For accounting periods commencing on or after 1 January 2026 there are some significant changes to the way accounts are prepared under FRS 102. Businesses need to start thinking about the impact of these to ensure they are prepared.
What’s changing with FRS 102?
There are 2 main areas of change to think about; Revenue Recognition and Lease Accounting.
1. Revenue Recognition
Revenue is quite often the biggest number in a set of accounts so changes to how this is recognised can have a significant impact on the turnover shown, as well as also profits. Under the current regime the rules are not particularly detailed which can present its own challenges in respect of consistent reporting. However, going forwards, a new 5 step model will help to determine the accounts treatment.
Companies will need to assess each income stream they have using these 5 steps. For a straightforward sale like an online business shipping a pair of shoes to a customer there will be no change; revenue would still be recorded on despatch of the goods.
However, when it comes to assessing a 2 year mobile phone contract including a handset, or gym membership fees, things become a bit more complicated.
This will undoubtedly impact upon when sales are recognised for some businesses, so it is important to get to grips with the potential impact on your accounts.
2. Leases
The treatment of leases is a more fundamental change. Whereas, currently, an operating lease i.e. a 5 year lease to rent a warehouse would be recognised though the Profit & Loss generally as the rentals are paid, the new rules will mean this same lease would need recognising on the balance sheet as both an asset and a liability.
An asset to reflect the ‘right to use’ the premises, and a liability to reflect the total payable under the lease.
The calculations will not be straightforward; they will need to be presented as the net present value of future cashflows, so there will be discounting required.
Accounts will also look much different with the historic rent charge in the profit and loss account being replaced with a depreciation charge for the amortisation of the asset that will be created.
There are exemptions from this for leases that are short-term (lease term of 12 months or less) or for low-value assets. These will not need to be recognised on the balance sheet.
There will be transition options available in respect of needing to adhere to the above.
Note: These changes do not apply to companies preparing their accounts under FRS 105 (Micro Entities).
How to stay compliant with FRS 102
We would recommend business owners start to review the potential impact of these changes on their financial reporting process well ahead of the first year of affected accounts which, for most companies, will be the YE 31 December 2026 at the earliest.
Our team of Financial Reporting experts are on hand to guide you through assessing the changes and what you need to do to prepare.
To talk to us about the FRS 102 changes and how these will impact your business, get in touch with the team.
