FRS 102 is the main financial reporting standard used by most UK and Irish businesses when preparing their annual accounts. It sets out how companies should recognise income, expenses, assets and liabilities in their financial statements.
The standard is regularly updated by the Financial Reporting Council (FRC) to keep UK accounting rules aligned with modern business practices and international standards. One of the latest revisions to FRS 102 applies to all accounting periods starting on or after 1 January 2026, and they introduce several important changes that businesses should be aware of.
The biggest change: lease accounting
One of the most significant updates affects how businesses account for leases.
Under the current rules, leases are normally classified as either:
- Finance leases – where the asset and a related liability appear on the balance sheet.
- Operating leases – where lease payments are simply recorded as an expense in the profit and loss account.
From 2026 onwards, this distinction has largely disappeared for businesses that lease assets. Instead, most leases need to be recorded directly on the balance sheet.
Companies must recognise:
- A “right-of-use” asset, representing the right to use the leased item.
- A lease liability, representing the future lease payments.
Rather than a single rental expense, businesses now record depreciation on the asset and interest on the lease liability. While this doesn’t change the cash you pay, it can significantly affect how your financial statements look.
There are still some exemptions, particularly for:
- Short-term leases (12 months or less)
- Low-value assets, such as laptops or small office equipment
What this means for businesses
For many businesses, these changes won’t alter their underlying finances, but they will change how financial results appear in the accounts.
For example:
- Balance sheets may show higher assets and liabilities due to leased items being recognised.
- EBITDA figures may increase, as lease expenses are replaced by depreciation and interest.
- Financial ratios or bank covenants could change due to the new accounting treatment.
Because of this, it’s important for businesses to review their leases and contracts now, because of the 2026 implementation date.
Changes to revenue recognition
FRS 102 has also introduced a new approach to revenue recognition.
The revised standard moves away from the traditional “risk and rewards” model and instead adopts a performance-based model, similar to international accounting rules.
In simple terms, revenue is recognised when a business has fulfilled its obligations to a customer, rather than just when risks or ownership transfer. This change aims to improve consistency and comparability between companies.
What you can do now
Businesses should start by:
- Creating a complete list of all lease agreements
- Collating all agreements and sending them to your accountants in time for your year-end accounts.
- Reviewing how contracts recognise revenue and performance obligations
- Considering how the changes may affect financial reporting and planning
Using modern accounting systems can make this transition significantly easier. At CJM Associates, we also offer cloud-based accountancy software services through our partnership with Xero, helping businesses keep accurate, real-time financial records while staying compliant with the latest accounting standards.
Need advice?
If you’re unsure how the FRS 102 changes could affect your business, the team at CJM Associates can help you with your current accounts, assess the impact, and ensure you are fully on top of the new rules.