Author Archives: Faren Vincent

The upcoming changes to FRS 102 will introduce some important shifts in how construction businesses report their financial performance.

While the underlying profitability of projects won’t change, the way results appear in the accounts will. For many businesses, the key will be understanding and explaining those differences clearly.

With the changes applying from 1 January 2026, early preparation will help avoid confusion later.

What is changing

The revised FRS 102 brings UK reporting closer to international standards. For construction businesses, the main change is how costs are recognised on long-term contracts.

Revenue will continue to be recognised based on project progress. However, costs will now be recognised as they are incurred, rather than being spread over the life of the project.

This means reported results may look different from what businesses and stakeholders are used to seeing.

What this means for project margins

Under the current rules, margins tend to appear relatively consistent as both revenue and costs are aligned with project completion.

Under the updated standard, margins may move more in line with when costs arise, where an output method for applying the percentage of completion method is followed. For example, if significant costs are incurred later in a project, earlier stages may show higher margins, with a levelling effect over time.

Importantly, this is a change in timing, not in the overall outcome of the project.

Why this matters in practice

For most construction businesses, the key impact will be how performance is interpreted externally.

Changes in margin profiles may:

• Require clearer explanations in discussions with lenders and bond providers
• Influence how results are presented to investors or clients
• Prompt a review of how project performance is communicated internally

This is less about increased risk and more about ensuring that stakeholders understand what sits behind the numbers.

Other areas to be aware of

Alongside cost recognition, a few additional changes are worth noting:

Bid and tender costs
These may need to be expensed earlier unless specific criteria are met, which could affect how early-stage project costs appear in the accounts.

Mobilisation costs
Some set-up costs may no longer be spread over the project unless conditions are satisfied, bringing forward when those costs are recognised.

Revenue recognition
A more structured five-step model will apply, requiring a clearer assessment of when control passes to the client.

What this means for your teams

These changes are not just relevant for finance teams.

Project managers, estimators and commercial teams will all play a role in ensuring costs are tracked accurately and performance is understood.

Closer collaboration between finance and operational teams will help ensure that reporting reflects project activity clearly and consistently.

What to do next

Most construction businesses do not need to make major changes, but they should take time to prepare.

Practical steps include:

• Reviewing current contracts to understand where timing differences may arise
• Ensuring systems can capture costs accurately as they are incurred
• Aligning finance and project teams on how performance will be reported
• Preparing clear explanations for stakeholders so there are no surprises

Final thought

The revised FRS 102 is a shift in presentation rather than performance.

Businesses that understand the changes and communicate them effectively will be well placed to maintain confidence with lenders, clients and investors.

With early preparation, the transition should be straightforward and provide an opportunity to strengthen how financial performance is explained across the business and beyond.

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.