Major Updates to UK GAAP: Revisions to FRS 102 and FRS 105 Effective 2026

The Financial Reporting Council (FRC) has published substantial amendments to FRS 102 (The Financial Reporting Standard applicable in the UK and Republic of Ireland) and FRS 105 (The Financial Reporting Standard applicable to the Micro-entities Regime). These changes are set to take effect from 1 January 2026, with early adoption permitted for financial statements prepared for accounting periods beginning on or after 1 January 2025 in some cases.

The updates aim to align UK accounting standards more closely with international frameworks (notably IFRS 15 and IFRS 16), while also maintaining proportionality for smaller entities. They focus on improving transparency, comparability, and user relevance of financial statements, especially in areas such as leases, revenue recognition, and supplier finance disclosures.

 

Overview of Key Amendments

 

1. Lease Accounting (FRS 102 Only)

 

In one of the most significant changes to date, FRS 102 will now require most leases to be accounted for on the balance sheet. This brings UK GAAP into closer alignment with IFRS 16.

Under the new model:

 

• Lessees must recognise a right-of-use asset and a lease liability for all leases longer than 12 months (unless the asset is of low value).
• The lease liability will be measured at the present value of future lease payments.
• The right-of-use asset will be depreciated over the lease term.

 

Impact: This change will affect financial ratios and reported net assets, especially in lease-heavy sectors like retail, hospitality, and logistics.

 

2. Revenue Recognition (FRS 102 Only)

 

A single, five-step model for revenue recognition is being introduced, inspired by IFRS 15. The steps are:

 

• Identify the contract with a customer.
• Identify the separate performance obligations.
• Determine the transaction price.
• Allocate the transaction price to the performance obligations.
• Recognise revenue when (or as) the entity satisfies the performance obligations.

 

Impact: Businesses with complex contracts (e.g. staged projects, bundled goods and services, or variable pricing) will need to reassess how and when revenue is recognised. This could lead to timing differences in reported profits.

 

3. Supplier Finance Arrangements (FRS 102 and FRS 105)

 

From 1 January 2025, all entities using supplier finance arrangements (also known as reverse factoring or supply chain finance) must provide new disclosures to help users understand the extent of their use and associated risks.

Disclosures must include:

 

• Key terms of the arrangement.
• The carrying amount of financial liabilities subject to the arrangement.
• The line items where those liabilities are presented in the financial statements.

 

Impact: Entities will need to track and report these arrangements clearly. This change aims to increase visibility over liquidity and working capital strategies, particularly where liabilities may resemble trade creditors but are financed externally.

 

What Does This Mean for Me? – Implications for UK SMEs and Businesses

 

1. Increased Financial Transparency, but with Added Workload

 

For many SMEs, especially those currently off-balance sheet for lease accounting, the new standards introduce significant additional reporting responsibilities. Lease liabilities and right-of-use assets must be calculated, recorded, and disclosed. This will impact debt covenants, gearing ratios, and potentially access to financing.

Revenue recognition changes will require many businesses to revisit how income is booked, especially if they provide bundled services, multi-stage contracts, or customer incentives. Careful implementation is needed to avoid misstatements and unanticipated tax implications.

 

2. System and Process Changes Required

 

Companies will need to invest in updating accounting systems and processes to:

 

• Identify all relevant leases.
• Automate lease and revenue recognition calculations.
• Track performance obligations within contracts.
• Capture and report on supplier finance arrangements.

 

Manual tracking may no longer be sufficient for businesses with even moderately complex arrangements.

 

3. Potential Impacts on Tax Planning and Compliance

 

Although UK GAAP adjustments typically do not directly alter taxable profit (due to separate tax rules and adjustments), they can affect timing differences and perceptions of business performance. Revenue brought forward or deferred under the new framework might not align with tax treatment, requiring adjustments on the tax computation.

Additionally, the new disclosures may prompt closer scrutiny from HMRC, particularly where supplier finance arrangements are used to manage cash flow.

 

4. Training and Staff Development Will Be Critical

 

Finance teams, auditors, and advisers will need to be trained on the new standards. SMEs may find it challenging to interpret and apply the new principles without external support, especially if in-house accounting expertise is limited.

Partnering early with external accountants or investing in updated software and compliance tools will be vital.

 

Conclusion

 

The upcoming changes to FRS 102 and FRS 105 represent the most significant overhaul to UK GAAP since their original introduction. While the goal is to enhance comparability and transparency, particularly for users of financial statements, businesses—especially SMEs—will face a steep learning curve.

Now is the time to assess your accounting policies, review lease and contract structures, and begin planning for implementation. The transition may be complex, but proactive preparation will reduce disruption and ensure compliance when the new rules take effect in 2026.