From 1 January 2026, FRS 102 is changing for most UK entities – and SME directors cannot leave this to the auditors at year end. The Financial Reporting Council’s Periodic Review 2024 brings in a new, IFRS-style model for revenue, on-balance sheet lease accounting, updated financial instruments guidance and enhanced narrative disclosures, including climate and going concern.
This matters for a large slice of the UK business base. As of March 2025 there were 2.73 million VAT or PAYE-registered businesses in the UK, a slight increase on the previous year, according to the Office for National Statistics (ONS, 2025). Many of these will be reporting under FRS 102 or Section 1A.
At the same time, the main rate of corporation tax remains at 25% for profits above £250,000, with a 19% small profits rate for companies with profits of £50,000 or less. HMRC’s corporation tax rates and allowances confirm that this structure continues into 2025/26. With modest growth of around 1.5% a year forecast in the OBR’s November 2025 economic and fiscal outlook (OBR, 2025), lenders and investors are paying closer attention to reported performance and resilience.
Against that backdrop, FRS 102 is changing in ways that will affect headline profit, EBITDA, covenants, distributable reserves and cashflow projections. SME boards should be treating this as a live project for 2025 – not a disclosure tidy-up in 2027 accounts.
What the new FRS 102 rules cover
The FRC completed its second periodic review of FRS 102 in March 2024, with most amendments effective for periods beginning on or after 1 January 2026. Updated FRS 102 factsheets explain the changes and how to apply them (FRC, 2024–25).
Key themes include:
- Revenue recognition: A new five-step model based on IFRS 15, but simplified for UK GAAP. Entities will need to identify performance obligations, determine transaction prices, allocate those prices and recognise revenue as obligations are satisfied.
- Leases: Most lessee leases move on to the balance sheet, recognising a right-of-use asset and lease liability, broadly aligned to IFRS 16 with some simplifications. Operating lease expense will be replaced by depreciation and interest, affecting EBITDA and leverage metrics.
- Financial instruments and other areas: There are changes to fair value measurement, uncertain tax positions, business combinations and the conceptual framework, with knock-on effects for recognition and disclosure.
- Supplier finance arrangements: Disclosure requirements for supplier finance apply from accounting periods beginning on or after 1 January 2025, ahead of the wider FRS 102 changes.
For small entities using Section 1A, the simplified framework is still available, but the disclosure burden will increase in several areas.
If your finance team has not yet produced an impact assessment, this is the first step. We can support you with a structured review of contracts, leases and disclosures as part of our annual accounts and advisory services.
How FRS 102 is changing revenue and leases
The most visible change for many SMEs will be how FRS 102 is changing revenue and leases. Both areas go to the heart of reported performance.
Revenue in practice
Under the revised Section 23, revenue recognition follows a five-step, control-based model. For a software business selling licences with implementation and ongoing support, for example, this may mean:
- Separating implementation, licence and support into distinct performance obligations.
- Recognising some revenue over time rather than on delivery.
- Deferring variable consideration such as usage-based fees until it is highly probable that they will not reverse.
This can move revenue between periods, affecting bonus schemes, debt covenants and dividend decisions.
Leases on the balance sheet
New Section 20 brings most lessee leases onto the balance sheet. A typical multi-site retailer might see:
- Recognition of right-of-use assets for shops, warehouses and vehicle fleets.
- Higher EBITDA, because lease payments are split between depreciation and interest.
- Higher reported debt from lease liabilities, which may tighten leverage ratios.
Directors should understand how these changes interact with banking covenants, management incentive plans and any earn-out structures. If you have complex lease portfolios, it may be worth investing in specialist software rather than relying on spreadsheets.
What SME directors must update before January 2026
FRS 102 is changing from the first day of the first period beginning on or after 1 January 2026, even though the first set of updated financial statements may not be filed until 2027. That leaves limited time for SME boards to prepare.
Key actions for directors include:
- Impact assessment: Map where FRS 102 is changing your numbers, focusing on revenue streams, lease portfolios, supplier finance and key estimates.
- Contract review: Identify material customer contracts with bundled goods or services, variable consideration, warranties or options, and assess how the new revenue model will apply.
- Lease inventory: Compile a complete, accurate list of leases with key terms, options and renewal patterns, and decide how you will capture and maintain this data.
- Systems and processes: Check whether your accounting system can handle right-of-use assets, lease liabilities and the revised revenue disclosures – or whether configuration or add-ons are needed.
- Covenants and remuneration: Review bank covenants, shareholder agreements and bonus targets that rely on EBITDA, net debt or distributable reserves, and agree any resets with stakeholders.
- Board reporting: Update management accounts and KPIs so directors see the revised metrics before they hit the statutory accounts.
We recommend treating this like any other change project – with a clear sponsor, timetable and ownership in finance. If internal capacity is limited, we can work alongside your team to deliver the technical work while you retain control of key judgements, drawing on our FRS 102 and business advisory support.
Small entity and climate disclosures under FRS 102
Many SME directors assume that using Section 1A means minimal disclosure change. That is no longer the case. The ICAEW’s guidance on Section 1A confirms that the Periodic Review 2024 amendments expand related party, lease, revenue and tax disclosures even for small entities.
Alongside this, the FRC has updated FRS 102 Factsheet 8 – Climate-related matters to clarify how climate issues can affect recognition, measurement and disclosure, including:
- Impairment of assets where climate policies shorten useful lives.
- Provisions where there are constructive or legal obligations to decarbonise.
- Going concern assessments where climate or transition risks are material.
Even if your business is not a heavy emitter, lenders and customers may expect clearer disclosure of how climate risks and net zero plans interact with your financial statements.
Companies House also continues to expect timely, compliant filings. Its guidance on filing your Companies House accounts sets out the legal requirements and deadlines. Late or incorrect filings can attract penalties and, in the worst case, threaten the company’s standing.
Bringing these strands together – small entity reporting, climate narrative and FRS 102 measurement changes – will require closer coordination between finance, legal, risk and operational teams.
Putting a plan in place – FRS 102 is changing
FRS 102 is changing against a backdrop of higher tax rates and subdued growth, with the OBR expecting real GDP to grow by around 1.5% a year over the medium term. In this environment, clean, transparent financial reporting is not a “nice to have” – it is a foundation for maintaining credit lines, attracting investment and supporting informed board decisions.
For SME directors, the main risks are not technical – they are practical:
- Misstated revenue and profit because contracts and leases were not analysed early enough.
- Breach of banking covenants when lease liabilities move onto the balance sheet.
- Confusing messages to shareholders, staff and other stakeholders when KPIs shift.
A structured response will typically include an impact assessment, a contract and lease review, system changes where needed, and updated board reporting. Once that framework is in place, your year-end process should run more smoothly and you will be better placed to explain the new numbers to lenders and investors.
FRS 102 is changing, but with the right support it does not need to disrupt your business. If you would like help planning and implementing the changes – from revenue and lease impact assessments through to revised disclosures and board training – please get in touch with us to discuss how our accounting and advisory services can support you with FRS 102 changes.