On 27 March 2024 The Financial Reporting Council published Amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland – Periodic review 2024 (FRS 102). Pinkesh Patel and Jennifer Ilsley describe these changes and what they mean for companies.

The effective date of these amendments is 1 January 2026 with early adoption permitted. The two significant changes see a new five-step model for revenue recognition more closely aligned with IFRS 15 Revenue from Contracts with Customers (IFRS 15) and alignment with IFRS 16 Leases (IFRS 16) with certain practical expedients. 

Changes proposed to revenue recognition and leases

Under the proposed amendments, there are significant changes to revenue recognition and leases to align FRS 102 with International Financial Reporting Standards (IFRS).

The new FRS 102 Section 23 for revenue recognition will introduce a five-step revenue recognition model aligned with IFRS 15, potentially altering how revenue is recognised. There are some simplifications compared to IFRS 15 regarding the treatment of costs to obtain a contract, treatment of licence revenues, principal vs agent considerations, application of a portfolio to a group of similar contracts as well as the treatment of discounts and contract modifications.

Under the new FRS 102 Section 20, almost all lessees will need to include leases on their balance sheets, recognising a right-of-use (ROU) asset and a corresponding lease liability. The ROU asset is based on the present value of the lease liability and certain adjustments, while the liability should be discounted using a simplified methodology to IFRS 16 which could involve the use of a gilt rate. These changes replace the operating lease expense with depreciation on the ROU asset and a finance charge on the lease liability.

These changes will likely impact the calculation of earnings before interest, depreciation, taxes, and amortisation (EBITDA) and other key performance indicators, which means there could be consequences for: 

  • the value of earn-outs paid on deals
  • the amount to be paid under employee incentive schemes
  • compliance with debt covenants
  •  whether a company falls within the scope of statutory audit.
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What does this mean for companies?

Satisfying the new standards typically means companies may need to invest in updated data collection, assessing system capabilities and processes, and revisit management reporting and forecasting formats to meet these requirements. This could represent a considerable operational and financial commitment. Additionally, companies will need to train and enhance the skills of their accounting and finance teams to ensure a seamless transition and continued compliance with the proposed changes. 

Although the proposed effective date is 1 January 2026, it is crucial for businesses to commence their strategic preparations now to best prepare for the transition and understand how the changes will impact them. It is important to take a proactive stance and avoid delaying the preparation process. 

Companies should carefully evaluate the potential impact of the proposed changes on their financial statements, systems, and processes. This includes planning for effective communication with stakeholders such as investors, lenders, and employees, to provide clarity and transparency around any changes to financial metrics or tax position. 


For more insight and guidance, get in touch with Jennifer Ilsley and Pinkesh Patel.