Changes to UK GAAP – how they might affect your business

The upcoming changes to FRS 102 (The Financial Reporting Standard applicable in the UK and Republic of Ireland) come into effect on 1 January 2026. With less than a year to go, businesses should start thinking about how to help prepare for these changes.

What are the key changes?

• The introduction of the five-step model for revenue recognition (FRS 102 Section 23)
• The introduction of on balance sheet accounting for leases as a lessee (FRS 102 Section 20)

Depending on the terms within customer contracts, businesses might find the timing of their revenue recognition changes, perhaps resulting in more or less revenue being recognised in the period in which they transition. With the concept of contract assets and contract liability being more explicit under the upcoming revised revenue standard, companies might also find themselves recording additional assets and liabilities depending on the satisfaction of their performance obligations.

For lessees, the amendments require the recognition of a right-of-use asset (ROU) and a lease liability for most lease arrangements, so businesses should expect an increase in their reported assets and liabilities on the balance sheet. What the lessees commonly refer to as an operating lease expense (rent expense) will now be replaced by the depreciation of the ROU asset and a finance change from lease liabilities in the profit and loss. Again, there are timing and measurement differences, the rent expense cashflow is unlikely to match the depreciation and finance charge recognised in the profit and loss.

Impact assessment

It’s important to be prepared for these changes so a comprehensive analysis should be conducted to determine how the financial statements will be impacted by these amendments.

Revenue and leases typically originate from contracts with third parties. We recommend that companies start collating and reviewing all relevant contracts to evaluate the financial reporting implication for each. It might be possible to assess similar contracts together, for example if a business has standard terms and conditions for all sales contracts for a particular revenue stream, it’s likely that the same basis of revenue recognition would be applied to these.

It may also be helpful to consider whether any amendments are needed to clarify terms and conditions within contracts to help with compliance.

Reporting metrics

The UK GAAP amendments are expected to have broader implications beyond just bringing leases onto the balance sheet. Businesses must evaluate how these changes will impact key financial metrics such as EBITDA, profit margins, and net debt. These metrics are not only important for internal reporting but also for various other internal or external arrangements that utilise this information.

Businesses with loans linked to metrics like EBITDA or gearing ratios will need to consider how these financial reporting changes will impact compliance, any covenants or other key terms within the agreement. Where breaches or unforeseen consequences may occur due to changes on the balance sheet, businesses will need to actively engage with lenders to ensure that terms are renegotiated ahead of the effective date. For example, EBITDA may increase under the revised FRS 102 lease accounting rules, as operating lease expenses will be replaced by depreciation and interest charges, which are excluded from EBITDA calculations.

Companies may also want to revisit the terms of any financial performance linked bonus schemes, profit sharing plans or share option schemes for employees or directors to ensure that these are amended as needed. This will be especially important for businesses where the basis for recognising revenue is expected to change or those holding longer leases which will result in higher finance costs being recognised in the income statement.

For businesses that have acquired other entities with some degree of contingent consideration, for example earn out clauses linked to revenue or profit, forming part of the compensation, the UK GAAP amendments may impact the amount or timing of these payments. It will be crucial to revisit current and historic acquisitions to ensure that any consideration that may become payable is factored into future forecasts.

Leases

For businesses with lots of leases or complex lease arrangements, the upcoming UK GAAP changes might mean that specialised lease accounting software or help from an expert is required. Using lease software can simplify the process, reduce mistakes, and give better insights into lease portfolios.

For those with fewer or less complex lease arrangements, it may be possible to undertake the lease calculations using internally prepared spreadsheets. Ensuring accuracy and establishing a robust internal control process will be important.

It will also be helpful to consider the discount rate methodology and how the company will obtain this information to undertake their lease calculations.

Considering the recent change in company size threshold

The UK GAAP amendments should also be considered in conjunction with the revisions to the company size threshold which are effective for accounting periods commencing on or after 6 April 2025.

More companies will be able to take advantage of reporting under FRS 105 as they become eligible for the micro-entities regime; the lease amendments noted above are not applicable to FRS 105 reporters and there are simplifications to the revenue reporting requirements.

In addition, the changes to revenue and lease accounting are likely to affect two of the metrics when determining company size, turnover and total assets so businesses should be mindful of this when considering the impact of the changes to the company size thresholds.

How we can help

If you’d like to discuss any of the points raised or how the UK GAAP amendments are likely to affect your business, please get in touch with Anna Hicks.