If you have not yet come across FRS 102 in conversation with your accountant – there’s a good chance you will soon! The updated accounting standard came into effect for accounting periods beginning on or after 1 January 2026, which means that for many businesses, the first affected accounts are already in progress – even if the impact is not fully visible yet.
In this article, we’ll explain what has changed, what businesses should be paying attention to, and what action you should take. If you want a fuller overview of everything that’s changed with FRS102, you can read our article on the Triennial Review here.
What is FRS 102, and why does it matter?
FRS 102 is the accounting standard that most UK businesses report under. It sets out the rules for how financial information is recorded and presented – including how income is recognised and how leases are shown on the balance sheet. It is, in short, the framework that shapes what your accounts look like and what they tell the people who read them.
The changes introduced through the UK GAAP periodic review are designed to modernise the standard and bring certain areas more closely in line with international accounting practices. For many businesses, the updates will be manageable. For some, the effect on their accounts could be more significant than they might expect! The two areas most likely to have a practical impact are leases and revenue recognition, and both are well worth understanding before year-end.
Leases: what could now appear on your balance sheet?
The changes to lease accounting are perhaps the most tangible shift for businesses to get to grips with. Under the revised rules, more leases will need to be reflected on the balance sheet – not just in the notes to the accounts, as has sometimes been the case.
In practical terms, this could include property leases, vehicle fleets, machinery, or equipment arrangements that were previously treated as straightforward operating costs. Under the new approach, a business may need to recognise both a right-of-use asset and a corresponding liability, reflecting the obligation to make future lease payments.
To be clear – this does not mean the business has taken on new debt. The underlying commercial arrangements have not changed. What changes is how those arrangements are presented, and that distinction matters, particularly if your accounts are used by lenders, investors, or potential buyers. Reported liabilities will increase, gearing ratios may shift, and businesses with bank covenants based on balance sheet metrics should consider the implications before those figures appear for the first time. In this case, a conversation with your lender in advance is far better than an unexpected conversation after the fact.
Revenue recognition: when does income count?
The other significant area of change concerns when income should be recorded. For straightforward sales, not much will change. But for businesses with more complex arrangements, a closer look at customer contracts will be worthwhile.
The updated rules focus on when an obligation to a customer has genuinely been fulfilled, in other words when the goods or service have actually been delivered. That might sound simple, but in practice it can get complicated. Think about long-term contracts, staged projects, milestone billing, fixed-fee retainers, or arrangements that bundle products and services together. In these situations, the timing of when income is recognised in the accounts may shift, which in turn affects reported profit, tax timing, and management information.
Construction businesses, professional services firms, and anyone working on phased or project-based contracts should consider whether their current accounting approach will hold up under these revised rules.
Which businesses should be paying the most attention?
The impact will vary from business to business, and some will barely be affected at all. But you need to review your position carefully if your business has property, vehicle, or equipment leases; operates on long-term or staged contracts; works in construction, manufacturing, or professional services; is subject to banking covenants; or is preparing for a sale, investment, or succession in the next few years. For businesses in these categories, the changes aren’t just an accounting exercise but also may bring about implications for reported performance and stakeholder conversations.
A note for Micro Entities: If you qualify as a Micro Entity – you report under FRS105 and should not be affected by the changes listed in this article.
What should you be doing now?
The main risk here is not the changes themselves – it is leaving it too late to prepare. Pulling together the information needed to account for leases and contracts properly can take time, particularly if records are not currently held in the right format.
Useful steps to take now include:
- reviewing existing lease agreements to understand their terms and what may need to be recognised differently – paying particular attention to ascertain borrowing rates
- looking at customer contracts where work is delivered over time
- checking whether your systems hold the information your accountants will need
- and considering how the changes might affect forecasts, management accounts, or KPIs you currently rely on
If covenants could be affected, speak to your lender early. And wherever possible, have the conversation with your accountant before year-end arrives – not once it is already upon you.
How FKCA can help
At Foxley Kingham, we’re working with clients now to assess how the FRS 102 changes are likely to affect them. That might mean reviewing leases and contracts, modelling the potential impact on reported figures, or supporting conversations with lenders and other stakeholders. For businesses approaching their first affected accounts, the earlier that preparation begins, the better.
If you’re not yet sure how the changes apply to your situation, get in touch. We would rather have that conversation now than help you unpick it later! To speak to the team, email accountants@fkca.co.uk