The landscape of financial reporting for UK recruitment businesses is set to change significantly with the upcoming amendments to the UK Generally Accepted Accounting Practice (GAAP). These changes, particularly in the areas of revenue recognition and leases, will take effect for accounting periods starting on or after 1 January 2026. As recruitment businesses prepare for these changes, it is crucial to understand the implications and potential consequences of the new rules, and how to navigate them effectively.

Understanding the key changes in UK GAAP for recruitment firms

Within the various changes to UK GAAP, there are two headline updates:

• A new lease accounting model that brings most leases onto the balance sheet.
• A five-step model for revenue recognition.

These changes could significantly impact the presentation of your accounts, the timing of profits and, if you are a small company, might even impact whether your business can still qualify for the small company provisions.

Potential consequences of UK GAAP changes on lease accounting

The changes aim to enhance transparency and align UK GAAP more closely with International Financial Reporting Standards (IFRS). It also brings about some potential consequences that recruitment businesses need to be aware of.

• Increased gross assets: recruitment businesses often lease out office space and with leases coming on balance sheet, the gross assets of the company are likely to increase. As an example, a new five-year lease with annual rent of £150,000 and an obtainable borrowing rate of 6.5% would result in a right-of-use asset of nearly £640,000 being recognised on the balance sheet in year one, with a corresponding lease liability. This increase in gross assets is important because it could push some businesses over the threshold for small company status, which would require them to be audited. It is key for businesses to monitor the headroom available against the company size thresholds and understand how new lease agreements (or extensions) might impact this.
• Impact on profit: while pre-tax cashflow is unlikely to be affected, the recognition and measurement changes could affect profits chargeable to taxation, and hence the amount and timing of tax payments, as well as the profits available for distribution as dividends to a director/shareholder. The charge to profit and loss would be higher at the start of the lease and reduce over time. For recruitment businesses, this potentially lower profitability could also impact the ability to award performance-related bonuses to their consultants.
• Contractual arrangements: with leases increasing balance sheet liabilities and the potential impact of the changes on profits, it is important to identify and assess any contractual arrangements impacted by figures in the annual accounts, such as lending covenants and employee pay.

Understanding how these arrangements will be affected will help facilitate informed discussions with lenders, employees, customers, suppliers and other parties that may use your accounts.

How the new UK GAAP will change revenue recognition in recruitment

One of the most notable changes is the introduction of a new five-step model for revenue recognition, aligning FRS 102 closely with IFRS 15. Some key considerations for recruitment businesses include:

• Contingent permanent fees: there is currently variation in practice, with some recruiters using the start date as the revenue recognition point, while others use the placement date. Under the new model, you will have to follow the five steps, so knowing what is specified in the contract terms will be essential in determining when the revenue can be recognised.
• Retained search: under the current practice, revenue is recognised in line with key milestones. It is likely to be similar under the new model, but you will need to review contractual arrangements to identify performance obligations and how they are delivered so you can determine when revenue should be recognised. These changes emphasise the importance of clearly defined contractual terms and the need for recruitment businesses to align their revenue recognition practices accordingly.

Preparing for the changes: what recruitment businesses should do now

The changes to revenue and lease accounting are significant, and it is important that management starts to assess the impact of these changes now to ensure they are ready for the first reporting period to which the changes apply. As a practical starting point, you might wish to identify the different types of customer contracts you currently have in place and understand key terms of your lease arrangements.

By taking these steps, recruitment businesses can stay ahead of the changes, remain compliant and build a solid foundation for future success in their financial reporting.

How we can help your recruitment business

Our team of accounting and financial reporting experts understand the challenges that come with adapting to new financial reporting standards. Assessing the potential impact early and being ready for the changes is key, and our experts are here to support you throughout the transition.

Our Bridging the GAAP guide contains our latest insights and guidance on the UK GAAP changes.

Please get in touch with Philippa Carter or your usual RSM contact to discuss how we can help your recruitment business prepare for the changes to UK GAAP.

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