Hi
Significant changes to UK accounting standards are on the horizon, and they could reshape how your financial story is told.
In March 2024, the Financial Reporting Council (FRC) announced a major update to FRS 102, the accounting standard used by most UK businesses. While the changes officially kick in for accounting periods starting on or after 1 January 2026, the time to understand and prepare is now, as you might already be in the comparative period for these new rules.
These
aren't just minor tweaks. We're looking at fundamental shifts in how you recognise revenue and account for leases, plus a raft of new disclosure requirements. This will impact businesses preparing accounts under FRS 102 - that's most small incorporated and unincorporated businesses in the UK.
The most substantial revisions revolve around two core areas revenue and
leases:
A new five-step revenue recognition model:
FRS 102 will now incorporate a five-step model for
recognising revenue, aligning more closely with International Financial Reporting Standards (IFRS). This model requires businesses to:
- Identify the contract(s) with a customer.
- Identify the separate performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the separate performance obligations.
- Recognise revenue when (or as) the entity satisfies a performance obligation.
This could change when you recognise revenue in your accounts. For
businesses with complex contracts, long-term projects, or bundled goods and services, the timing of profit recognition might shift. This could make profits appear lumpier or smoother, depending on your current practices and the nature of your customer agreements.
On Balance Sheet lease accounting:
Currently, many small businesses account for operating leases (like office rent or equipment hire) as a simple expense in the profit and loss account. The new rules will require most leases to be brought "on balance sheet." This means you'll recognise a 'right-of-use' asset (representing your right to use the leased item) and a corresponding lease liability
(representing your obligation to make lease payments).
This is a significant shift which will impact your balance sheet which will look different, with both assets and liabilities increasing. This could affect key financial ratios that lenders or other stakeholders look at. It will also
impact your profit & loss account because instead of a straight-line rental expense, you'll see a depreciation charge for the right-of-use asset and an interest expense on the lease liability. The total expense pattern over the lease term might also change.
Company size thresholds: Critically, the increase in gross assets from bringing leases on balance sheet might impact whether your business continues to qualify for small company provisions. (Fortunately, recent increases to company size thresholds, effective from 6 April 2025, may provide some welcome headroom here.)
Beyond these two major changes, Section 1A of FRS 102, which governs disclosures for small businesses, is also being beefed up. While it still focuses on the disclosure regime, it now mandates more minimum disclosures, often by cross-referencing requirements from other sections of FRS 102 applicable to larger entities.
Key areas with new or enhanced
mandatory disclosures include:
- Revenue: More detail on how and when revenue is recognised.
- Leases (as a lessee): Information about your on-balance sheet leases.
- Going Concern: An explicit statement that accounts are prepared on a going concern basis, confirmation that management has assessed this, and disclosure of any significant judgments or material uncertainties. While material uncertainties would likely have been disclosed anyway to ensure a "true and fair view," this is now a more explicit requirement for all.
- Related Party Transactions
- Dividends Declared and Paid/Payable
- Current and Deferred Tax
- Provisions and
Contingencies
- Share-Based Payment Transactions
- An explicit, unreserved statement of compliance with FRS 102.
This drive for greater transparency is further underscored by
the expectation that small entities will soon be required to file their statutory profit and loss account at Companies House. This means your revenue recognition policies, gross profit, and operating profit will be visible to competitors, customers, suppliers, and employees.
What this means for your business: These changes aren't just an accounting
exercise; they have real-world implications:
- Profitability and tax: While pre-tax cash flow is unlikely to be directly affected, the timing of profit recognition can change. This, in turn, could affect the amount and timing of your tax payments and the profits available for distribution as dividends.
- Lending covenants: If you have bank loans with covenants based on figures in your annual accounts (e.g., debt-to-equity ratios, asset levels), these could be impacted by the new lease accounting rules. Similarly, employee bonus schemes or other contractual arrangements tied to reported profits might need review.
- Stakeholder management: How
your business's financial health and performance are perceived by lenders, investors, suppliers, and customers could change. With income statements soon to be public, it is vital that small businesses understand how their financial performance and position shown in their accounts will be affected, so that they can manage stakeholder expectations.
What to do
now
With the 1 January 2026 effective date looming, and the comparative period potentially already underway, proactive preparation is key.
- Don't delay – start assessing now: Assessing the impact of the new revenue and lease accounting models can take time and may be complex, so it
makes good business sense to consider the requirements now.
- Do a deep dive into your contracts:
- Revenue: Identify all your different types of customer contracts. Understand the performance obligations within them. How might the five-step model change when you recognise
revenue for each type?
- Leases: Compile a list of all your operating leases (property, vehicles, equipment). Understand their key terms – duration, payment schedules, renewal options. These will be crucial for calculating the new on-balance sheet figures.
- Understand the new
disclosures: Review the list of new mandatory disclosures. Identify which ones will be relevant to your business and start thinking about how you will gather the necessary information.
- Review your systems: Will your current accounting software and management information systems be able to handle these new requirements? Consider if updates or even a "finance function
optimisation review" might be beneficial to automate processes and free up resources.
- Monitor size thresholds: Keep an eye on your turnover and gross assets, especially with leases coming on balance sheet. Understand how close you are to the small company thresholds and how new lease agreements could impact this.
- Communicate with stakeholders: Start thinking about how you will explain these changes and their impact to your bank, investors, and other key partners.
- Talk to your accountant: This is crucial. Your accountant can help you navigate the complexities of these changes, assess the specific impact on your business, and plan for a smooth
transition. They can also advise on whether early adoption might be beneficial for your circumstances.
A Quick Note on Micro-Entities (FRS 105)
If your business applies FRS 105 (the standard for micro-entities), there are also changes, including a new five-step revenue
recognition model and updates to concepts. However, crucially, there are no changes to lease accounting and no additional disclosure requirements under FRS 105.
Be prepared
The 2024 revisions to FRS 102 represent the most significant accounting shift for small
businesses since FRS 102 was first introduced. While change can seem daunting, understanding these new rules early and planning effectively will put your business in a stronger position. Being ready for change is a competitive advantage.
Start the conversation with your accounting advisor today to ensure you're well-prepared for a seamless transition and can confidently explain your updated
financial story.
Noel Guilford