The UK’s financial reporting landscape is about to undergo significant change. The Financial Reporting Council (FRC) has issued substantial amendments to the Financial Reporting Standard (FRS) 102, the core standard underpinning UK Generally Accepted Accounting Practice (UK GAAP). These changes, particularly in the areas of revenue recognition and leases, is designed to enhance transparency and align UK GAAP more closely with International Financial Reporting Standards (IFRS). These changes will take effect for accounting periods beginning on or after 1 January 2026, so professional services firms need to understand the impact of these new rules ahead of the 2026 financial year.

What do the UK GAAP changes mean for professional services firms?

There are various changes to UK GAAP, however, there are two headline changes:

• A new, more prescriptive five-step model for revenue recognition, based on IFRS 15.
• A new ‘on balance sheet’ lease accounting model, based on IFRS 16, which brings most leases onto the balance sheet.

These changes could significantly impact the presentation of accounts and timing of profits so it’s key to understand how to navigate the new rules.

Revenue recognition

Professional services firms, such as legal, consulting and accountancy practices, typically operate with complex, multi-phase contracts. While the change to revenue recognition may not have a significant impact overall, the new five-step revenue recognition model requires firms to identify and allocate revenue to distinct performance obligations within each contract.

This new five-step model means that firms will now need to focus on:

• Correctly identifying performance obligations within each contract.
• Ensuring that engagement terms support the right to be paid, even in the event the contract is cancelled.

Professional services contracts often include variable consideration, milestones and ongoing deliverables, requiring careful analysis and potentially changing the timing and amount of revenue recognised. Enhanced disclosure requirements will mean firms need to provide more detail about performance obligations and significant judgements made in revenue recognition.

Lease accounting

The new ‘on balance sheet’ lease accounting model will bring most leases onto the balance sheet as both a right-of-use asset and a corresponding lease liability. This includes operating leases, but excludes leases of low value or short-term leases.

This will have potential consequences that professional services firms need to be aware of:

• Impact on profit: changes in recognition and measurement may influence taxable profits as well as the timing of tax payments, impacting the profits available for distribution to shareholders or partners. This consideration is especially relevant for LLPs with multi-generational partners, particularly when lease renewals occur.
• Increased gross assets: professional services firms usually lease out office space and with leases coming on balance sheet the gross assets of the firm are likely to increase, pushing some firms above the audit threshold.
• Contractual arrangements: as bringing leases onto the balance sheet increases balance sheet liabilities and affects profitability, contractual arrangements, such as lending covenants, are likely to be impacted.

Understanding how these arrangements will impact your business will help to facilitate informed discussions with stakeholders.

Systems and process upgrades

Due to the complexity of contracts and leases, professional services firms are more likely to need upgrades to their accounting systems and processes to comply with the new requirements. This includes the ability to track performance obligations, allocate revenue and manage lease data in detail.

Relying on spreadsheets or outdated software, can increase the risk of errors in revenue allocation, lease calculations and disclosure, especially as contract volumes and complexity grow. A lack of training for finance, commercial and client-facing teams can result in inconsistent application of the new rules, missed deadlines and increased audit findings.

What should professional services firms be doing to prepare for the UK GAAP changes?

Start planning for the changes now by:

• Conducting a comprehensive review of all client contracts, particularly those involving milestones or where there is a contingent fee or damages-based agreement, ensuring that engagement terms support the right to be paid. Business terms and engagement letters may need to be updated, which could be a time-consuming process.
• Assessing the impact of current lease arrangements on profits, assets and contractual commitments.
• Ensuring accounting systems can handle the new requirements and that your finance team is aware of the practical implications.

Early planning will help avoid surprises and ensure a smooth transition and RSM’s team of accounting and financial reporting experts is ready to support your firm through these changes. For more insights and practical guidance, visit our Bridging the GAAP hub or contact Philippa Carter or your usual RSM contact to discuss how we can help your firm prepare for the new UK GAAP.

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