FRS 102 Has Changed: What UK Accounting Firms Need to Do Right Now

The Biggest Change to UK GAAP in a Decade is Already Here

For accounting periods beginning on or after 1 January 2026, the amended FRS 102 is now the applicable standard for the vast majority of UK entities. Following the Financial Reporting Council's second periodic review, the changes represent the most significant update to UK Generally Accepted Accounting Practice since FRS 102 was first introduced. If you have not already begun preparing your clients, the time to act is now.

This post sets out the key changes, the practical questions your clients are likely to bring to you, and the steps your firm should be taking to manage the transition confidently.

What Has Changed:
The Three Areas That Matter Most

1. Lease Accounting: Operating Leases Come On to the Balance Sheet

This is the headline change. Under the revised standard, lessees can no longer keep most operating leases off the balance sheet. Instead, virtually all leases must now be recognised as a right-of-use (RoU) asset and a corresponding lease liability. The approach closely mirrors IFRS 16, though with some practical simplifications designed for the UK market, including the use of an obtainable borrowing rate rather than an incremental borrowing rate.

The practical consequences for your clients are significant:

• Balance sheets will grow, often materially, as previously off-balance-sheet property, vehicle and equipment leases are brought on.
• Lease expenses are now split between depreciation of the RoU asset and interest on the lease liability, rather than being presented as a single operating cost. This changes EBITDA and other key metrics.
• Loan covenants, banking facilities and management KPIs that reference gearing, net debt or profit measures may be affected even where the underlying cash flows remain identical.
• Short-term leases (twelve months or less) and leases of low-value assets are exempt, providing some relief for clients with simpler lease portfolios.

Importantly, there is no requirement to restate comparative figures. Any cumulative transition adjustment is instead recognised in opening retained earnings, which simplifies the first-year transition but means careful documentation is essential.

2. Revenue Recognition: A New Five-Step Model

The amendments introduce a single, comprehensive five-step model for revenue from contracts with customers, broadly aligned with IFRS 15. In summary, entities must:

• Identify the contract with the customer.
• Identify the distinct performance obligations within it.
• Determine the transaction price.
• Allocate that price to each performance obligation.
• Recognise revenue when (or as) each performance obligation is satisfied.

For many straightforward businesses, this will not change much in practice. However, clients with bundled goods and services, variable consideration, long-term contracts, licences, warranties, or customer loyalty schemes will need to review whether their existing revenue recognition policies remain appropriate. The model introduces more judgement and more required disclosures, particularly around performance obligations and the timing of revenue recognition.

3. Increased Disclosures for Small Entities Under Section 1A

Small entities reporting under Section 1A of FRS 102 have historically benefited from reduced disclosure requirements. The revised standard narrows that gap. Additional disclosures are now required, where relevant and material, in relation to:

• Going concern judgements and assumptions.
• Provisions and contingent liabilities.
• Share-based payments.
• Current and deferred taxes.
• Lease obligations and RoU assets.
• Performance obligations under revenue contracts.
• Dividends.

This means that even your smallest limited company clients may face more work at year-end than in previous years. Disclosure checklists and accounts production templates will need to be updated accordingly.

Other Changes Worth Noting

Beyond the headline areas, the periodic review also introduced several further amendments that firms should be aware of:

• Supplier finance arrangements: New disclosure requirements for supply chain finance, reverse factoring and similar arrangements took effect from periods beginning on or after 1 January 2025. If your clients use these arrangements and have not yet addressed the disclosures, this needs immediate attention.
• Uncertain tax treatments: Section 29 now requires entities to assume that HMRC will examine all relevant amounts with full knowledge of the facts, bringing FRS 102 into line with international practice on tax uncertainty disclosures.
• Revised Conceptual Framework: Section 2 has been rewritten to align with the IASB's 2018 Conceptual Framework, and a new Section 2A introduces fair value measurement guidance closer to IFRS 13.

What Your Clients Are Likely Asking

Expect a wave of client queries as year-ends under the new standard begin to arrive. The most common concerns are likely to be:

"Will this change my company's profit?" Not necessarily. For most clients, total profit over the life of a lease or contract will not change, but the timing and presentation will. Lease costs shift from a single rental charge to depreciation plus interest, and revenue may be recognised at different points than before. Clients need to understand that a change in presentation is not the same as a change in underlying performance.

"Will my bank still be happy with my accounts?" This is often the real worry, and it is a fair one. Bringing leases onto the balance sheet can affect gearing ratios and other covenant tests, even though nothing has changed operationally. Clients with lease-heavy balance sheets (retailers, hauliers, care providers) should be flagged early so covenant conversations can happen before the accounts land on a lender's desk, not after.

"Do I need to do anything differently day to day?" For lease accounting, yes. Clients will need to maintain a clear lease register (start date, term, payments, any options to extend or break) so you can calculate the RoU asset and liability accurately. Many clients have never kept this information in one place, so this is worth raising well before the year-end.

"Does this apply to my small company too?" Almost certainly. Section 1A entities are still in scope for both the lease and revenue changes, and now face additional disclosure requirements as well. The idea that "small company accounts are simple" is less true than it used to be.

"When do I actually need to worry about this?" Now, if the accounting period beginning on or after 1 January 2026 has already started, or is about to. The earlier the lease register and contract review happen, the smoother the first set of accounts under the new standard will be.

What Your Firm Should Be Doing Now

1. Identify affected clients first. Run a quick portfolio review to flag clients with material operating leases, complex or bundled revenue arrangements, or supplier finance facilities. These are the clients who need attention before anyone else.
2. Update your templates and checklists. Accounts production templates, disclosure checklists and engagement letters should all reflect the Section 1A changes, not just the headline lease and revenue amendments.
3. Get ahead of the lease register problem. Many clients will not have the lease data you need in a usable format. Ask for it now, not at the year-end, so there is time to query missing information.
4. Flag covenant impacts early. Where lease accounting changes could affect gearing or profit-based covenants, loop in the client's lender or funder proactively. A conversation in advance lands very differently to a surprise in the finished accounts.
5. Brief your whole team. This is not just a technical accounts production issue. Client-facing staff, from bookkeepers to account managers, should understand the headline changes well enough to answer basic client questions and know when to escalate.
6. Lean on your software. Accounts production and disclosure tools should be doing the heavy lifting on calculations and disclosure requirements, freeing your team to focus on the judgement calls and client conversations that actually need a human.

Turning Compliance Into a Conversation

It is easy to frame the FRS 102 changes as a burden. The volume of work is real, and the pressure on practices is genuine. But there is another way to read what is happening.

The new standard is forcing a deeper, more detailed conversation between accountants and their clients, about leases, about revenue, about how the business actually operates day to day. That conversation is an opportunity. It is a natural moment to review a client's lease portfolio, question whether their revenue recognition policy still fits how they trade, and demonstrate value that goes well beyond ticking a compliance box. Practices that build efficient, well-templated workflows around the new standard are not just managing the transition, they are positioning themselves to offer richer advisory conversations off the back of it.

The firms that will look back on this period as a turning point are the ones that planned early, communicated proactively, invested in the right tools, and treated the FRS 102 changes not as a threat to manage but as a platform to build on.

The first year-ends under the new standard are coming. The question is whether your practice is ready.