10 August 2026
By Brad Haywood, Associate Partner, Clive Owen LLP
If you prepare accounts under UK GAAP, 2026 is the year that FRS 102 sees fundamental changes to align itself with International Financial Reporting Standards, with the two biggest changes being how revenue is recognised and how leases are accounted for.
For many of the businesses we work with, the first affected accounting period is already underway, so this isn’t a “watch this space” update.
That being said, these are big changes that require planning, changes to internal controls and training for finance teams. Our Consulting service line is already actively engaging on projects with our clients to help with the transition.
The changes come from the Financial Reporting Council’s Periodic Review 2024, published in March 2024, and they apply to accounting periods beginning on or after 1 January 2026 (early adoption was permitted). If your year end is 31 December, that means your current financial year is the first one the new rules apply to.
Two changes matter most: a new model for recognising revenue, and a new model for accounting for leases.
Revenue: a five-step model replaces judgement calls
Under the old Section 23, revenue recognition for goods and services leaned on assessing when the risks and rewards of ownership transferred, or estimating the stage of completion of a contract. It worked, but it left room for inconsistency, particularly for businesses with bundled contracts, milestone billing, or long-term service arrangements.
The amended Section 23 replaces this with a five-step model, closely based on IFRS 15:
- Identify the contract with the customer
- Identify the separate performance obligations within it
- Determine the transaction price
- Allocate that price across the performance obligations
- Recognise revenue as each obligation is satisfied
For a lot of straightforward, single-delivery sales, the outcome won’t look very different from today. But if your business sells bundled products and services, has multi-year contracts, charges variable or contingent fees, or offers warranties, discounts or rebates, the mechanics of when and how much revenue you recognise could genuinely shift. Getting the performance obligations identified correctly is where most of the judgement now sits, and it’s where we’re spending most of our time with clients.
Leases: (almost) everything comes onto the balance sheet
This is the change with the biggest visible impact on financial statements. Under current FRS 102, if you lease an asset under what’s classed as an operating lease, say a warehouse, a fleet of vehicles or office equipment, the cost simply appears as a rental expense in profit or loss. Nothing shows on the balance sheet.
The amended Section 20 removes that distinction for lessees, bringing FRS 102 much closer to IFRS 16. With limited exemptions (broadly, short-term leases and low-value assets), businesses will now recognise a right-of-use asset and a matching lease liability on the balance sheet at the start of a lease, then depreciate the asset and unwind the liability with an interest charge over its life.
This is not just a presentational change. It affects:
- Balance sheet strength – assets and liabilities both increase, which changes gearing and net asset positions
- EBITDA – what used to be a single rental charge splits into depreciation and interest, so EBITDA typically rises even though nothing about the underlying business has changed
- Covenants and lending agreements – if your banking covenants reference gearing, leverage or EBITDA, it’s worth reviewing the wording now, before your first affected accounts land on a lender’s desk
- Distributable reserves and dividend planning – in some cases
What to do now
A few practical steps we’re recommending to clients:
- Pull together a full list of leases and licences, including any embedded leases hiding inside service or supply contracts. Under the new rules, “is this a lease?” becomes a more formal test than it used to be.
- Review contracts that generate revenue in bundled, milestone, or variable-fee arrangements, and map them against the five-step model.
- Talk to your bank or other lenders early if covenants are based on figures that are about to move. A conversation now is far easier than an unexpected breach later.
- Decide on your transition approach. There are practical expedients available that can reduce the restatement burden, but they need to be chosen deliberately, not by default.
- Build the new numbers into budgeting and forecasting now, so management accounts and statutory accounts aren’t telling two different stories.
Tax Considerations
Taxable profits will still be calculated from your financial statements, so shifts in when revenue or lease costs are recognised can significantly change the timing of your tax charge which may impact previous tax planning, even where nothing has changed in cash terms. Talk to our tax team now so any transitional impact is planned for rather than discovered when preparing your next tax return.
Final Thoughts
Our best advice is to engage early to mitigate the impact of these changes. For most businesses the underlying economics haven’t changed, only how they’re reported. But the businesses that get ahead of it, reviewing contracts, briefing their finance teams, and talking to their lenders before the numbers move, will have a far easier time than those who wait for their accountants to spring the surprise on them.
We are already working on transition projects with clients across a range of sectors in our Consulting service line and are happy to share what we’re seeing or engage to support you with the changes.
Additionally, in association with Lloyds Banking Group, we are pleased to be hosting an event that will cover these accounting changes as well as provide a broad economic update. For further information and to register your place, visit: Event Details – 16 September 2026
