What the FRS 102 updates mean for accountants and their clients

Accountants and bookkeepers discuss how the changes will affect their approach, and their clients.

New changes to the Financial Reporting Standard (FRS) 102 are coming into effect for accounting periods beginning on or after 1 January 2026.

FRS 102, which is reviewed every five years, applies to entities within the UK and Republic of Ireland and provides a standardised framework for financial statements to ensure they give a ‘true and fair’ picture of an entity’s financial position, including profit and loss accounts.

The main changes to the standard include a five-step model for revenue recognition:

• Step one: Identify the contract with a customer.
• Step two: Identify performance obligations (goods or services as laid out in contract).
• Step three: Identify transaction price.
• Step four: Allocate the transaction price to the performance obligations.
• Step five: Recognise revenue in accounts when goods or services are provided to the customer.

Further details on FRS 102 changes are available in this article.

So how are these changes likely to affect accountants and their small business clients?

Changes are to present a clearer view of a company’s financial position

James Shaw, Head of Contractor Accounting, Sapphire

The FRS 102 updates are designed to bring the standard more in line with international norms, while retaining the pragmatic, principles-based approach that UK GAAP is known for.

Key changes include:

• Revenue recognition: The new model draws inspiration from IFRS 15 but is designed to be proportionate and practical for smaller entities.
• Lease accounting: Most leases will now need to be brought onto the balance sheet. This change will provide a more accurate picture of a business’s financial commitments.
• Fair value and other measurement changes: Updates to the fair value framework and how entities account for business combinations and uncertain tax positions.

While these updates are intended to modernise UK GAAP and improve comparability, they will require adjustment, particularly for small businesses. For example, when it comes to financial reporting, lease-related liabilities will now appear on the balance sheet and this could alter key financial metrics and impact borrowing decisions or covenant compliance.

For some businesses, the updated revenue model could mean recognising income earlier or later than before, potentially affecting reported profits and tax planning.

The revised standards emphasise transparency, so businesses really must provide sufficient detail in their notes to the accounts.

A more explicit confirmation around going concern is now required, including evidence that management has considered the foreseeable future when preparing their accounts.

While these changes might seem technical, they’re really about presenting a clearer, more complete view of a company’s financial position.

Accountants can help support clients with these changes through:

• Tailored impact assessments – Highlighting where and how the changes will affect the business, from financials to compliance processes.
• Educating teams – Accountants can translate technical jargon into practical steps, offering training or briefings to business owners and finance teams.
• System and process review – businesses may need to update their accounting systems or processes, for example, to capture lease data more accurately.
• Advising on early adoption – There may be benefits to adopting the new rules early, and accountants are well placed to advise on the pros and cons.
• Planning: Financial projections and cash flow forecasts need adjusting, so proactive planning now can reduce surprises later.

Verdict: The changes may seem technical but they’re about presenting a clearer, accurate view of a company’s financial position.

Financial statement presentation and timing of profit recognition to be affected

Michael Marslin, Director, Financial Services team, PKF Littlejohn

It is crucial to understand the impact on financial statements and any existing and potential contracts as soon as possible, since the comparative period for these changes has already started for most preparers.

The most significant changes introduce a five-step revenue recognition model based on IFRS 15 and a recognition of lease liabilities and corresponding right-of-use assets on the balance sheet like IFRS 16, with some exceptions.

These changes could significantly impact the presentation of the financial statements, the timing of profit recognition, key performance metrics and debt covenants.

Small entities applying Section 1A of FRS 102 must consider the impact of changes in FRS 102, particularly in revenue and lease accounting. The amendments introduce additional disclosure requirements, including mandatory disclosures regarding going concern. The FRC has also converted several previously ‘encouraged’ disclosures into mandatory ones and introduced new minimum disclosures, many of which were previously only required for medium and large businesses.

Several changes have been introduced for micro-entities applying FRS 105. These include a five-step revenue recognition model and updates to the concepts and pervasive principles section of the standard. However, there are no changes to lease accounting, nor are there any additional disclosure requirements for micro-entities.

Verdict: These changes could significantly impact the presentation of financial statements, the timing of profit recognition and key performance metrics.

More of my clients now fall under ‘small and micro entity’

Ben Rose, MAAT, Partner, Martin Seitler & Co

Turnover and balance sheet totals thresholds have been increased under the changes. As a result, generally more clients will fall under the SME category – which is good news for some clients who were just at the threshold previously.

If a company moved from ‘micro’ to ‘small’, then we would have to report their financial statements slightly differently. However, not much is changing for our clients as many of them still fit in the ‘micro entity’ category. For example, neither a small company nor a micro entity need to submit their Profit and Loss account to Companies House… yet.

Verdict: More clients will fall within the ‘small and micro’ entity category under the new FRS 102 amendments due to threshold changes.

Accountants will need to provide consultative advice

Vipul Sheth, Chartered Accountant, MD, Advancetrack

The changes are all about bringing UK accounting standards closer to international norms and improving consistency and transparency in financial reporting. Revenue recognition now focuses on when goods or services are delivered rather than when invoices are issued. Companies will be expected to provide fuller, clearer disclosure about key judgments they have made in financial statements.

Those affected will need to adapt to stricter rules on revenue recognition and will have to spend time considering what leased equipment and vehicles need to be included in their balance sheets, which could be quite time-consuming. Service-based businesses will also have to consider when they are recognising service delivery, in order to follow the five-step approach.

For accountants, it’ll mean a greater focus on providing consultative advice to clients, to help them understand the changes. The new rules will be more complex, but hopefully they will ultimately lead to clearer, more reliable financial statements and better decision-making.

Verdict: Changes are complicated and accountants will need to provide consultative advice to clients. Hopefully the new rules will lead to clearer financial statements and better decision-making.

Including leases under one umbrella in the balance sheet is welcome

Aaron Westgate, Chartered Accountant and Accountant Teacher

Leases and revenue steal the headlines but there are a slew of welcome changes. Most notable is the classification of software (a staple accounting line for almost every company) but everything from financial instruments to share-based payments gets a focus.

Leases are the bigger move to reflect what we see in reality – for example, lots of 1-year leases for business expenditure. The move to simplify leases under one umbrella is the big change we’ve been expecting (and wanting) for some time, avoiding the class ‘off balance-sheet’ item controversy

Revenue changes may be less significant than leases but are still welcome. For revenue, we’ve always had to consider the breakdown of bundles and quirks to atypical revenue streams but this helps simplify some of the pain points in accounting for it.

Verdict: The move to include leases under one umbrella in the balance sheet is a welcome change.

Annie Makoff is a freelance journalist and editor.