What the Changes Mean, Who They Affect and How to Prepare

Two key accounting standards under UK GAAP (FRS 102) are changing, affecting how businesses recognise revenue and account for leases.

These updates apply to accounting periods beginning on or after 1 January 2026, meaning the time to start preparing is now.

These changes are particularly relevant for businesses that:

• Lease property, vehicles or equipment
• Deliver services, goods, long-term contracts or bespoke arrangements
• Report under FRS 102 and rely on external stakeholders such as banks, investors or trustees

For many organisations, the impact will go beyond disclosure. The changes may alter the timing of reported income, increase assets and liabilities on the balance sheet, and affect key ratios, covenants and performance metrics. Early preparation is critical to avoid surprises and maintain control over financial reporting.

Why These Changes Matter

These updates bring UK GAAP closer to IFRS and are designed to better reflect the economic substance of transactions.

However, they also introduce more judgment and may significantly affect:

• Reported profits (timing of revenue)
• Balance sheet size (new assets and liabilities)
• Key ratios and banking covenants

Revenue Recognition

The revised revenue recognition standard introduces a contract-led approach. Revenue will now be recognised based on what has been promised to the customer and when that promise is satisfied, focusing less on when risks and rewards are transferred and rather on when the transfer of control occurs

Businesses with service-based contracts, phased delivery or bundled arrangements may see changes in revenue timing and reported results. Revenue is recognised using a 5-step model:

1. Identify the contract
2. Identify performance obligations
3. Determine transaction price
4. Allocate price
5. Recognise revenue when control transfers

The new standard also includes specific rules for recognizing contract modifications and the cost of contracts. Disclosures in the financial statements have been expanded to include:

• Splitting of revenue into type, geography and timing
• Contract assets and liabilities (amounts owed to/from customers)
• Clear descriptions of performance obligations

Lease Accounting

All leases will now be recognised like a finance lease and will be recognised on the balance sheet through a right-of-use asset and a corresponding lease liability. This may lead to larger balance sheets, changes to gearing and new conversations with lenders. There are some exceptions, for example short-term leases (12 months or less) and low-value asset leases.

Some other key changes worth noting include:

• Instead of straight-lined lease expenses, expenses are front-loaded through depreciation and interest charges
• Accounting for lessors has remained relatively unchanged
• The lease liability is the present value of lease payments discounted at the interest rate implicit in the lease (if known), or the business’s incremental borrowing rate
• The right-of-use asset is the lease liability less certain payments

Disclosures in the financial statements have been expanded to include:

• Future lease payment commitments (maturity analysis)
• Key assumptions such as discount rates and lease terms

We recommend that businesses:

• Assess the potential impact on financial statements
• Review key contracts and lease arrangements
• Consider key implications for covenants and performance metrics
• Seek advice early to avoid unexpected outcomes

Early preparation is key ahead of the upcoming implementation deadline.