Changes to FRS 102 are coming soon, effective from 1 January 2026, with early application permitted.

The periodic review introduces updates to a number of areas but this article highlights the main two:

• Revenue accounting is set to become more complicated for many businesses in certain industries such as tech or life sciences, or in businesses with multiple service arrangements.
• Changes to lease accounting for lessees will impact EBITDA and balance sheet ratios.

Private Equity investors and finance teams should plan early, especially where sights are set on investment or exit strategies.

The end of the operating lease model (for lessees)

From 2026, lease accounting in UK GAAP will be closely aligned with IFRS 16 leases, the equivalent international accounting standard. The concept of operating and finance leases will be removed and most leases will be brought onto the balance sheet by recognising a lease liability and a right of use asset. Only limited exemptions for low value or short-term leases apply.

Those who monitor EBITDA closely may see big changes as the metric will increase as rent costs are removed from operating expenses and instead are reflected through a depreciation charge on the asset and a finance cost on the lease liability.

Management teams will need to identify and analyse lease contracts across the business (often a time consuming task) before calculating the balance sheet values both at the start and end of the year.

Revenue changes – introducing the concept of performance obligations

The UK revenue recognition model will be completely replaced from 2026 and many companies will be faced with the challenge of recognising revenue under the new ‘5 step methodology’ as exists under IFRS. In some cases this could significantly effect the timing of revenue recognition.

Put simply, the changes require companies to identify the separate ‘performance obligations’ that they have within their customer contracts, allocate revenue to each separate performance obligation and recognise the revenue based on when the performance obligation is deemed to have been satisfied.

The companies likely to be most effected by the changes will be those with:

• Long term contracts
• Multiple element arrangements
• Variable consideration – amounts receivable under the contract that are not fixed. Examples of these are volume based rebates or awards for early delivery.
• Costs to obtain or fulfil contracts

The RSM UK GAAP series has highlighted the specific impact of the changes to FRS 102 on various industries. Please visit our Bridging the GAAP page if you would like to know more about the issues facing your industry.

What do these two changes to FRS 102 mean?

Stuart Clowser, RSM’s Head of Private Equity notes that ‘The changes to FRS 102 will have a significant impact on the results (both historic and future) of Private Equity backed entities. Early consideration by finance teams, including data collection and initial assessments will be essential to a smooth transition process’.

The key considerations for management and investors will be:

• Earn outs or employee incentive schemes are likely to have growth-based targets with EBITDA as a key measure. Addressing increases or decreases in EBITDA resulting from GAAP changes is key to ensuring that these targets are working as intended.
• Debt covenants could be impacted by the changes to results – early conversations with lenders will help management to plan for the covenant reporting post transition.
• The lease changes are only applied prospectively meaning that in the year of transition, there will be a lack of comparability in the P&L and balance sheet. Directors may wish to highlight this in the directors’ report.
• Businesses have a choice to apply the revenue changes retrospectively – management should consider if restating comparatives would result in a more useful reflection of the entities performance.

If you would like to discuss these changes further, please get in touch with Stuart Clowser, Amelia MacPherson, or your usual RSM contact.