FRS 102 practical implementation series

Revised Section 23 introduces a fundamentally different approach to revenue recognition. Before commencing detailed contract analysis, organisations must first understand the transition requirements and choices that exist. The transition approach adopted will drive the periods affected and the data that needs to be collated and analysed.

Section 23 provides a choice of transition methods, either the fully retrospective approach or the modified retrospective approach. The table below outlines the key features of each option.

Practical expedients

Both approaches offer several optional practical expedients that can be applied where relevant. If a company chooses to use any of these, they must be applied consistently across all contracts.

Please note all organisations will need to disclose the transition approach and practical expedients applied in the first financial statements in which the amendments to Section 23 are effective (31 December 2026).

What does this mean in practice?

Organisations may choose the modified retrospective approach on the basis that it is less onerous, however, it reduces comparability. To address this, Management may choose to present enhanced transition disclosures to aid understanding of the changes.

Where fully retrospective adoption is used, it is typically to meet users’ demand for stronger comparability. However, in some cases, it may be driven by transactions linked to key metrics in the financial statements, for example, measures of profit, including EBITDA.

Outside the financial statements, organisations are also considering ways to maintain comparability in management reporting, including retaining historic GAAP figures alongside the new information until it is fully understood.

Closing thoughts

Implementation choices determine how changes will be embedded across the organisation, how much historical data must be analysed, and how financial impacts are communicated.

Selecting a suitable transition approach, using practical expedients where they add real value, and planning work systematically, helps organisations manage implementation efficiently and avoids unnecessary complexity. A thoughtful, measured approach keeps the process manageable and aligned with business needs.

When applying the amendments for the first time, unlike for Section 23, Section 20 does not permit organisations to restate comparative information in the financial statements. Instead, organisations must recognise the cumulative effect of applying the amendments as an adjustment to the opening balance sheet at the date of initial application (1 January 2026). This means that in the year ending 31 December 2026 there will be a lack of comparability between current and prior year information.

The key measurement principles at initial recognition are summarised in the table below.

What does this mean in practice?

Obtainable borrowing rate

Most organisations plan to use the obtainable borrowing rate (OBR) to discount lease liabilities, as deriving an incremental borrowing rate often needs external valuation support. However, the FRC has not issued detailed guidance on how the OBR should be determined. The best evidence is likely to be recent borrowings of similar size and term. Some organisations may be able to obtain estimates from bankers, though these don’t always guarantee an achievable rate. Where internal estimation methods are used, engage auditors early to confirm acceptability.

Investment properties

Leases that subsequently qualify as investment property are measured at fair value through profit or loss, which may require external valuation, adding cost and time. Remember it is the right‑of‑use asset, not the property itself, that is measured at fair value.

Note that there is an exemption in Section 16 Investment Property that allows intercompany investment properties to be measured under a cost model.

IFRS group reporters

Some organisations that initially planned to rely on their IFRS group‑reported figures are reconsidering this approach because differing materiality levels may make group‑level assumptions inappropriate at entity level (e.g., discount rates), and supporting calculations are not always available.

Subsidiary figures prepared under IFRS generally cannot be used in consolidated FRS 102 parent financial statements, as the expedient does not address this scenario. While some companies are discussing the issue with their auditors, the starting assumption should be that no exemption applies, and IFRS-reporting subsidiaries must prepare FRS 102 figures at the date of initial application.

Additional practical expedients

As well as the above key principles, there are several additional optional practical expedients that organisations may apply on first time application of the amendments.

Please note all organisations will need to disclose the approach and practical expedients applied in the first financial statements in which the amendments to Section 20 are effective (31 December 2026). This is essential for user understanding, especially given that comparatives are not restated.

What does this mean in practice?

Although the transition approach reduces comparability, organisations generally find that not restating prior periods, together with the available optional expedients, helps ease the workload of first‑time application.

Some companies are also considering broader explanations to help users understand the transition, given the limited disclosures required by FRS 102. At the same time, some are exploring ways to maintain comparability in management reporting, including continuing to track historic GAAP figures in parallel until stakeholders become familiar with the revised information.

Low-value asset exemption

Where the low‑value asset exemption is used, organisations must determine an accounting policy that defines what qualifies as “low value”. This assessment is based on the value of the underlying asset on an absolute basis, independent of lease payments or the materiality of the lease.

The exemption is applied at the individual asset level, not at the lease level, allowing the exemption to be applied even when several assets are bundled into one contract.

Closing thoughts

The transition to the revised Section 20 is manageable with early planning. Choosing the right transition pathway, identifying lease populations, understanding optional expedients and ensuring data readiness will reduce risk and effort.

Transition decisions shape the overall project timeline and significantly influence stakeholder understanding. A structured and thoughtful approach ensures a smooth adoption and keeps implementation aligned with wider business needs.

Our practical guidance on FRS 102 implementation will continue to grow as new articles are added throughout the year. Our aim is to provide clear, accessible insights that help you stay prepared, make informed decisions and navigate transition with confidence. Check back regularly for the latest updates.

Effective implementation of the new FRS 102 requirements begins with one essential task: collecting the right data.

Before any calculations, modelling or policy decisions can be made, organisations need a complete and accurate dataset. For the amendments to FRS 102, especially those relating to leases and revenue, this means understanding what arrangements exist, where the information is held, and whether it’s reliable. Data may include contracts, frameworks, amendments, side letters and other relevant documents.

In reality, this step takes far more time than most project teams anticipate, often becoming the biggest blocker later in the process.

Why data collection is so challenging in practice

Based on our experience supporting prior transitions, several recurring issues emerge:

Data location

Contracts and records are spread across the organisation and data rarely sits neatly in one place. You may need to approach and engage other teams, including:

• Property teams;
• Procurement;
• Operational teams, including project managers;
• Sales and account management; and
• Shared service centres.

Different teams hold different pieces of information - and often in different formats. Locating everything takes time, coordination and persistence.

Data quality

Documents may be missing, incomplete or outdated. Even when documents do exist, data may be inconsistent, unstructured or hard to extract.

All of this slows the transition timetable, particularly if large volumes are involved. Common scenarios that we have repeatedly seen include:

• Documents can't be located
• Documents in different languages
• Key documents saved only in email chains
• Older arrangements never digitised
• Legacy files stored by former employees
• Expired documents still guiding current practice
• Non searchable documents

Data completeness

Completeness is a major audit focus. Where no central register exists, many companies discover they don’t have:

• A definitive list of leases;
• A register of recurring revenue arrangements;
• A consolidated schedule of service agreements;
• A clear record of cross group arrangements.

Without a benchmark, it’s impossible to know whether the dataset is complete.

What “good” data collection looks like

Strong data collection is structured, disciplined and forward looking. Companies that transition smoothly tend to follow these practices early:

View in practice

Data collection tends to be more straightforward in smaller or more centralised organisations. For larger, decentralised groups, particularly those that have expanded through acquisition, the process can be more complex, especially where systems and practices differ across locations.

Resource

Where companies identify that the data collection process is going to be significant, it is key to have dedicated resource in this area during the transition phase – even if this means arranging additional temporary resource, as delays early in the transition project will lead to compressed timelines later on. The “last minute scramble” to locate information is all too familiar in GAAP conversion and implementation projects.

Completeness

“Completeness” is an area that many companies overlook. It is essential to be able to clearly demonstrate to auditor that the entire contract population has been identified and assessed.

Make sure contracts with unusual or non‑standard terms are included in the population. For example, supplier arrangements could contain embedded leases that can be overlooked. Key indicators include any agreement that specifies a particular asset used to deliver services - this is a common trigger for further analysis.

Identifying relevant contracts early and moving them promptly through the contract‑analysis process helps avoid issues or surprises during the audit, when time pressures are far greater.

Closing thoughts

Data collection may not feel like the most technical or glamorous part of transition, but it is absolutely critical. It sets the pace, the scope and the quality of every subsequent workstream.

The amendments to FRS 102 introduce significant changes to the revenue and lease requirements. Accounting treatments in both areas must be reassessed and documented under the new framework, with a clear rationale for the changes to be implemented. This is critical for Management information and audit purposes and typically requires a more detailed and systematic contract review than was necessary under previous standards.

General considerations

Revenue and lease contract reviews require appropriately skilled personnel, sufficient time, and clear documentation of conclusions and actions. The scale of effort will vary depending on the nature, complexity, and volume of contracts.

Before commencing contract analysis:

• Identify any transitional expedients that will be applied to ensure the analysis remains focused on affected areas (link to articles 1 and 2 in this series); and
• Ensure the full dataset has been captured — including all contracts, frameworks, amendments, side letters and other relevant documents (link to article 3 in this series).

FRS 102 provides less detailed guidance than IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases, on which Sections 23 and 20 are based. Where helpful, IFRS examples may be considered during analysis, while recognising that the standards are not fully aligned.

Analysing revenue contracts

All entities should perform contract analysis under the revised requirements, even where no accounting change is expected. This is because Section 23 has been replaced in full and is not comparable to the previous standard. Companies must therefore be able to evidence conclusions reached under the new model.

Approach

Where standardised contracts are used, reviewing one contract per type can create efficiencies. However, this benefit is often reduced where standard terms become amended during contract negotiations, increasing the number of contracts requiring individual assessment.

For businesses with largely bespoke contracts, most agreements will require separate review, and large contract populations can make this process resource‑intensive. A practical approach is to group similar contracts to establish consistent accounting positions, while ensuring that high‑value or unusual contracts are reviewed individually so that material features are not overlooked. Any differences identified must still be measured at the contract level. Practical expedients may also be available on first‑time application.

Many of the volume‑related challenges experienced at transition should reduce in later periods once systems support contract‑by‑contract accounting from inception.

1. Structure

Revenue contract analysis will typically be documented in a technical accounting paper structured around the five‑step model:

1. Identify the contract(s) with a customer;
2. Identify the performance obligations in the contract;
3. Determine the transaction price;
4. Allocate the transaction price to the performance obligations; and
5. Recognise revenue when (or as) each performance obligation is satisfied.

Depending on the contract, further areas may also need to be addressed, including:

• Contract modifications; and
• Contract costs.

Developing standardised review templates can help ensure consistent data capture and clear linkage to relevant accounting guidance. While templates will not address every scenario, they provide structure and support comparability across reviews.

Revenue contract analysis often involves significant judgement, with certain areas proving particularly complex.

View in practice

In practice, identifying performance obligations is often the most challenging aspect. Contracts frequently contain multiple promises, and Section 23 requires judgement to determine whether these are distinct in the context of the contract and therefore separate performance obligations. This assessment has a significant impact on subsequent steps in the model and on the timing of revenue recognition.

Input from non‑finance teams, such as operations, is often required due to their understanding of contract substance. This can create challenges in communicating accounting concepts to non‑accountants. We also observe that similar businesses with similar contracts can reach different accounting conclusions, reflecting the level of judgement involved.

Analysing lease contracts

For lessees, the starting assumption under Section 20 is that all leases are recognised on balance sheet from the date of initial application.

1. Approach

All leases will require some level of review, even if only high‑level, to determine whether they qualify for an exemption from on‑balance‑sheet recognition.

Short‑term and low‑value asset exemption

Where these exemptions are applied (refer to article 2 in this series), the lease population and conclusions should be clearly documented and aligned with accounting policies.

2. Structure

Lease analysis under Section 20 will typically follow a structured process covering:

• Determining whether the contract contains a lease;

Noting that a transition expedient exists to avoid reassessing pre‑transition contracts (refer to article 2 in this series).

• Identifying lease and non‑lease components;

Lease contracts often include bundled services or maintenance. While Section 20 usually requires separation of non‑lease components, an exemption is available - but this must be applied by class of asset. Applying the exemption impacts the timing of expense recognition and reduces comparability between leases.

• Determining the lease term;

Including assessment of non‑cancellable periods and whether extension or termination options are reasonably certain to be exercised.

• Determining the lease payments;

Including fixed payments, in‑substance fixed payments, variable payments linked to an index or rate, expected payments under residual value guarantees, and purchase options that are reasonably certain to be exercised.

• Identifying additional information required for lease measurement;

Including the discount rate, initial direct costs, and restoration obligations (refer to article 2 in this series).

Where the interest rate implicit in the lease is not observable, Management must select either the incremental borrowing rate or the obtainable borrowing rate. Establishing appropriate rates can be complex.

As with revenue, the use of templates and structured data capture tools supports consistency and completeness.

View in practice

Lease accounting requirements are generally well understood, particularly by entities with experience of finance lease accounting. In practice, challenges are more often driven by the volume of leases and the complexity of project management than by issues of interpretation. Nevertheless, certain technical areas still require careful application—for example, assessing whether an arrangement contains a lease and determining the appropriate discount rate.

Significant judgement is also required in relation to assumptions about lease extension and termination options, as well as purchase options. These judgements cannot be automated and typically depend on input from non‑finance teams, such as operational or property functions.

Closing thoughts

Contract analysis is the stage at which the key impacts of the FRS 102 amendments become most apparent. Given the technical complexity and time required, companies should clearly define scope, ensure robust documentation, and produce outputs that are coherent and technically sound. Early engagement with auditors on planned work and emerging conclusions is essential to avoid late‑stage issues during initial application.

Implementing the FRS 102 amendments extends beyond technical accounting. Once revenue and lease impacts are understood, organisations must ensure that systems and processes can support the revised requirements both at transition and on an ongoing basis.

For many organisations, this is the point at which implementation becomes clearly cross‑functional. Finance alone cannot deliver the change, and input may be required from IT, property, sales, procurement and operations teams.

Transition data capture

Several system approaches may be available at transition. Some accounting systems allow parallel accounting under both the old and new requirements. This dual‑ledger functionality can provide flexibility during the first year of adoption while maintaining stable statutory records.

Where transition adjustments are straightforward, calculations may be performed outside the core system (for example, in Excel) and recorded through transition journals. In this scenario, full integration into the general ledger may only occur once the transition‑year financial statements are finalised.

Other variations will arise depending on system capabilities and the complexity of adjustments.

Ongoing data capture

Many companies required system changes when FRS 102 was first introduced in 2015, and a similar assessment is now required.

IT teams may also need to work with finance to update charts of accounts, posting rules, and reporting structures to ensure data flows accurately from contract capture through to financial reporting.

Leasing systems: do you need one?

Many companies may investigate procuring dedicated lease accounting software, particularly where they hold a large volume of leases. These tools can offer greater stability compared to Excel-based models, which may become vulnerable to broken links, formula errors, or version‑control issues over time. In addition, specialist leasing systems often provide enhanced features such as real‑time reporting and AI-driven contract extraction capabilities. While these tools offer benefits, they do not eliminate the need for human review. The level of manual input and analysis required is often underestimated and should be factored into implementation planning.

For smaller lease portfolios, maintaining lease calculations in Excel or similar applications may remain a practical and cost‑effective approach. Management should assess the costs and benefits of each option in light of scale, complexity, and resourcing.

View in practice

Revenue

Revenue changes, particularly for long‑term contracts, often present the greatest system challenges. Where accounting treatments change, system impacts can be significant and may require fundamental changes to data capture and measurement. Common issues include:

- Aggregating or disaggregating data to align with revised performance obligations;

- Changing methods used to measure progress, ensuring consistency by performance obligation; and

- Updating how contract modifications are processed.

Where system changes are extensive, implementation becomes more complex, as updates must be designed, implemented, and tested thoroughly.

Leases

Where lease systems are implemented, we commonly observe that:

- Vendor selection and implementation take longer than expected;

- AI tools still require significant manual review;

- Inputs and outputs must continue to be validated and updated on an ongoing basis;

- Efficiency gains may be limited in the first year, with benefits typically emerging in subsequent reporting periods.

Other processes

Beyond accounting systems, other processes must also be updated to ensure accurate data capture, validation and retention.

Integrating with other business systems

Review of the impact on other systems is required. For example, companies should assess whether:

These systems often sit outside finance, meaning early engagement with operational teams is essential.

Strengthening contract‑related processes

The new standards rely heavily on contract terms, and therefore companies should:

• Implement a formal process for contract assessment at inception and when modified;
• Ensure each contract is logged in a central repository with required information;
• Build completeness checks using other datasets such as payment listings, customer billing schedules or fixed asset registers.

Training and upskilling

Teams involved with contracts - including sales, property, procurement and operations - need to understand what information must be captured. Training may include:

• A practical overview of the accounting requirements, tailored for non-accountants;
• Identifying clauses that trigger lease recognition and lease modification;
• Identifying features affecting revenue recognition (for example, performance obligations, variable consideration, contract modifications);
• Updating internal guidance on negotiation or drafting of agreements.

Finance teams must be prepared to explain accounting concepts and the rationale for change to colleagues outside of finance.

Updating documentation and manuals

Related documentation will also require updating, including:

• Accounting policy manuals;
• Process and controls documentation;
• Checklists for lease and revenue assessments;
• Templates for contract reviews and technical papers.

Clear documentation helps ensure consistent application and supports the audit process.

View in practice

A common issue in transition projects is underestimating the impact on non‑finance teams, leading to insufficient time and resources being allocated. Although system changes can only start once finance has clarified the accounting requirements, cross‑functional coordination often becomes a key bottleneck.

Cross‑functional engagement may involve revisiting workflows, adjusting responsibilities, and aligning stakeholders who may not be familiar with the underlying accounting implications. This means that even seemingly minor accounting changes can trigger significant knock‑on effects for others.

Building realistic timelines, communicating clearly, and securing early buy‑in from non‑finance teams are critical to achieving a timely and effective transition.

Closing thoughts

System and process updates often reveal the true scale of the project, affecting data, controls, technology, reporting, and people. Companies that do well typically start early, involve cross‑functional teams, document processes clearly, test systems before go‑live, and treat system changes as a core workstream. This enables not only a smooth transition but also efficient and reliable reporting going forward.