FRS 102 2026 changes: what leases and revenue mean for your first year-end
If your company's financial year started on or after 1 January 2026, your next accounts are the first under the most significant rewrite of FRS 102 since the standard was introduced. Two changes matter most: almost all leases now sit on the balance sheet, and revenue follows a new five-step model (PKF Smith Cooper).
This isn't just a big-company problem. Small companies reporting under Section 1A are caught by both changes; only micro-entities using FRS 105 are outside them (Learnsignal).
Change 1: Leases move onto the balance sheet
The old split between operating and finance leases is gone for lessees. Your office, warehouse, vehicle and equipment leases now create a right-of-use asset and a lease liability (ICAS). Short-term leases (12 months or less) and low-value assets can stay off.
What that does to your numbers:
- EBITDA rises, because rent is replaced by depreciation and interest.
- Debt and gearing rise, because the lease liability is now borrowing on the face of the balance sheet.
- Profit timing shifts, with higher total cost in the early years of each lease.
On transition, a modified retrospective approach is mandatory: comparatives aren't restated, and a catch-up adjustment goes to retained earnings at the start of the year (Forvis Mazars). For a 31 December year-end, that date is 1 January 2026.
Change 2: Revenue follows five steps
Section 23 now mirrors IFRS 15 in simplified form: identify the contract, identify the performance obligations, set the price, allocate it, and recognise revenue as each obligation is satisfied. Businesses most likely to see timing change include:
- SaaS and subscription companies bundling set-up, licences and support.
- Agencies and professional services firms with milestone or retainer billing.
- Construction and project businesses with variations and long contracts.
- E-commerce brands with returns, loyalty points or bundled delivery.
Change 3: Longer small-company accounts
ICAEW expects most small companies' financial statements to become longer and more detailed, with expanded disclosures on related parties, leases, revenue and tax (ICAEW).
Watch your bank covenants
If your facility tests leverage or interest cover on reported figures, the lease change alone can move your ratios with no change in trading. Read your facility agreement for "frozen GAAP" wording now, and talk to your lender before the numbers do it for you.
Your pre-year-end checklist
- 1.Build a lease register: term, payments, break clauses, discount rate.
- 2.Review your top 20 customer contracts against the five steps.
- 3.Model the effect on EBITDA, net debt and covenants.
- 4.Update accounting policies and board reporting KPIs.
- 5.Agree the approach with your auditor or accountant before fieldwork.
How Step 1 Advisors helps
Our GAAP Advisory practice writes lease and revenue memos the way an auditor reads them — several of our team used to be the auditor. We've applied IFRS 16 and IFRS 15 across UK, US and Indian groups, so FRS 102's new sections are familiar ground. Book a diagnostic call and leave with a written read of your exposure.