Financial reporting updates: what are the draft changes in FRS102?

The Financial Reporting Council (FRC) have announced potential changes to financial reporting standards in the UK including to FRS102. These are detailed in a document called FRED 82. Released last month, the updated draft amendments revealed that accounting for leases and revenue recognition are the two biggest areas of change. Matthew Barton discusses the upcoming changes.

In the latest update, it has been announced that these changes are not expected to take effect until periods commencing on or after 1st January 2026. However, as with any major changes in accounting standards, the process of gathering relevant information and preparing for the change may need looking at before the date of change.

An alignment with International Standards

The changes on leases and revenue recognition are being primarily driven by an alignment to International Standards. We can see this to a large extent with the first version of FRS102. However, there are some areas where differences were retained. The proposed 2026 changes will further close these gaps.

What’s changing for FRS 102 and revenue?

A proposed five-step model for revenue recognition

The proposed model will be aligned to the five-step model used in IFRS 15.

Revenue will be largely recognised based on identifying the promises stated in contracts and recognising revenue once these have been met. This will have a significant impact on the timing of recognition of revenue for many businesses.

What is changing for lease accounting?

Lease accounting will see some changes in the form of a new model. The new on-balance sheet lease model will be aligned to the IFRS 26 leasing requirements. This will mean that a greater number of leases will be accounted for on a company’s balance sheet.

It’s hoped that greater alignment between the current FRS 102 rules and IFRS 16 will prompt lessees to recognise assets and liabilities, as well as establishing better representation of leasing transactions.

A new model for lease accounting

A new on-balance sheet lease model is proposed which will be more aligned to the IFRS 16 leasing requirements. This means that essentially there will no longer be an operating lease for UK accounting purposes (with some exceptions.) This will have a major impact for businesses renting out property, as well as other items such as motor vehicles and machinery.

Although it has taken some time, it seems the proposed measures will come into effect and will recognise a business’ liabilities in full. This means many businesses will be subject to additional lease liabilities due to the recognition of additional assets.

A consultation stage impact assessment will accompany any changes. However, in the meantime it’s important to note that any proposed measures are still subject to change.

Preparing your business for change

If your business holds a significant amount of leased assets or has revenue based on a contract (rather than sale of goods) basis, it’s important to understand the impact that the proposed changes may have. Knowing will help you take any steps necessary in preparing your business.

Our team can guide you through any upcoming changes. Whether that be gaining a better understanding of lease and revenue accounting, or discussing how they affect you and your business. We will ensure you have the right support with tailored advice to support you every step of the way.