The Change That Slipped Past While Everyone Watched MTD
Ask most UK practices what has dominated 2026 and the answer is quarterly updates. It is a fair answer. Making Tax Digital for Income Tax went live on April 6th, the first submission deadline landed in August, and phase two arrives in April 2027.
Meanwhile, a second change has taken effect with far less noise. The Financial Reporting Council's periodic review amendments to FRS 102 apply to accounting periods beginning on or after January 1st 2026. That is not a future consultation or a proposed timetable. It is the standard your clients are reporting under right now.
Here is the timing problem. Because accounts follow the year end rather than the tax year, the impact feels distant. A December 31st 2026 year end will not produce a signed set of accounts until 2027. But the transactions being recorded today, the leases being signed this month and the contracts being negotiated this quarter are all inside that first affected period. The work to get this right is happening now, whether or not anyone has scheduled it.
What Actually Changed
The periodic review touches several sections of the standard. Four changes matter most for the average general practice client base:
- Lease accounting (Section 20). Lessees must now bring most leases onto the balance sheet, recognising a right of use asset and a lease liability, in line with the principles of IFRS 16.
- Revenue recognition (Section 23). The old risks and rewards approach is replaced by a five-step model based on IFRS 15.
- Fair value measurement. A new Section 2A replaces the previous appendix to Section 2 and aligns fair value principles with IFRS 13.
- Other amendments. Updates to the conceptual framework in Section 2, removal of the option to adopt IAS 39 in most cases, new disclosure requirements for supplier finance arrangements, and guidance on uncertain tax treatments.
Supplier finance disclosures ran ahead of the pack, applying to periods beginning on or after January 1st 2025, so those may already be in your files.
Leases: The Change Clients Will Feel First
This is the amendment most likely to produce an awkward conversation. Operating lease rentals used to sit quietly in the profit and loss account. Now a lessee recognises an asset and a liability, and the single rental charge becomes depreciation plus interest.
The knock-on effects reach well beyond the accounts file:
- EBITDA rises because rental expense is stripped out and replaced with depreciation and interest below that line.
- Gearing and working capital ratios move, which can put pressure on banking covenants written before anyone contemplated this change.
- Balance sheets get bigger, which affects how a business presents to lenders, funders and prospective buyers.
There are relief valves. Low value leases may be exempt from balance sheet recognition, and leases ending within twelve months of the date of initial application can be treated in the same way. The practical expedients on transition are generous too: no need to reassess whether a contract contains a lease, permission to apply a single discount rate to a portfolio of similar leases, use of hindsight in assessing lease terms, reliance on previous onerous lease assessments, and the ability to reuse IFRS 16 calculations already prepared for group reporting.
For lessees, the leases changes are applied on a modified retrospective basis, with the cumulative effect recognised as an adjustment to opening retained earnings at the date of initial application. Lessors make no adjustment on initial application, other than an intermediate lessor reassessing subleases previously classified as operating leases.
Revenue: Five Steps and a Choice to Make
The new model asks entities to identify the contract with the customer, identify the performance obligations, determine the transaction price, allocate that price across the obligations, and recognise revenue as each obligation is satisfied.
For a straightforward retailer or a simple service business, the numbers may barely move. The businesses to look at closely are the ones with bundled goods and services, variable consideration, warranties, customer options for additional goods, long-running project work, or a significant financing component. In those cases the timing and pattern of revenue can genuinely shift.
Unlike leases, revenue offers a choice of transition route. Full retrospective application means recalculating comparatives to the earliest practicable date. The modified retrospective approach recognises the cumulative effect as an adjustment to opening retained earnings without restating comparatives, with practical expedients available for variable consideration and contract modifications. That choice is a judgement call worth documenting properly, because it affects what the comparative column tells a reader.
Do Not Forget the Tax Consequences
Transition adjustments are not a presentational matter. They flow through to tax, which is exactly why this belongs on the radar of your tax people as well as your accounts team.
For lessees, rules introduced by Finance Act 2019 spread the tax effect of transitional lease adjustments over the average remaining lease term, which softens the cliff edge. On the revenue side, a change in the timing of recognition under the five-step model can accelerate or defer taxable profit depending on the contract. Deferred tax needs revisiting alongside the adjustment, and for owner managed businesses there is a distributable profits question to check before the next dividend is voted.
Who Is In Scope, and Who Is Not
Small entities reporting under Section 1A are not carved out of the lease and revenue changes. That surprises people. If your client base is largely small limited companies, this is your issue, not a large company issue.
Micro-entities applying FRS 105 were not given the equivalent lease and revenue changes, so that population is a different conversation. The practical risk is misclassifying a client at the boundary, particularly a company that has grown past the micro-entity thresholds and needs to move to FRS 102 Section 1A in the same period the new rules bite.
Early adoption is permitted, provided all the amendments are applied at the same time. Adopting early can help a group aligning with IFRS reporting, a business preparing for sale, or a company negotiating new finance on a transparent basis. The trade-offs are reduced comparability with peers and a demand on team time that has to be planned for.
A Practical Plan for Autumn 2026
The firms who will handle this calmly are the ones treating it as a client management exercise now rather than a technical exercise later.
- Segment your client list. Flag every entity with a period beginning on or after January 1st 2026, then sort by year end so you know which files hit first.
- Build a lease register per client. Property, vehicles, plant, IT equipment, copiers. Capture start and end dates, break clauses, renewal options and payment profiles. This is the single biggest data gathering task and it is far easier done while the period is running.
- Review contracts for the businesses with complexity. Bundled offerings, staged projects, subscriptions, rebates and warranties all deserve a proper read.
- Choose and record your transition policies. Decide the revenue route and which lease expedients you are using, then document the rationale on file.
- Warn clients about covenants early. A conversation with the bank before a ratio breaches is a service. The same conversation afterwards is damage control.
- Update templates, checklists and disclosure notes, and brief your accounts team before the first affected file lands on someone's desk unannounced.
- Price the work. Building a lease register and reassessing revenue policy is chargeable advisory work. It should not quietly disappear into a fixed compliance fee.
The Opportunity Hiding in the Detail
There is a familiar pattern here. A technical change arrives, firms absorb the cost silently, and clients never learn that anything happened. The alternative is to lead with it. A short note to affected clients explaining that their balance sheet is about to look different, and that you have already mapped the impact, is the kind of proactive contact that renews trust and justifies fees.
It also pairs neatly with the conversations practices are already having about capacity. Firms that keep client data, deadlines and workflow visible in one place will find the segmentation exercise above takes an afternoon rather than a fortnight. Those working from spreadsheets and memory will find it takes considerably longer, and will discover the gaps at the worst possible moment.
The Bottom Line
MTD deserves the attention it is getting. It should not absorb all of it. The FRS 102 periodic review is already in force, it reaches small companies as well as large ones, it changes the shape of client balance sheets, and it carries a tax tail through transition adjustments and deferred tax.
December 2026 year ends are running now. March 2027 year ends start in a matter of months. The practices that get ahead of this will spend 2027 explaining an anticipated change to prepared clients. The rest will spend it explaining a surprise.
