Amendments to FRS 102 – Is early adoption right for my business?

The Financial Reporting Council (FRC) introduced amendments to FRS 102 as part of its second periodic review, with changes taking effect for accounting periods beginning on or after 1 January 2026. However, businesses have the option to early adopt these amendments, provided all changes are applied at the same time.

With updates to lease accounting and revenue recognition—aligning FRS 102 more closely with international standards—these changes will have a notable impact on financial reporting and Key Performance Indicators (“KPIs”).

This article explores whether early adoption is the right choice for your business. We’ll outline the key amendments, assess their impact, and highlight the potential advantages of implementing them ahead of the mandatory deadline.

Summary of Key Changes

The amendments to FRS 102 introduce significant updates to financial reporting, particularly in the areas of lease accounting and revenue recognition. The two key changes are:

• Lease accounting – A new model of accounting for operating leases based on the on-balance sheet model from IFRS 16 Leases. This means that all leases are brought onto the balance sheet as right-of-use (“ROU”) assets and corresponding lease liabilities are recognised. There are exemptions for short-term leases (less than one year) and where the underlying asset is of low value.
• Revenue recognition – A new model of revenue recognition based on the five-step model for revenue recognition from IFRS 15 Revenue from Contracts with Customers, with appropriate simplifications. This may impact businesses with long-term contracts, variable consideration, or bundled goods and services.
  It is important to note that businesses cannot selectively early adopt certain amendments while delaying others. If you choose to early adopt, you must apply all the amendments to FRS 102 at the same time.

It is important to note that businesses cannot selectively early adopt certain amendments while delaying others. If you choose to early adopt, you must apply all the amendments to FRS 102 at the same time.

Impact of the Changes for Businesses

The amendments to FRS 102 could have a significant impact on financial reporting and KPIs which in turn, could impact on covenants and earn-out agreements. Some of the main areas affected include:

• The new lease accounting model will increase reported assets and liabilities, increasing debt ratios.
• EBITDA is likely to improve as lease expenses move from operating costs to depreciation and finance costs.
• The new revenue recognition model may change the timing of revenue recognition, particularly for businesses with long-term contracts, performance-based payments, or multiple deliverables.
• Changes in financial metrics may affect loan covenants, particularly those linked to EBITDA or debt levels. Businesses with existing lending arrangements should discuss potential impacts with their banks and lenders.
• Earn-out agreements based on revenue or profit targets may need to be reassessed to ensure they still reflect the intended financial performance measures.
• The increase in gross asset values due to the recognition of right-of-use assets under the new lease accounting model may push some businesses over company size thresholds. In some cases, this could result in companies becoming subject to audit where they were previously exempt. However, it is worth noting that the company size thresholds are set to increase for accounting periods beginning on or after 6 April 2025.

Advantages of Early Adoption

Early adoption of the amendments to FRS 102 may offer several benefits for businesses.

• Implementing changes ahead of the mandatory deadline gives businesses time to resolve issues before they become critical.
• Businesses that rely on external financing can proactively discuss changes with lenders and renegotiate covenants if needed.
• Companies can educate investors, shareholders, and management early, ensuring financial performance is interpreted correctly.
•  Businesses operating internationally or within sectors already aligned with IFRS may benefit from adopting changes sooner to ensure consistency across reporting frameworks.

While early adoption may not be right for every business, those with significant lease portfolios, complex revenue models, or strict financial covenants should consider whether transitioning ahead of the deadline would be beneficial.

Whether you choose to early adopt or wait until the mandatory deadline, preparation is key to a smooth transition. If you need help preparing for the changes, get in touch with our friendly experts. We can help you assess the impact, implement the necessary changes, and ensure a seamless transition.