Changes to UK financial reporting standards: An overview of FRS 102

FRS 102, the main financial reporting standard for UK companies, has been substantially revised with most changes being mandatory for periods beginning or after 1 January 2026.

There are headline changes to the way that operating leases and revenue are accounted for, but there are other revisions that companies should also be aware of. These changes aim to align UK reporting standards more closely with international ones and are outlined below.

Operating leases

Lessees must now recognise most leases on the balance sheet. This involves recording a right-of-use (RoU) asset and a lease liability. Lease expenses will be split into depreciation and interest, replacing the previous straight-line lease expense model. There are exemptions for short-term leases (≤12 months) and low-value assets (undefined).

FRS 102 offers no choice on transition. A ‘cumulative catch-up’ approach is mandated where comparative values are not restated.

Following the change, you can expect net debt and total assets to increase, as well as EBITDA as lease expenses move below EBITDA as depreciation and interest charges.

Of course, these changes may affect covenant compliance, credit ratings, and performance-based remuneration, so the potential impact on your business needs to be considered in full.

Industries with typically significant lease portfolios are most likely to be affected, including retail, hospitality, transport, and manufacturing.

Revenue: A new five-step model

FRS 102 will adopt a new five-step revenue recognition model aligned with international standards. The five steps are as follows:

1. Identify the contract with a customer.
2. Identify performance obligations.
3. Determine the transaction price.
4. Allocate the price to performance obligations.
5. Revenue is then recognised when (or as) obligations are satisfied.

In this model, revenue may be accelerated or deferred compared to current practice. More judgement will be required to identify performance obligations and variable consideration.

Many companies will not see any impact; however, some - especially those operating many different, bespoke contracts - could see significant changes.

FRS 102 offers a choice: either the cumulative catch-up approach as above for leases, or a full retrospective approach where comparatives are restated.

Those expected to be most impacted by this change are where contracts are complex or span multiple periods, commonly found in construction, software, telecoms, and professional services.

Other key changes

Other changes to FRS 102 include:

• Additional mandatory disclosures for small companies, including the removal of exemptions to disclose some related party transactions.
• An additional disclosure is required for companies that prepare a cash flow statement relating to supplier finance agreements.
• Notes to the financial statements have more focused requirements with the need to be more bespoke and cover all areas deemed ‘material’.

What should companies do now?

Overall, these changes will improve consistency and comparability but may require system and process updates.

Companies should get ahead of the changes by assessing the potential impact early. This can be achieved by:

• performing a gap analysis to identify any contracts and/or leases affected.
• modelling the financial impact on key metrics and covenants.
• ensuring accounting systems can manage new lease and revenue models
• communicating with stakeholders - inform lenders, investors, and boards about expected changes in financial results to prevent any shocks upon adoption.

Join our webinar on Wednesday 22 October to follow a discussion of the requirements under these new reporting standards, the key considerations for transition and how these are likely to impact companies and their stakeholders – register here.

For further information and clarification, please contact your usual Duncan & Toplis adviser or get in touch.