FRS 102 in 2026: What the Periodic Review Actually Changed

Most of the FRS 102 periodic review amendments apply to accounting periods beginning on or after 1 January 2026. That means they are in force now, and the first sets of accounts prepared under them are being produced this year.

The headline change is that operating leases largely disappear from the notes and appear on the balance sheet. The second is that revenue moves to a five-step model. Both are described below using the Financial Reporting Council's own explanation of the changes, because this is an area where secondary summaries written before 2026 are now describing a standard that no longer applies.

What changed, and when

The FRC published the amendments in March 2024, arising from its second periodic review of UK accounting standards. Most take effect for accounting periods beginning on or after 1 January 2026.

Three structural changes sit at the centre:

• a new Section 20 Leases
• a new Section 23 Revenue from Contracts with Customers
• a new Section 2A Fair Value Measurement

The FRC describes these as proportionate alignment with IFRS 16, IFRS 15 and IFRS 13 respectively, and says plainly that they will have a significant impact on some preparers.

Two earlier changes are already in force and are worth checking if they were missed: new disclosure requirements about supplier finance arrangements, effective 1 January 2025, and new requirements on accounting for uncertain tax treatments.

Leases: the change that moves the balance sheet

Accounting by lessors remains largely unchanged. The change is on the lessee side, and it is substantial.

The distinction between operating and finance leases is removed for lessees. Lessees must recognise right-of-use assets and lease liabilities on the balance sheet for most leases.

For an entity that previously held operating leases, the FRC sets out what the accounts will now show:

• increased assets and increased liabilities
• decreased rental expenses, with increased depreciation and interest expenses
• in the cash flow statement, the principal portion of lease payments reclassified as financing, and the interest portion classified as either operating or financing — where previously the whole operating lease payment sat in operating

The front-loading effect

Operating lease expense used to be recognised on a straight line. Under the new section, interest expense is typically front-loaded. The cash flows are identical, but the profile of the charge is not.

A consequence that catches people out: because of that front-loading, the lease liability will typically exceed the right-of-use asset for much of the life of the lease. Two balances that start equal do not stay equal.

Why this reaches beyond the accounts

The FRC is explicit that key financial metrics may change, naming gearing, interest cover, current ratio and EBITDA. It also raises implications for loan covenant compliance, and notes that in some cases entities may want to renegotiate covenants to reflect the change in accounting.

That is the part worth acting on early. An entity whose covenants are defined by reference to gearing or EBITDA may breach them on paper without anything about the business having changed. That conversation with a lender is better had before the accounts are signed than after.

The two exemptions, and a UK-specific widening

Two recognition exemptions are available. Where taken, the lease stays off balance sheet with accounting similar to the previous operating lease treatment:

• short-term leases, meaning less than 12 months
• leases of low-value assets

There is an important difference from international standards here. The FRC has made the low-value exemption available more widely under FRS 102 than it is under IFRS 16, provided that the most economically significant leases are recognised on balance sheet. Anyone applying IFRS 16 knowledge directly to an FRS 102 entity will understate what can be left off.

Revenue: a single five-step model

Section 23 introduces a single five-step model for recognising all revenue from contracts with customers, recognised when or as control of the promised goods or services transfers to the customer.

Whether a particular entity sees a change in the timing or amount of revenue depends entirely on its business model and its contracts. Some will see no practical difference; others will see a material one.

The FRC notes that there are a number of accommodations to keep the five-step model proportionate for FRS 102 preparers, so it is not simply IFRS 15 rebadged. Those familiar with IFRS 15 will find outcomes more comparable than before, but should not assume the requirements are identical.

Transition, and the comparatives trap

Preparers can choose between a fully retrospective approach, with comparative information restated, and an alternative transition approach.

The FRC flags something that matters for anyone reading a set of accounts this year: not all comparative information will be restated to the new basis. A reader comparing this year against last year may be comparing two different measurement bases, and the transition note is where that is disclosed.

If you are brushing up on how to read a set of accounts in general, our guide to reading and understanding financial statements covers the structure these changes sit inside.

Who this affects

Any entity preparing accounts under FRS 102 — which is the great majority of UK and Irish companies outside the listed sector. Entities with significant property or vehicle leases will see the largest balance sheet movement.

Charities are affected too, since the Charities SORP sits on top of FRS 102, and the accounting thresholds that decide the level of scrutiny changed separately this year — see our guide to the charity accounts thresholds.

For the underlying double entry behind right-of-use assets and lease liabilities, our guide to bookkeeping journal entries covers the mechanics.

What to do now

Three practical steps follow from the above. Identify every lease and establish which qualify for the short-term or low-value exemptions, because that determines the size of the balance sheet movement. Model the effect on gearing, interest cover and EBITDA before the year end, and check those figures against any covenant definitions. And decide the transition approach early, because it determines whether comparatives are restated.

The FRC publishes a suite of FRS Factsheets to help preparers apply the amendments, and those are the right reference for the detail rather than any summary, including this one.