
Finance teams should:
- Understand the new five-step revenue recognition model and its practical implications
- Prepare for the changes to lease accounting which bring most leases onto the balance sheet
- Review any transition options available and plan for any necessary system and process updates
- Engage with stakeholders early and avoid common pitfalls such as underestimating the time and effort required regarding data capture.
Five step revenue recognition model
Step 1
Identify the contract(s) with the customer.
Step 2
Identify separate performance obligations.
Step 3
Determine transaction price.
Step 4
Allocate transaction price to performance obligations.
Step 5
Recognise revenue when or as an entity satisfies performance obligations.
The FRC’s review of FRS 102 aims to modernise UK GAAP and increase alignment with international standards. These changes represent fundamental shift in approach to revenue and lease accounting necessitating a deeper analysis of contracts and arrangements combined with a requirement to make more detailed and enhanced disclosures. Early planning is essential so that finance teams ensure a smooth transition which avoids disruption and ensures compliance.
Understanding the FRS 102 Transition Timeline
In terms of applying the changes to FRS 102the transition requirements and reliefs available requirements are designed to give businesses time to prepare, but first and foremost it is important to understand how the requirements will apply in practice.
The first milestone is 1 January 2025, when disclosure requirements for supplier finance arrangements come into effect for accounting periods commencing on or after that date. This early change is designed to improve transparency around such arrangements also known as reverse factoring, following a high-profile case where such arrangements were not clearly reported.
The more significant amendments, covering revenue recognition, lease accounting, and all other changes become mandatory for accounting periods commencing on or after 1 January 2026. This means that entities should begin planning now, as these changes may impact systems and various processes as well as financial reporting.
When it comes to comparatives, the approach varies by topic. For leases, the standard requires a modified retrospective approach, meaning you do not restate prior-year figures but instead, recognise right-of-use assets and lease liabilities on the first day of the period of first implementation, with an adjustment to opening reserves. For revenue, there is flexibility: in that an entity may choose to restate comparatives for consistency or apply a catch-up adjustment on the first day of the period of first implementation.
Other amendments have specific application rules. Fair value changes apply prospectively from the date of adoption, while uncertain tax positions are generally applied retrospectively unless hindsight is involved.
In short, the timeline is not just about dates, it reflects different transition methods for different areas. Understanding these nuances early will help you plan disclosures, manage stakeholder expectations, and avoid surprises during implementation.
Revenue from customer contracts
The revised standard introduces a five-step model based on the principles contained in IFRS 15 Revenue from Contracts with Customers (“IFRS 15”) moving away from transaction-based recognition principles to a contract-focused approach. This applies to all contracts with customers for goods and services, including construction, professional services, and software licensing.
Five-step model explained
- Identify the contract(s) Confirm enforceable agreements, including master and side contracts. Ensure completeness of documentation and consider whether multiple agreements should be combined into one contract for accounting purposes or separated into distinct components.
- Identify separate performance obligations in the contract Break down promises into distinct goods or services. For example, a software license and ongoing maintenance and updates might be separate obligations if they are distinct.
- Determine the transaction price Assess fixed and variable forms of consideration, discounts, rebates, and contact penalties payable to the customer. Apply judgment to estimate the amount of variable consideration to recognise ensuring that it is ‘highly probable’ that there won’t be a significant reversal of such amounts recognised in future periods.
- Allocate transaction price to performance contracts Allocate based on standalone selling prices. If these are not observable, estimate using market data ,an approach based on expected cost-plus margin, or residual allocation approach.
- Recognise revenue when (or as) performance obligations are satisfied Conclude whether control transfers at a point in time (e.g., delivery of goods) or over time (e.g., ongoing services). Apply input or output methods for ‘over-time’ recognition reflecting the stage of completion of performance obligations.
Key judgments and challenges
- Understanding and applying new terminology consistently across contracts
- Accounting for costs of obtaining and fulfilling contracts (e.g., sales commissions)
- Identifying distinct goods/services and dealing with enhanced guidance on accounting for contract modifications
- Assessing variable consideration and the recognition thresholds
- Determining whether obligations are satisfied over time or at a point in time.
Disclosure Requirements
Disaggregate revenue by product line, geography, customer type, timing, and whether acting as principal or agent
Explain unsatisfied performance obligations and expected timing
Disclose contract assets, liabilities, and impairment losses separately.
Lease Accounting
The new model brings most leases onto the balance sheet, removing the operating vs finance lease distinction for lessees. Exemptions apply for short-term leases (≤12 months duration with no purchase option) and leases of low-value underlying assets.
Lease accounting implementation plan
Identify
Focus on identifying leases (including arrangements containing leases), capturing existing lease data and review existing processes and systems in order to capture leases going forward.
Classify
Assess the lease population to determine which leases are outside of the scope or will be off balance sheet (low value, short term, variable).
Measure
Generate calculations and populate lease disclosures.
Maintain
Do not reinvent the wheel every year so opt for a sustainable solution
Repeat
Embed the above processes to setup your ongoing lease management
Right-of-Use Assets (“ROU”) and Lease Liabilities
ROU Asset measured as:
Lease liability + prepaid lease payments – lease incentives received + initial direct costs + estimation of restoration/rehabilitation costs.
- Depreciate either over the shorter of the lease term or useful life, or useful life if ownership of the underlying asset is intended to transfer at the end of the lease
Lease Liability = present value of lease payments, discounted using:
- Implicit rate (if readily determinable); otherwise
- Incremental borrowing rate; or
- Obtainable borrowing rate.
Key judgments
Applying definition of lease term and assessing reasonable certainty of exercising extension and/or termination options
Determine discount rate for each lease
Identify variable lease payments (only index-linked or interest-based variable lease payments are included when calculating the lease liability).
Impact
- EBITDA improves as operating lease expenses are replaced by depreciation and interest charges
- Profit profile changes: higher costs in early years, lower costs in later years.
Disclosures
- Unless investment property present ROU assets and lease liabilities separately from other assets and liabilities either on face of balance sheet or in the notes.
- Detailed information such as nature of lease arrangements, restrictions and covenants imposed by leases, types of discount rate used and proportion of leases accounted for using each type of discount rate, extension and termination options, leases not yet commenced, variable lease payments.
- Provide reconciliation of movements in ROU assets.
- Disclosure also includes exemptions applied, variable payments expensed, expense for short term leases and leases of low value underlying asset, lease interest expense, sub-letting income, total cash outflows for lease payments.
Implementation: Avoid reliance on complex spreadsheets for large lease portfolios - consider system solutions. System Solutions for Lease Accounting FRS 102
Other important changes
- Fair Value Definition: Updated to align definition of fair value to be consistent with IFRS 13 Fair Value Measurement.
- Uncertain Tax Positions: Entities must recognise and disclose uncertain income tax treatments where a settlement is probable by applying either a probability-weighted approach (expected value of settlement) or a most likely approach (most likely settlement amount).
- Business Combinations: Various clarifications including whether amounts payable are consideration (affecting goodwill) or are instead remuneration for future services which are expensed separately.
- Increased disclosures for Small Entities applying Section 1A of FRS 102: Increase in level of disclosures required to show a true and fair view.
- Lessor Accounting: While the operating lease vs finance lease model is retained for lessors new terminology introduced as well as in-depth guidance on accounting for sub-letting.
Implementation Summary
Successful implementation of the FRS 102 amendments requires a structured approach and early engagement across your organisation.
Below are the key steps and common risks to manage:
Key Actions
- Confirm effective dates and scope of all amendments to ensure compliance planning starts early.
- Identify and collate all lease agreements and revenue contracts, including any side agreements or contract modifications.
- Decide transition methods for revenue recognition considering whether to restate comparatives or apply catch-up adjustments.
- Quantify the impact on bonus plans, distributable reserves, KPIs, and covenant calculations to inform relevant stakeholders.
- Train finance teams and update systems to handle new recognition and disclosure requirements.
- Draft new disclosures early to avoid last-minute issues and ensure audit readiness.
- Engage stakeholders such as auditors, lenders, and boards to manage covenant implications and expectations.
Common Pitfalls to Avoid
- Underestimating data capture requirements, especially for leases and complex revenue contracts.
- Ignoring covenant and bonus plan implications, which can affect financing and remuneration.
- Delaying system updates, leaving insufficient time for testing following implementation.
- Treating implementation as a one-off project rather than embedding ongoing compliance processes to ensure sustainable solutions and avoiding the need to re-invent the wheel.
- Failing to involve procurement, legal, and operational teams, which often hold critical contract and lease information.
Further Support
Our specialists are on hand to guide you through every stage of the FRS 102 transition, from assessing the impact on your financial statements to updating systems and training your teams.
Whether you need help with revenue recognition, lease accounting, or managing disclosures, we can provide tailored advice and practical solutions to make the process smooth and compliant.
Please get in touch with us today to discuss your requirements and explore how we can support you.
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FRS 102 Gudie
