Major changes to UK GAAP are coming into effect for accounting periods beginning on or after 1 January 2026, following the Financial Reporting Council’s (FRC) September 2024 update to FRS 102 and related Financial Reporting Standards.

The changes align FRS102 more closely with international financial reporting standards, although some differences do remain.

These amendments introduce significant revisions to revenue and lease accounting. Additional improvements, clarifications and consequential amendments have also been made across several areas of the standard.

Understanding these changes is crucial to ensure compliance and avoid unexpected impacts on financial statements and business operations.

This blog is intended for finance professionals and finance teams preparing financial statements under UK GAAP.

FRS 102 lease accounting requirements

Recognition of leases

The amendments to FRS 102 lease accounting, effective for accounting periods beginning on or after 1 January 2026, will significantly change how leases are recognised in the profit and loss account under UK GAAP.

Under the current rules, many leases are classified as operating leases, with rental payments recognised as a straight-line operating expense. However, the revised FRS 102 rules will require most leases to be recognised on the balance sheet, with companies recording a right-of-use asset and a corresponding lease liability. As a result, lease costs will no longer appear solely as rental expenses within operating costs. Instead, businesses will recognise depreciation of the right-of-use asset and interest on the lease liability, fundamentally altering how lease expenses flow through the P&L.

Effects on EBITDA and loan covenants

These changes will also affect key financial metrics, particularly EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation). Because EBITDA excludes depreciation and interest, the removal of operating lease rental expenses from operating costs will typically result in a higher reported EBITDA under the amended FRS 102.

While this may initially appear positive, the new approach also introduces additional liabilities on the balance sheet, which can increase reported net debt and leverage ratios. This shift may have important implications for bank covenants, especially where lending agreements reference measures such as debt-to-EBITDA, interest cover, or gearing.

In many cases, the real challenge is not a deterioration in a company’s financial performance, but whether existing loan agreements were written based on the previous UK GAAP framework. Some lending arrangements include “frozen GAAP” clauses, which allow covenant calculations to continue using the accounting standards that applied when the agreement was originally signed. Where this type of protection is not included, or is limited, businesses may need to review and potentially renegotiate covenant definitions or thresholds with lenders ahead of the first reporting period affected by the FRS 102 changes. Taking proactive steps can help avoid unintended covenant breaches caused purely by the shift in accounting treatment.

FRS 102 revenue recognition changes

A new revenue recognition model under FRS 102

One of the most significant updates introduced by the amended FRS 102 is the overhaul of revenue recognition under UK GAAP.

From accounting periods beginning on or after 1 January 2026, FRS 102 Section 23 introduces a new, more structured revenue recognition model that aligns closely with IFRS 15 – Revenue from Contracts with Customers.

This change represents a shift away from the previous “risks and rewards” approach, moving instead towards recognising revenue based on the transfer of control of goods or services to the customer. As a result, businesses reporting under UK GAAP may see changes in the timing and profile of revenue recognition, particularly where contracts include multiple deliverables, variable pricing, or long-term service arrangements.

The five-step revenue recognition approach

Under the revised FRS 102 revenue recognition rules, companies must apply a five-step model when recognising revenue from customer contracts. This framework requires businesses to:

1. Identify the contract with a customer
2. Identify the distinct performance obligations within the contract
3. Determine the transaction price
4. Allocate the transaction price to each performance obligation
5. Recognise revenue when (or as) those obligations are satisfied.

This approach introduces more detailed guidance and judgment compared with the previous version of FRS 102, requiring businesses to analyse contracts more carefully and potentially reconsider existing accounting policies. Companies may need to evaluate bundled goods and services, warranties, variable consideration and customer options, all of which could affect when revenue is recognised in the financial statements.

Contract analysis and disclosure

For many organisations, the biggest impact of the FRS 102 revenue recognition changes will be the need for greater contract analysis, documentation and disclosures. The updated standard aims to improve consistency, transparency and comparability in financial reporting, but it may also require updates to internal processes, systems and accounting policies.

Businesses with complex contracts, long-term projects, or multiple performance obligations, such as those in construction and technology, may see the most significant changes in how and when revenue is recognised under UK GAAP.

For companies preparing for the FRS 102 changes in 2026, early assessment of revenue streams and contract terms will be key to ensuring a smooth transition to the new revenue recognition model.

Other amendments to FRS 102 that businesses should be aware of

While lease accounting and revenue recognition are the most widely covered aspects of the FRS 102 amendments, several other important updates will also affect financial reporting under UK GAAP.

These changes will also apply to accounting periods beginning on or after 1 January 2026, aiming to improve transparency and consistency in financial reporting.

Fair value measurement and updated accounting principles

One notable update is the introduction of enhanced guidance on fair value measurement. The revised FRS 102 framework aligns more closely with IFRS 13, clarifying how companies should measure the fair value of assets and liabilities, the valuation techniques to use, and the assumptions underlying those valuations.

This change is intended to improve consistency and comparability in financial statements, particularly where businesses measure items such as investment property, financial instruments or business combination assets at fair value. For many organisations, this may require more robust valuation processes, documentation and professional judgement when preparing financial statements under UK GAAP.

Wider improvements and clarifications across the standard

In addition to these headline updates, the revised FRS 102 standard includes a range of clarifications and improvements across multiple sections, including business combinations and contingent consideration arrangements.

Whilst these refinements may not be as high-profile as the changes to leases and revenue recognition, they can still influence how businesses structure transactions, prepare disclosures, and interpret accounting policies.

What should finance teams do to prepare for FRS 102?

For finance teams, the combined effect of these updates means that preparing for the FRS 102 changes during 2026 should involve working with your accountant to undertake a comprehensive review of accounting policies, financial reporting processes and internal controls to ensure continued compliance with UK GAAP.

How Barnes Roffe can help

The upcoming FRS 102 changes represent one of the most significant shake-ups to UK financial reporting in recent years, and although they are aimed at better alignment with international accounting standards, they will have a significant impact on many businesses.

Businesses will need to assess how the amendments affect their financial reporting, accounting policies and financial metrics.

At Barnes Roffe, our specialists work closely with businesses to help them understand the practical implications of the amended FRS 102, including the impact of the new lease accounting model, revenue recognition rules, and wider updates to the standard.

Our team can support organisations with FRS 102 impact assessments, helping identify where changes may affect reported results, EBITDA, balance sheet presentation, and key financial ratios. This includes reviewing contracts, lease arrangements, and accounting policies, modelling the potential impact on financial statements, and identifying any implications for bank covenants, management reporting, or performance metrics.

By evaluating new rules and their impact early, businesses can plan for a smooth transition and avoid unexpected issues when the new requirements take effect.

Contact us today for more help and advice on the FRS 102 changes.

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