The Amendments to FRS 102[1] bring in significant changes to the reporting standard for both revenue recognition and lease accounting (amongst other incremental changes), which will broadly align these accounting requirements to those of IFRS 15 ‘Revenue from contracts with customers’ (IFRS 15) and IFRS 16 ‘Leases’ (IFRS 16).
From our experience with implementing IFRS 15 and IFRS 16, both for our own business and for numerous clients, we understand the significant impact new accounting standards can have on businesses. Early assessment is crucial, as these changes often necessitate adjustments to internal controls, systems, processes, and the collation of extensive data.
These changes will have significant impacts on items such as Earnings Before Interest Tax Depreciation and Amortisation (EBITDA), net debt, interest cover and other key performance metrics. Businesses will need to consider how these might impact areas such as debt covenant calculations, earn-outs and dividend payments.
This article shares insights from our work with retail businesses, focusing on key accounting challenges, the impact of FRS 102 amendments, and how to navigate them.
Leases
The Amendments are likely to impact any business that is a lessee, i.e. most businesses. Similar to IFRS 16 the distinction for lessees between operating and finance leases will no longer apply, and the majority of leases will be brought on to balance sheet as a right of use (ROU) asset and corresponding lease liability. As with IFRS 16, there are some exemptions, with short-term leases (less than 12 months) and low-value leases (such as mobile phones, computers, and small furniture items) being excluded from the new leasing model. These leasing costs should continue to be expensed as incurred.
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Key Challenges: We have outlined the key challenges faced by our Retail sector clients during IFRS 16 implementation, which will likely impact FRS 102 reporters:
Identification of a lease asset: Retail leases aren’t always straightforward. From airport kiosks to mall concessions, retailers must assess whether they’re leasing a specific, identifiable asset or just capacity. If the lessor has substantive substitution rights, it may not qualify as a lease. Also, non-lease components like utilities and service charges must be separated out—they don’t meet the definition of a lease under Section 20.
Determination of lease payments: Retail leases come in all shapes—fixed rents, turnover-based rents, index-linked rents. Judgement is needed to decide if variable payments are actually in-substance fixed and should be included in lease liabilities. Reinstatement obligations also require careful evaluation.
Lease term: Retail leases often include extension, termination, or rent-free periods. Under the Amendments, you must assess at lease commencement whether you're “reasonably certain” to exercise these options. This affects the lease term—and the size of your lease liability and right-of-use (ROU) asset.
Impairments: right-of-use assets will need to be assessed for impairment, just like other forms of property plant and equipment, in line with FRS 102 Section 27 Impairment of Assets. This is particularly relevant in the retail industry if there are underperforming outlets within the property portfolio.
Applying the portfolio approach: Retailers with many similar leases—like retail chains—can apply a portfolio approach. This simplifies accounting by grouping leases with similar terms, but only if it doesn’t materially differ from how you would have applied the Amendments on a lease-by-lease basis. Judgement will need to be applied to determine if leases are sufficiently similar, e.g. lease term, asset class and lease conditions. You will also need to disclose the basis on which you have made this portfolio assessment in your financial statements.
Lease premiums: These are common within the retail industry – where a lessee pays an upfront sum to secure a lease. Such lease premiums need to be included in the ROU asset on transition and subsequently depreciated over the lease term. These would also need to be disclosed in the financial statements if material.
Subleases: Retailers acting as intermediate lessors must account for the head lease and sublease separately. Depending on the structure, part of the ROU asset may be derecognised and replaced with a lease receivable. The obligation to the head lessor remains unchanged.
Systems and software implementation: Companies may need to update or modify accounting systems and software to comply with new lease accounting standards and handle a large portfolio of leases. This includes functionalities for calculating and reporting lease-related figures.
Revenue
Under the revised FRS 102 Section 23, businesses must follow a five-step model aligned with IFRS 15 for revenue recognition:
- Identify a contract with a customer
- Identify performance obligations within the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognise revenue when or as the entity satisfies the performance obligations
A major difference between existing accounting under current FRS 102 and the amendments is the emphasis on identifying performance obligations (aligned with IFRS 15) within customer contracts and allocating the transaction price to each obligation. Revenue must now be allocated to distinct performance obligations based on their standalone selling prices. This may cause significant changes in revenue recognition patterns and require additional systems and processes.
The focus has also shifted from transferring risks and rewards of ownership to the notion of ‘control’ of goods or services passing to the customer. The requirements are more customer-centric, focusing on what customers expect to receive under the contract.
Key challenges: We have identified several significant challenges that we assisted our retail clients with during their IFRS 15 implementation. These challenges will likely also affect FRS 102 reporters upon adopting the Amendments:
Multiple-element arrangements: Retailers often bundle products with services—like delivery, installation, or after-sales support. Under updated revenue recognition rules, these must be unbundled into distinct performance obligations, each with its own revenue recognition pattern and value.
You’ll need to assess whether each component is ‘distinct’—meaning it provides value on its own and is separately identifiable in the contract. For example, furniture and electronics retailers who also offer delivery and installation must now allocate the total contract price across each element. Similarly, annual maintenance services for things like air conditioning or heating equipment will require revenue to be split—product revenue on delivery, service revenue over time.
This shift has pushed many large retailers to revamp their systems to track revenue more precisely—and in some cases, even rethink how they structure customer contracts.
Customer loyalty programmes: Loyalty rewards—like free coffees, discount vouchers, or future purchase perks—may seem simple, but they can trigger complex accounting. If these rewards give customers a material right, they must be treated as a separate performance obligation, requiring part of the revenue to be deferred.
Under IFRS 15, we’ve seen retailers forced to delay revenue recognition, sometimes significantly. This has had real-world consequences—affecting bonus pools, dividend declarations, and even breaching bank covenants. It is critical to evaluate loyalty schemes upfront and build systems that can track and allocate revenue accurately.
Warranties: Retailers often offer warranties—but not all are treated the same. A service-type warranty (sold separately or covering defects beyond normal use) is a separate performance obligation, meaning part of the revenue must be deferred. An assurance-type warranty, on the other hand, simply guarantees the product meets agreed specs and is accounted for as a provision.
Determining the type requires significant judgement, and the accounting impact can be material. Similarly, rights of return may create a stand-ready obligation, requiring careful evaluation and potential revenue deferral.
Internet sales/ e-commerce: Whether retailers deliver directly, use third-party couriers, or offer in-store pickup, the timing of revenue recognition hinges on when control transfers to the customer. Getting this wrong can misstate revenue.
The principal vs agent assessment is now more nuanced—bearing credit risk is no longer a deciding factor. Recent amendments echo IFRS 15 changes, which led some retailers to shift from gross to net revenue reporting, recognising they were acting as agents in the supply chain.
It’s important to review delivery arrangements and contract structures carefully, as they can significantly influence revenue recognition outcomes.
Disclosure requirements
Across the Amendments, there are additional disclosure requirements, which businesses will need to ensure they can accurately capture at the reporting date, to comply with these Amendments.
How can we help?
To tackle the amendments to FRS 102, start with a clear, actionable timetable. Prioritise key steps: complete an impact assessment, allocate resources, upskill your team, engage stakeholders, gather data, and calculate adjustments—so you stay ahead of reporting deadlines.
We're here to assist you at every stage, from planning and implementation to integrating changes into your routine operations and financial reports.
For more information, please read our article on the Changes to FRS 102 announced - What do I need to know? | Grant Thornton, or contact our experts.
[1] On 27 March 2024, the Financial Reporting Council (FRC) released “The Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs – Periodic Review 2024” which implemented amendments to FRS 102 (the Amendments to FRS 102). These are effective for periods beginning on or after 1 January 2026, with early adoption permitted.
