FRS 102 Amendments – What is changing?

The amendments are effective for accounting periods beginning on or after 1 January 2026, with early adoption permitted.

What are the significant changes coming up in FRS 102?

The amendments include:

A new model for revenue recognition based on IFRS 15’s five-step model with appropriate simplifications.

A new model for lease accounting by lessees that is based on IFRS 16’s on-balance sheet model, again with some simplifications .

Other improvements and clarifications to:

• fair value measurement;
• business combinations;
• measurement of cash-settled share-based payments;
• uncertain tax positions; and
• a revised Section 2 aligned to the latest version of the IASB’s Conceptual Framework.

How will revenue recognition change?

FRS 102 currently uses a risks and rewards approach, where the timing of revenue is different for different types of income – revenue from the sale of goods, revenue from sale of services, construction contracts, and income from interest, royalties and dividends.

The amendments introduce a single comprehensive model to cover all types of revenue, which focuses on the transfer of control and follows the five-step approach used within IFRS 15:

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

All entities are going to have to look carefully at each of their different revenue streams and how they contract with customers to apply the principles of the new model.

Preparers should be mindful of the wider impacts of changes to the timing of revenue recognition on key business metrics – employee remuneration such as staff bonuses, calculation of earn out payments, debt covenants and an entity’s ability to pay dividends.

How will lease accounting change?

Currently, FRS 102 requires a lessee to classify a lease as either a finance lease or an operating lease.  This depends upon the economic substance of the transaction.

IFRS 16 however, has no differentiation between finance or operating leases.

Contracts which meet the definition of a lease will recognise a right of use asset and a lease liability (present value of future rental payments).  The previously recognised rental expense will be replaced by a depreciation charge and interest cost.

One of the main challenges when IFRS 16 was introduced was determining the appropriate discount rate to use in the calculation of the lease liability. The new amendments provide some simplifications to this.

For leases where the underlying asset is of ‘low value’ or the total lease term is 12 months or less, there is still an option to continue to follow operating lease accounting and to recognise the rental expense straight line over the lease term.

Similarly to revenue, the introduction of an on-balance sheet model for leases is expected to have a significant impact on key metrics – such as gross asset totals for purposes of determining company size, EBITDA, profit, interest cover and net debt.

The changes to revenue and lease accounting could be significant, but is there anything which has changed?

There are also some clarifications and improvements to other areas of FRS 102. The other key changes are:

• A new section 2A Fair Value Measurement, has been updated to reflect the principles of IFRS 13 Fair Value Measurement. The updated appendix provides more detail on measurement and valuation techniques.
• Section 2 Concepts and Pervasive Principles has been updated to reflect the IASB’s conceptual Framework for Financial Reporting.
• There will no longer be an option to newly adopt the recognition and measurement principles that are within IAS 39. However, those entities already applying the option now will be allowed to continue to do so.
• A number of disclosures that were previously only ‘encouraged’ have now been made mandatory for small entities in the UK (not Ireland) adopting FRS 102 Section 1A.

What else might affect entities need to think about?

The new requirements are expected to have a number of wider business impacts influencing business decisions and business KPIs, including:

• There may be additional data requirements to keep track of revenue and lease contracts and/or other required data.  Any applicable increased disclosure requirements may also require additional data collection.
• IT systems and processes may need to be reviewed to ensure that they are able to gather and process the required information.
• Some of the changes may influence commercial negotiations and the structuring of arrangements.
• Debt covenants and performance metrics may need to be renegotiated, such as those related to net debt, interest cover or EBITDA.
• The revised profile of the income statement may affect the ability to pay dividends, particularly where timing of revenue recognition is altered, recognition of depreciation and interest charges from lease accounting – both of which will impact distributable reserves.

We regularly assist clients who require support on the conversion from UK GAAP to IFRS.

The type of work we assist with can include:

• Training and workshops to bring teams up to speed with the new requirements
• Preparing an initial impact assessment
• Preparing Accounting assessment papers for audit
• Assisting with the calculations ,  adjustments and disclosures for your financial statements

If you would like to discuss the impact of the new FRS 102 amendments on your business, then please do reach out to a member of our team.