Are you ready for changes to FRS 102 from January 2026?

In March 2024, the FRC issued amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs – Periodic Review 2024. The effective date for most amendments is periods beginning on or after 1st January 2026*, with early adoption permitted. These amendments seek to provide greater consistency and alignment to international accounting standards including:

• A new model for revenue recognition, aligned to IFRS 15: Revenue from Contracts with Customers, but with some simplifications;
• On balance sheet lease accounting for lessees, aligned to IFRS 16: Leases, but with certain practical exemptions; and
• Other modifications to fair value measurement, uncertain tax positions, business combinations, and a revised Section 2 aligned with IASB’s Conceptual Framework.

* The amendments relating to supplier finance arrangements will be effective from 1st January 2025.

Key FRS 102 changes (Effective on or after 1st January 2026)

Changes for revenue

The objective of Section 23 is for an entity to recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Entities will need to review their revenue contracts and recognition policies applying the five-step model.  Particular attention will be paid to contracts that contain bundles of goods or services, variable consideration, warranties, options and financing components.

Five-Step Revenue Recognition Model:

• • Step 1: Identify the contract(s) with a customer
  • Step 2: Identify the performance obligations in the contract
  • Step 3: Determine the transaction price
  • Step 4: Allocate the transaction price to the performance obligations in the contract
  • Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation

Changes for leases

The changes remove the distinction between operating leases and finance leases for lessees, requiring the recognition of a right-of-use (RoU) asset and a lease liability on the balance sheet. Key changes include:

1. Recognition Exemptions: There are exemptions for short-term leases and leases for which the underlying asset is of low value
2. Identifying a Lease: A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration
3. Lease Term: The term of a lease includes the non-cancellable period, periods covered by an extension option that the lessee is reasonably certain to exercise, and periods covered by a termination option that the lessee is reasonably certain not to exercise
4. Measurement: The lease liability is measured by calculating the present value of the lease payments, and the R0U asset is measured at cost, being the lease liability plus any directly attributable costs of the lease
5. Impact on profit and loss: The cost of the lease will now be presented as a mixture of depreciation of the RoU asset and finance cost of the lease liability.

Other changes include modifications to fair value measurement, uncertain tax positions, business combinations, and a revised Section 2 aligned with the International Accounting Standards Board’s Conceptual Framework.

How could the changes affect your business?

From 2026, revisions to FRS 102 will come into effect which increase complexity around revenue recognition and lease accounting. There may be commercial impacts which are wide reaching and include:

• Impact on key metrics such as EBITDA, profit, net debt
• Debt or pension covenants may need to be renegotiated
• Remuneration, bonuses or share options may need to be amended if reported financial performance is altered as a result of the changes
• Financial records and data may need to be amended to ensure all information is available for correct accounting and reporting

What can we do to help?

Early planning and understanding of the impacts on your business will be the key to a smooth transition.

We can work with you to perform an initial impact assessment and help you understand changes needed to your systems and processes and any communications to stakeholders etc.

What next?

Please do not hesitate to get in touch with Gravita to discuss further.