With the new FRS 102 requirements becoming effective for accounting periods on or after 1 January 2026 and impacting several areas of financial reporting for companies, planning is vital. The major changes are set out below.
Leases
A new model for lease accounting will be introduced aligning with the process used by international accounting standards. Operating leases will now recognise both a right-of-use asset and a corresponding lease liability on the balance sheet.
The leased asset and operating lease commitments will be recognised with the initial amounts being based on net present value of total lease payments. The asset is depreciated over its useful life in the same way as other tangible fixed assets with an interest charge reflecting the unwinding of that net present value calculation.
There are minor exemptions for low value assets and short-term leases and the new requirements do not affect those micro-entities that prepare financial statements under the FRS 105 Financial Reporting Standard applicable to the Micro-entities Regime.
Revenue Recognition
UK and international standards will be further aligned with a new revenue recognition model and this applies to both FRS 102 and FRS 105. This impacts long-term contracts through a five-step framework for recognising revenue from contracts:
- Identification of the contract with a customer
- Identification of the performance obligations in the contract
- Determine the transaction price
- Allocation of the transaction price to the performance obligations
- Recognise revenue when (or as) the entity satisfies a performance obligation
Every business should consider the potential effects of the changes outlined above. These could include:
- Loan Covenants: compliance with loan covenants and finance negotiations may be impacted. EBITDA may be positively impacted.
- Implications for annual profits will have effects for bonus payments and share schemes as well as dividend payments.
- Systems and processes may need to be updated.
In preparation, businesses should review their policies to ensure they meet the new requirements and plan system changes and processes accordingly. Those businesses impacted by changes in revenue recognition and lease accounting must ensure they collect the financial data required from the beginning of the first accounting period where it is effective. It should be noted that the transition will not require comparative figures to be restated.
To discuss any aspect, please contact Eimear Brown, Head of Audit E: eimearbrown@bakertillymm.co.uk T: 028 9032 3466.