With changes to UK GAAP taking effect in January 2026, FRS 102 will undergo significant revisions. Gaining an early understanding of these updates will help you prepare effectively.

Preparing for changes to FRS 102 – key changes

Following the FRC’s Periodic Review of UK GAAP published in 2024, a suite of significant changes to FRS 102 are coming into effect. Most notably these changes will see substantial updates to revenue recognition and lease accounting.

The new rules will see FRS 102 adopt a comprehensive five-step model for revenue. For lessees, most operating leases will now be recognised on balance sheet aligning closer with international standards.

These changes will have practical implications for most businesses, so advance planning is crucial.

Key changes at a glance

Revenue recognition – the five step model

Revenue recognition will now follow a more structured approach. The new rules introduce a framework for recognising revenue with more prescriptive requirements than before.

Entities must follow these steps:

1. Identify the contract(s) with a customer

2. Identify distinct performance obligations

3. Determine the transaction price

4. Allocate the transaction price to performance obligations

5. Recognise revenue when (or as) each obligation is satisfied

Detailed guidance is now included within Section 23 of FRS 102, to apply each step of the model. Elements to consider:

• Multi-element contracts: Bundled products and services will need distinct performance obligations identified and separated

• Timing shifts: Revenue recognition could move earlier or later depending on when obligations are satisfied

• Contract reviews: Existing customer agreements will need analysis under the new framework

Lease accounting

Operating leases that were previously off-balance sheet will now be moved on balance sheet for lessees. For most leases, entities will recognise both a right-of-use asset and a lease liability. Exceptions are available for short-term leases and low value assets, providing some relief for businesses managing smaller or temporary arrangements. Elements to consider:

• Balance sheet impact: Assets and liabilities will increase, in some cases substantially.

• Profit reporting changes: Operating lease expenses will be replaced by depreciation and interest charges.

• Financial ratios: EBITDA, gearing, and leverage ratios will be affected, which may be relevant for loan covenants

• Lease inventory: All leases need identifying, measuring, and tracking (with exceptions for short-term and low-value items)

• Discount rates: Appropriate discount rates will be needed for present value calculations

Practical preparation steps

In order to prepare for the amendments, below are some key areas to consider.

Data, systems and processes

Implementation will require preparation across several areas. This includes gathering relevant data (e.g contracts) and ensuring systems and processes are updated. Finance teams may also need training to understand and apply the new models correctly. This includes assessing whether internal expertise is sufficient or external support is needed.

Impact assessment

The upcoming changes extend beyond accounting entries and may affect key business metrics. Financial measures such as EBITDA will be impacted by lease changes, and loan covenant ratios may require review to ensure continued compliance. For firms, this could mean updating internal reporting processes, and communicating the implications to stakeholders.

Early adoption

While the mandatory effective date for most changes is 1 January 2026, early adoption is permitted. Preparing for and understanding the changes ahead of time is key.

Getting started

A practical starting approach to prepare for the upcoming changes would be as follows:

1. Assess exposure: Identify which areas of the business will be most affected

2. Quantify impact: Run preliminary calculations on key contracts and leases

3. Develop a plan: Establish timelines, resources, and key milestones

4. Seek support where needed: Whether for training, systems, or technical guidance

How Buzzacott can help

Managing these changes alongside day-to-day operations requires careful planning. Whether support is needed with understanding the changes, impact assessment or data preparation, Buzzacott can assist with the transition and help you ensure you meet all of your obligations under the new rules. Speak to a member of our team to discuss how we can help you to prepare for the changes.