FRS 102 is the principal financial reporting standard for entities in the UK and the Republic of Ireland, which is applicable for small, and medium and large-sized enterprises that do not apply IFRS or FRS 101.
Latest FRS 102 updates
In March 2024, the Financial Reporting Council (FRC) introduced significant amendments to FRS 102. These are designed to enhance consistency with global standards and improve financial transparency.
Most changes will take effect from accounting periods beginning on or after 1 January 2026, but early adoption is permitted.
Extant Section 23 has been replaced in its entirety with a new Section 23 Revenue that is based on the requirements of IFRS 15 Revenue from Contracts with Customers.
The Amendments introduce a five-step model to be applied to all contracts with customers. This model is based on the core principle that an entity should recognise revenue in a manner that depicts the transfer of control of promised goods or services to the customer, as follows:
Step one: Identify the contract(s) with a customer.
Step two: Identify the performance obligations in the contract.
Step three: Determine the transaction price.
Step four: Allocate the transaction price to the performance obligations in the contract.
Step five: Recognise revenue when (or as) the company satisfies a performance obligation.
Areas of increased complexity include non-refundable upfront fees, principal versus agent considerations, customer options for additional goods or services, variable consideration, licensing, and contract balances.
There are no exemptions for intra-group arrangements, for example, intra-group service agreements.
The lease accounting requirements have been completely replaced with a new Section 20 Lease that is based on IFRS 16 Leases.
For lessees, the amendments require all lease arrangements to be recognised on the balance sheet, therefore removing the distinction between operating and finance lease arrangements.
A right-of-use asset and lease liability will be recognised on the balance sheet. The operating lease expense will be replaced by depreciation of the right-of-use asset and a finance expense, as the discount on the lease liability unwinds.
Exemptions will be available for short-term leases (leases with a term of less than 12 months) and low-value leases.
Incremental improvements have been made throughout FRS 102; however, many of these changes are aimed at tightening definitions or guidance, and as such, for most entities, there should not be a significant impact.
Who is impacted by these FRS 102 changes?
Entities that may see the greatest impact of the FRS 102 changes include:
Those that have a large number of operating leases as a lessee, such as retail, professional services and healthcare.
Those that have revenue contracts that are complex and long-term in nature, or span the year-end, such as construction, software and service providers.
How will the FRS 102 changes impact my business?
The commercial implications of the updated FRS 102 requirements could be significant, prompting businesses to evaluate several key areas:
Financial metrics: How will changes influence core performance indicators such as EBITDA, net profit, and net debt?
Covenant compliance: Could existing debt or pension covenants require renegotiation if EBITDA or net debt figures are impacted?
Incentive structures: Do current remuneration, bonus, or share option schemes need adjustment where payouts are tied to financial results?
Dividend strategy: Might dividend distributions be constrained if the amendments affect distributable reserves?
How to prepare for the 1 January 2026 FRS 102 changes
Companies should take proactive steps to ensure they are ready for the upcoming changes:
Understand the change and assess the impact: Conduct an impact assessment to pinpoint the specific effect on the business.
Data collection and contract analysis: Review lease and revenue contracts in order to apply the new requirements.
Communicate the impact with stakeholders: Identify key stakeholders and inform them early in the process.
Implement and update necessary systems and processes: Ensure the changes are embedded into the accounting and other systems, and that these capture the required data.
Plan accounting policies and disclosures: ensure accounting policies and disclosures are updated in the financial statements.
We have extensive experience in assisting our clients with the application of new and revised accounting standards, including FRS 102.
This includes detailed contract analysis, supporting with measurement differences, preparing and updating accounting policy manuals and preparing additional disclosure notes for the first financial statements in which the revised accounting standards are applied.
FRS 102 is the UK and Republic of Ireland’s principal financial reporting standard under UK GAAP for entities not applying full IFRS. It offers a streamlined framework for preparing transparent, compliant financial statements, simplifying reporting for private companies, charities, and non-corporate bodies.
When will FRS 102 take effect?
FRS 102 changes take effect for accounting periods beginning on or after 1 January 2026.
What are the major changes to FRS 102
Revenue recognition: Section 23 of FRS 102 is replaced with a five-step model aligned with IFRS 15.
Lease accounting: Section 20 of FRS 102 adopts IFRS 16 principles, requiring lessees to recognise right-of-use assets and lease liabilities on the balance sheet.
Disclosure enhancements: Based on IFRS for SMEs, with more detailed reporting expectations.
Who is affected by FRS 102?
All entities reporting under FRS 102, including small entities under Section 1A. Industries most impacted include.
How to prepare for FRS 102 changes?
Conduct an impact assessment
Review and analyse leases and revenue
Update accounting systems and policies
Communicate changes
Look into software solutions for tracking and reporting leases
What industries are more likely to be impacted by FRS 102?
Like the adoption of IFRS 16, industries that could be significantly impacted are
The Financial Reporting Council (FRC) has made changes to Section 23 Revenue, as part of its improvements to FRS 102. These changes will take effect for periods starting on or after 1 January 2026.
The Financial Reporting Council (FRC) has issued comprehensive improvements to FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland. These include amendments to Section 20 Leases, which will be effective for periods beginning on or after 1 January 2026.
A lease is a legal or contractual arrangement in which the owner of an asset grants the use of that asset to another party in exchange for some form of remuneration. Under the Financial Reporting Council (FRC) amendments to FRS 102, the definition of a lease has changed and given the changes to lease accounting, lease classification is more critical than ever.
