Far-reaching new FRS 102 requirements require urgent business assessment
Stuart MacPherson · Posted on: September 10th 2025 · read
The new FRS 102 requirements are potentially far-reaching, impacting businesses in several areas of financial reporting for companies… with leases and revenue recognition particularly in need of detailed consideration.
It is crucial that companies prepare now for the revisions to the standard, which will be effective for accounting periods beginning on or after January 1, 2026.
Planning for these changes now will help those potentially affected better understand the impact this could have on company finances. Appreciating the likely repercussions will enable companies to make decisions which alleviate any negative risks.
Breaking down the key changes...
Leases:
FRS 102 will introduce a new model for lease accounting reflecting the method of accounting that has been used by international accounting standards for the last decade or so. With minor exemptions for low value assets (which can’t be applied to vehicles, heavy plant or property) and short-term leases, lessees will now recognise both a right-of-use asset and a corresponding lease liability on the balance sheet.
The leased asset and operating lease commitments will be recognised with the initial amounts being based on net present value of total lease payments. The asset is then depreciated over its useful life in the same way as other tangible fixed assets with an interest charge reflecting the unwinding of that net present value calculation.
Micro-entities preparing financial statements under FRS 105 Financial Reporting Standard applicable to the Micro-entities Regime are unaffected by the new lease accounting requirements.
Revenue Recognition:
A new revenue recognition model, aligning UK and international standards, will be introduced impacting long-term contracts through application of a five-step framework for recognising revenue from contracts with customers:
- Identify the contract with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognise revenue when (or as) the entity satisfies a performance obligation
This approach ensures that revenue is recognised to reflect the transfer of promised goods or services to customers, aligned with the consideration expected to be received. Unlike lease accounting changes, the new model applies to both FRS 102 and FRS 105.
What will the impact on businesses be...
"The changes in this periodic update of the FRS 102 accounting standard implement fundamental changes which could have a significant impact on a company’s balance sheet. Directors need to assess how the changes to lease accounting and revenue recognition could affect key performance indicators like EBITDA, net debt and gearing ratios."
Businesses need to assess the potential impact of the changes on their specific circumstances which could include the following:
- Loan Covenants: compliance with loan covenants and finance negotiations may be impacted. EBITDA may be positively impacted, however, the change in lease accounting can also result in a significant additional liability being recognised within creditors.
- Changes to revenue recognition may impact on annual profits thereby affecting:
- Bonus schemes: changes to financial reporting could affect profitability and therefore employee bonus and share schemes.
- Dividend payments: the availability of distributable profits may shift, impacting dividend payments.
- Accounting Processes: businesses will need to review and potentially update systems and processes to comply with the new requirements (including ensuring they properly track those transactions affecting corporation tax calculations).
- Early Adoption: early adoption of the revised standard is permitted. But only in full i.e. companies cannot cherry pick which changes to adopt early.
- Disclosure: there could also be significant additional disclosure, including for small companies, on leasing arrangements.
Other Changes…
Lease accounting and revenue recognition are the headline changes, but there will be other more subtle changes that impact companies… including small companies. There will be updates to disclosure requirements in respect of fair value measurement, deferred tax accounting, and other areas. The amendments also increase the extent of going concern disclosures with companies required to provide more detailed information about material uncertainties and judgments.
How to prepare for those changes...
As with all change, the key to a smooth transition is planning ahead of the effective date. What do businesses need to do?
- Review accounting policies to align with the new requirements.
- Where impacted by the changes in revenue recognition and lease accounting, ensure that existing financial systems collect the necessary financial data to support the transition.
- Plan for system and process changes considering the need to adapt systems and processes to reflect changes in accounting required at the date of transition.
- Training: staff will need to be trained on the changes in the updated standard and understand the impact on day-to-day accounting.
- Engage with advisors: consult with professional advisors to ensure a smooth transition and gain an understanding of the implications for corporation tax.
- Engage with stakeholders so that they are aware of the changes. The transition will not require comparative figures to be restated, so in the year of transition current and comparative numbers may not be directly comparable.
Planning and communication are key, both internally in terms of ensuring the relevant staff in the organisation understand the changes, and externally with stakeholders… everyone who needs to be informed must understand any transformational impact on the company’s financial position.
How can MHA help?
We can work with you on an impact assessment to fully understand the effects on your business. We will consider the extent of your lease portfolio and extract vital information from your contracts. We will support you through the transition with specialist advice relating to your lease accounting policies, contract reviews and disclosure impacts as they relate to the FRS 102 amendments.
