Guide to FRS 102 Changes

Background

The Financial Reporting Council (FRC) has updated FRS 102 to bring UK GAAP closer to IFRS. The biggest changes affect lease accounting, revenue recognition and small company disclosures.

Most of the changes apply to accounting periods beginning on or after 1 January 2026.

Leases (Section 20)

What’s changing?

Under the current rules, leases are classified as either:

• Finance leases (recognised on the balance sheet); or
• Operating leases (kept off the balance sheet).

From 1 January 2026, this distinction largely disappears for lessees. Most leases will now be recognised on the balance sheet.

Businesses will need to recognise:

• A Right-of-Use (ROU) Asset; and
• A Lease Liability.

Instead of recording lease rentals as an operating expense, companies will recognise:

• Depreciation on the ROU asset; and
• Interest on the lease liability.

Exceptions

The new rules do not apply to:

• Short-term leases (12 months or less); or
• Leases of low-value assets.

How are the changes applied?

The new lease standard is applied using a modified retrospective approach.

This means:

• Comparative figures do not need to be restated.
• Lease liabilities are calculated at the start of the first year of adoption.
• Any resulting adjustment is recorded in opening reserves.

Revenue Recognition (Section 23)

What’s changing?

The current standard generally recognises revenue when the risks and rewards of ownership pass to the customer.

The revised standard introduces a more structured approach based on a five-step model, bringing FRS 102 closer to IFRS 15.

The Five-Step Model

How are the changes applied?

Businesses can choose between:

• Full retrospective application by restating comparatives; or
• Modified retrospective application, with any transition adjustment recorded in opening reserves.

Small Companies (Section 1A)

What’s changing?

Small company accounts will require significantly more disclosures than before.

This means accounts are likely to become longer and more detailed.

Related Party Transactions

Most related party transactions will now need to be disclosed.

An exemption remains for certain wholly-owned group transactions and some government-related entities.

Directors’ Transactions

Where disclosure is required, companies may need to include:

• The nature of the relationship;
• Details of transactions;
• Outstanding balances;
• Guarantees provided or received; and
• Any bad debt provisions relating to related parties.

Leases and Revenue

Additional disclosures will be required, including:

Leases

• Details of right-of-use assets;
• Information about significant leasing arrangements; and
• Lease-related expenses recognised during the year.

Revenue

• When performance obligations are satisfied;
• Payment terms; and
• The nature of goods and services provided.

Share-Based Payments

Small companies will now need to disclose information about share option and share-based payment arrangements, including:

• The types of awards granted;
• Numbers of options outstanding; and
• Related expenses recognised in the year.

Provisions and Taxation

Additional disclosures will be required for:

• Provisions and contingencies;
• Current and deferred tax balances; and
• Significant movements during the year.

Dividends

Disclosure of dividends declared, paid or payable during the year will now be mandatory.