Upcoming Changes to FRS 102 for Revenue Recognition and Leases

Revenue recognition

With effect from accounting periods commencing on or after 1 January 2026, the standard essentially aligns itself with International Financial Reporting Standards (IFRS 15) and brings in the 5-step model to determine revenue recognition.

The model was developed to address inconsistencies and weaknesses in previous revenue standards, particularly regarding the timing and value of revenue recognition.

According to the standard - The objective of the model is for an entity to recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The change can either be adopted (i) "full retrospective" by restating comparative information or (ii) retrospectively with the cumulative adjustment made against opening reserves at initial date of application.

Going forward, entities need to be aware of the five step model so that where practicable, contracts can be drafted appropriately to achieve the desired revenue profile.

Leases

The change for leases is similarly applicable to accounting periods commencing on or after 1 January 2026 and the changes are based on the principles of IFRS 16 Leases. The changes must be applied retrospectively, with the cumulative effect of initially applying the new requirements (recognised as an adjustment to the opening balance of retained earnings) at the date of initial application. The comparative information therefore remains as previously presented, with operating leases off-balance sheet.

The key change is that there is no longer the distinction between operating and finance leases for lessees, with businesses required to recognise a "right of use" asset, which will be brought onto the balance sheet together with the associated liability. This method of accounting is very similar to previous finance lease accounting.

There is, however, an exemption if the lease is short-term or the underlying asset value is of low value. In such cases, lessees are permitted to leave the asset "off balance sheet" and recognise the lease in a similar manner to the current accounting treatment i.e. recognising the expense on the Profit and Loss account over the lease period.

• Short-term leases - "A lease that, at the commencement date, has a lease term of 12 months or less. A lease that contains a purchase option is not a short-term lease."
  This recognition exemption must be applied by class of underlying asset.
• Low value leases are assessed on an absolute basis and are not specifically defined by value, however the standard does include a list of items which are considered NOT to be of low value, some examples are: Cars, vans and similar, cranes, forklifts, production line equipment, and land & buildings. The basis for conclusions for FRS 102 notes that low-value assets can include tablet and personal computers, items of office furniture and telephones (not exhaustive).

For lessors the operating lease and finance lease distinction remain in place and the accounting remains very similar to previous requirements.

Stakeholder impact

Depending on your business there may be a significant impact on revenue presented in the financial statements and a change in certain financial earnings metrics (due to a switch from lease costs to depreciation) where assets are brought on balance sheet. Accordingly, you may want to consider:

• Communicating the impact with stakeholders to manage expectations
• Consideration of debt covenants that may be impacted
• Engaging with Auditors (if applicable) well in advance of the relevant year end
• Managing the impact of any payments linked to revenue e.g. bonuses, commissions, licences based on revenue generated