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.