Many owner managers are aware that changes to FRS 102 are coming. Fewer know what those changes will actually do to their numbers, and almost none have started preparing.
That gap between awareness and action is where problems tend to develop.
The amendments take effect for accounting periods beginning on or after 1 January 2026. For owner-managed businesses, the effect goes well beyond the annual accounts. Your reported profit, your balance sheet, your conversations with lenders - all of these may look different, without anything changing in how you run the business.
Although much of the discussion around FRS 102 has focused on larger organisations, owner-managed businesses need to consider the implications too. The areas highlighted below are some of the most common issues we’re discussing with clients and, for many owner-managed businesses, are likely to be where the impact is felt most clearly. Without dedicated finance teams or more sophisticated accounting functions, understanding the practical consequences of these changes can be challenging.
Lease accounting: the same business, different numbers
Most leases will now sit on your balance sheet. Property, equipment, vehicles, if you lease rather than own them, those lease commitments will be much more visible in your accounts.
Under the amended rules:
- a right-of-use asset and a lease liability are both recognised on the balance sheet
- the asset is depreciated over the lease term
- interest is charged to your profit and loss account
- your cash payments stay the same, but reported net debt increases
The cash leaving your business does not change. What changes is how your financial position looks to anyone reading your accounts - your bank, a prospective investor, a potential acquirer.
ABC Engineering Ltd: what the numbers look like
ABC Engineering leases its factory and several pieces of production equipment. Under previous FRS 102 requirements, annual lease payments of £250,000 were recognised as an operating expense in the profit and loss account. Under the amended standard, those leases are recognised on the balance sheet.
The practical impact:
- A lease liability of around £1.3 million is recognised on the balance sheet
- A right-of-use asset of around £1.3 million is recognised within fixed assets
- EBITDA increases, as lease costs are replaced by depreciation and interest
- Profit in the early years of a lease may reduce, as interest charges are typically higher at the start of the lease term
- Gearing and leverage ratios may increase, potentially affecting banking covenants or lending discussions
Importantly, nothing has changed operationally. ABC Engineering is paying the same lease rentals for the same assets and generating the same cash flows. However, the business may appear to have a higher level of reported debt in its financial statements, which could influence how lenders, investors and other stakeholders assess the company.
The new lease accounting rules may make your business look more indebted on paper, even though nothing has changed operationally or commercially. If you have bank covenants or other financing arrangements linked to reported debt or gearing, now is the time to understand the impact and discuss it with your lender. Likewise, if you are negotiating new property or equipment leases, the terms you agree today could affect your reported financial position from 2026 onwards.
Revenue recognition: why reported profit may change
The revised revenue model requires more judgement about timing. This is most relevant for businesses with contracts that bundle products and services, pricing tied to milestones or performance, or projects delivered over time.
Under the new rules, income may be recognised earlier or later than it is today, even where contract terms and cash receipts are identical.
A straightforward example: a business selling a software license with a maintenance contract attached may find that income it currently books at the point of sale needs instead to be spread across the contract period. Reported profit changes. Performance against budget shifts. The figures you show your bank look different. None of that reflects a change in the underlying business.
Identifying which contracts are affected is the right first step. Doing it now, rather than at year-end, gives you time to respond rather than scramble.
Reported profit and reserves: broader than the bottom line
The combined effect of these changes has consequences that go beyond the accounts themselves:
- lease costs split between depreciation and interest alter your reported EBITDA
- income recognised at a different point changes reported profit, even if cash flows are identical
- reserves available for dividends may be affected
- incentive arrangements tied to profit targets may need revisiting
- banking covenant headroom may reduce
There is also a change that catches many owner managers off guard: new disclosure requirements for related party transactions. If you are a small entity, you may now need to disclose all material related party transactions and their terms, including director loans. This is not a minor footnote. It is worth a conversation with your advisor now, before the accounts are being prepared and time is short.
A readiness check: questions worth asking now
You do not need all the answers today. But these questions will tell you quickly where to focus:
- Do you have a complete list of all your leases, including key terms such as length, break clauses and payment profile?
- Have you reviewed contracts for embedded leases? For example, a supply agreement that gives you the right to use a specific asset?
- Are your revenue arrangements clearly documented, particularly where contracts include multiple elements or milestone payments?
- Do your budgets and forecasts reflect the new accounting treatment? If not, targets may look misleading after the transition.
- Can your systems produce the disclosures the new rules require?
- Have you assessed the impact on your corporation tax position? Timing differences created by the new rules can affect when tax falls due.
- Could higher asset values from lease recognition push you above the thresholds for small company status, and trigger a statutory audit obligation you do not currently have?
Where your reported numbers will change materially, talk to your lenders early. A conversation before the numbers shift is far easier than one after.
The cost of waiting
Businesses don’t usually struggle here because the rules are hard. They struggle because they leave it too late - they reach year-end, realise the information they needed was never captured, and end up doing the whole implementation under pressure, at exactly the wrong moment.
Get started now and you buy yourself time to do this properly. Work through what it means for your key metrics, check your covenants, update your processes, and get your lenders briefed before the numbers in your accounts change.
We work with owner-managed businesses to assess the impact of these amendments, model where reported results will change and put practical implementation plans in place before the pressure is on.
For a discussion about what this means for your business, including practical steps to prepare for implementation, contact the Accounting Services team.
