FRS 102 changes from January 2026: leases and revenue

Major changes to UK GAAP apply to accounting periods beginning on or after 1 January 2026. Under the revised FRS 102, most leases now go on the lessee’s balance sheet, and revenue is recognised using a five-step model based on IFRS 15. The Financial Reporting Council (FRC) issued the changes on 27 March 2024 as its Periodic Review 2024.

When do the FRS 102 changes apply?

The changes apply from the first accounting period that starts on or after 1 January 2026. The date of initial application is the first day of that period. Early adoption is allowed only if you adopt all of the amendments at the same time.

One change came earlier. New disclosures on supplier finance arrangements apply to periods beginning on or after 1 January 2025, according to the FRC’s FRS 102 page.

What changes for leases?

Lessees must now recognise most leases on the balance sheet. The new Section 20 removes the old split between operating leases and finance leases for lessees, following IFRS 16.

At the start of a lease you record:

• a lease liability, the present value of the future lease payments
• a right-of-use asset, normally the same amount plus any initial direct costs

The rent charge in the profit and loss account disappears. It is replaced by depreciation of the asset and interest on the liability. Interest is front-loaded, so the total charge is higher in early years and lower later.

Lessor accounting is largely unchanged, the FRC’s June 2026 explainer says.

Which leases are exempt?

Two exemptions let you keep a lease off the balance sheet:

• short-term leases of 12 months or less
• leases of low-value assets, such as laptops and small office equipment

The FRC says vehicles, heavy machinery and property are normally not low-value. Lessees can also use an obtainable borrowing rate instead of an incremental borrowing rate to discount the payments in some cases.

Worked example

A company rents a unit for £24,000 a year, paid in arrears, on a five-year lease. Using a 6% discount rate, the lease liability at the start is about £101,097.

EBITDA rises by £24,000, because rent moves below the EBITDA line. Net debt and gearing also rise, which matters for reading a balance sheet and for loan covenants.

What changes for revenue?

Revenue now follows a single five-step model in the revised Section 23, a simplified version of IFRS 15. The five steps are:

1. Identify the contract with the customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the price to each performance obligation.
5. Recognise revenue when, or as, each obligation is satisfied.

Revenue is recognised when control passes to the customer, rather than on the transfer of risks and rewards. Businesses most likely to see a difference have bundled contracts, rebates, variable pricing, rights of return, warranties or long-term projects.

How does transition work?

Leases and revenue use different transition methods:

• Leases: the modified retrospective approach is compulsory. You do not restate comparatives, and any cumulative effect goes to opening equity at the date of initial application.
• Revenue: you can choose full retrospective restatement, or the modified retrospective approach with the cumulative effect in opening retained earnings.
• Fair value guidance: applied prospectively, with no restatement.

Does this affect small companies and micro-entities?

Small companies using Section 1A of FRS 102 must apply the lease and revenue changes too. Some Section 1A entities also face more disclosures, which ICAEW says give greater clarity on what is needed for a true and fair view.

Micro-entities using FRS 105 keep the old operating and finance lease model. They do get the new five-step revenue model. See our guides to micro-entity accounts and abridged vs full accounts.

What is the corporation tax effect?

The tax rules follow the accounts, so transition can move profit between years. ICAEW’s March 2026 article sets out the main points:

• Lease transition: spreading rules stop the one-off adjustment being taxed at once. It is brought in over broadly the weighted average remaining lease term.
• Revenue transition: the net adjustment is generally taxed in the first period under the new rules, under the change of basis rules in Chapter 14, Part 3 of CTA 2009 and HMRC’s BIM34000 guidance.
• Capital allowances: a lease already treated as a finance lease keeps its existing treatment.
• Interest restriction: leases that were operating leases under the January 2022 edition should not affect Corporate Interest Restriction.

A higher taxable profit could push a company into quarterly instalment payments. Use our corporation tax calculator to test the effect.

What advisers should do

1. List every lease for each client, with term, payments and break dates.
2. Review revenue contracts with several deliverables or variable pricing.
3. Check loan covenants that use EBITDA, net debt or gearing.
4. Model the tax on the transition adjustment and any instalment payments.
5. Update software and templates for the new balance sheet lines. Our balance sheet format guide shows the standard layout.

Frequently asked questions

When do the FRS 102 changes take effect?

They apply to accounting periods beginning on or after 1 January 2026. A 31 March year-end company first applies them in its accounts for the year ending 31 March 2027.

Do operating leases still exist under FRS 102?

Not for lessees. Most leases go on the balance sheet, except short-term leases of 12 months or less and leases of low-value assets.

Do micro-entities have to apply the new lease rules?

No. FRS 105 keeps the old lease model, but micro-entities do adopt the new five-step revenue model.

Do I need to restate last year’s figures?

Not for leases, which use the modified retrospective approach. For revenue you can choose full restatement or the modified approach.

How is the lease transition adjustment taxed?

It is spread for corporation tax over broadly the weighted average remaining term of the leases that caused it, so it is not taxed all at once.