FRS 102 and FRS 105 changes: What do I need to know?

The Financial Reporting Council’s (FRC) periodic review of the standards in 2024 brought significant updates that could impact how entities prepare their accounts from 1st January 2026.

In addition, the LLP SORP 2026 provides guidance for Limited Liability Partnerships (LLPs) that prepare their accounts under FRS 102 (but not FRS 105). 

And finally, the FRC is bringing in changes to FRS 102 which impact balance sheet and profit and loss (P&L) accounts from 1st January 2027. 

What has changed in FRS 102 from the periodic review 2024?

The most notable changes to FRS 102 are to leases and revenue recognition. These are two areas that will affect the majority of SMBs that prepare their accounts in accordance with UK Generally Accepted Accounting Practices (UK GAAP).

Both changes take effect for accounting periods beginning on or after 1st January 2026, giving businesses some time to prepare. In this article, we will look at the developments in further detail before covering a few other important updates.

Change 1: Lease accounting (Section 20 Leases)

Leases for lessees will take on an on-balance sheet lease accounting model, which means that most leases will now need to be recognised as a lease liability on the balance sheet. The exceptions to this are short term leases (leases that are agreed for a term of 12 months or less) and leases on assets with a low value, as neither of these types of lease will need to be recognised on the balance sheet.

The new on-balance sheet model is a significant change in lease accounting. Previously, operating leases were treated similarly to rental agreements and were not recognised on the balance sheet. The lease payment was simply expensed through the income statement (also known as the profit and loss account). However, under the new rules, you will need to recognise:

• a right of use asset liability, and
• a lease liability

on the balance sheet, and charge:

• depreciation, and
• interest on each of these elements through the income statement.

This could have a significant impact on your company’s balance sheet. 

Adding operating leases to your balance sheet has the potential to drastically change performance metrics like EBITDA and net debt. Similarly, as the interest expense could increase considerably, you also need to be aware of the impact on bank loans and other third-party finance, if they carry lending covenants.

Speak to your accountant about whether you need to consider providing a detailed explanation of the changes in accounting figures and performance metrics to key stakeholders, such as a third-party lender.

There has been no major change to lease accounting for lessors.

Change 2: Revenue recognition (Section 23 Revenue from Contracts with Customers)

The revenue recognition standard in FRS 102 has been completely rewritten. It will now be based on a comprehensive five step model. Previously, revenue was recognised when the risks and rewards of a transaction were considered to have been transferred to the customer. Now, you will need to consider when control over goods and services has been passed on to the customer.

This change is to bring FRS 102 closer to international accounting standards (IFRS).

Here is a brief overview of the five-step model that you will need to go through when determining the amount of revenue to recognise, and when.

1. Identify the contract with the customer.
2. Identify the performance obligations in the contract i.e. what goods or service you need to provide.
3. Determine the transaction price.
4. Allocate the transaction price to each performance obligation.
5. Recognise revenue when the performance obligations (goods or services) have been delivered.

The new revenue recognition model will impact all businesses, regardless of size, particularly on the timing of revenue recognition. The FRC has shared guidance on applying the five step model here.

You will need to pay attention to how and when revenue is recognised for contracts involving bundled goods and services. This includes ongoing servicing and maintenance support services, as well as other types of contracts.

If there is a significant impact on when revenue is recognised, you might find the timing and amount of your tax payments is affected.

What has changed in FRS 105 from the periodic review 2024?

The changes to revenue recognition in FRS 102 also apply to micro-entities that use FRS 105. The lease changes do not apply to FRS 105 users.

What other changes are happening?

Small entity disclosures (Section 1A Small Entities)

There is now greater clarity on what those small businesses that apply Section 1A need to disclose. Previously a business could choose which disclosures to make to provide a true and fair view of their accounts. However, the standard now makes certain disclosures mandatory.  

Concepts and pervasive principles (Section 2)

There have been updates to certain definitions, such as assets and liabilities. These changes shouldn’t to impact many companies but do check if the definitions affect any of your existing accounting policies.

Fair value (Section 2A)

The definition of fair value has been amended to align with the international standards. If you have assets or liabilities recognised at fair value, check the revised definition to determine if your estimates are still suitable.

Supplier finance arrangements (Section 7)

Disclosures are now required about supplier finance arrangements with third party finance providers. This change applied from 1st January 2025.

Share based payments (Section 26)

The FRC confirms the exclusion of equity instruments for control in business combinations from the section, other than those issued to employees. This means no need to worry about the ‘fair value’ of shares in your business under this section unless you’ve issued those shares to employees.

Changes are made to the treatment of some cash settled and equity settled share-based payments and net settlement awards. This applies to companies that issue share awards to directors and employees.

Income Tax (Section 29)

Minor updates have been made to deferred tax in business combinations, as well as to uncertain tax treatments.

What do LLPs need to know about the changes in LLP SORP 2026? 

The changes outlined in LLP SORP 2026 apply for accounting periods starting on or after 1st January 2026 and applies alongside FRS 102. LLPs preparing accounts as micro-entities under FRS 105 do not need to consider the LLP SORP 2026. 

If your LLP is classed as small and uses FRS 102 section 1A, you only need to apply the following sections of the SORP: 

• recognition and measurement  
• disclosures 

Disclosure requirements 

As with the small entities disclosures under FRS 102 Section 1A, disclosures for small LLPs that were previously only encouraged become mandatory under LLP SORP 2026. Those disclosures include: 

• activities and significant changes  
• identity of members 
• remuneration policy and accounting treatment  
• loans and debts due to and from members 
• post-retirement payments to members policy 

Members remuneration 

There are changes to the way members’ remuneration must be presented for subsidiary and parent LLPs. 

What are the balance sheet and P&L changes in FRS 102 from 1st January 2027? 

If you use an adapted balance sheet or P&L format when drawing up your financial statements, the allowed formats have changed, specifically the definitions of current and non-current assets and liabilities.  

If you don’t use adapted formats, these changes do not apply to you. 

How can I prepare my business for the changes?

It is important to prepare yourself for the upcoming changes. Here are some key things you can do:

• Review revenue contracts – Look at any existing contracts you have with customers or clients and assess them against the new five step revenue model. Do you need any changes to your current revenue recognition practices? Standardised contracts may ease the process going forward
• Review leases – are there are any hidden leases in non-lease contracts? Review existing lease agreements to see if any now fall into the revised scope. This only applies if you report under FRS 102 and not FRS 105.
• Impact assessment – recalculate your key metrics following any lease changes. Do they affect any bank of lending covenants?  You may then wish to communicate financial metrics to key stakeholders such as investors, lenders and employees, and explain what the changes are. In the case of lenders, you may need to agree covenant waivers or renegotiate covenants altogether.
• Train staff on the changes – Ensure staff are up to date on the key changes and how they apply to the business.
• Disclosure requirements – Make sure you know what is expected from the extra disclosure requirements
• Decide when to adopt the changes – do you want to adopt the amendments early? If you are planning to seek future financing, the revised balance sheet, income statement and metrics can be factored into financing terms. Also, any newly incorporated companies might choose to adopt early to avoid changing later down the line.
• Consider the tax implications – assess whether the timing of revenue recognition will significantly impact tax payments and therefore cash flow.

While the full implementation of the changes is not until accounting periods starting on or after 1st January 2026, (or 1st January 2027 for the adapted balance sheet and P&L changes), it is important that you start preparing now.

How can TaxAssist Accountants help? 

TaxAssist Accountants are here to support you with the transition. We can help you understand the new FRS 102 and 105 standards and LLP SORP 2026 and provide personalised advice and planning support. Call us today on 020 3793 2199 or use our online contact form to arrange a free initial consultation.

Last updated: 1st May 2026