FRS 102 Changes From 2026: What Small Companies Need to Know

FRC amendments to FRS 102 from the Periodic Review 2024 take effect for accounting periods beginning on or after 1 January 2026. The two changes that touch most small companies are a new on-balance-sheet model for leases and a revised, more structured approach to recognising revenue. Neither is optional once your period falls in scope.

Who this affects

FRS 102 applies to UK companies that are too large for the micro-entity regime under FRS 105 but do not report under full IFRS. Under the Companies Act 2006 thresholds that took effect for financial years starting on or after 6 April 2025, a micro-entity has turnover of no more than £1 million, a balance sheet total of no more than £500,000, and an average headcount that does not exceed 10. Companies above those limits that still qualify as small or medium-sized typically report under FRS 102, so this is the group the periodic review changes land on directly.

If your company's financial year begins on or after 1 January 2026, the new rules apply to that year. A company with a 31 March or 30 June year end, for example, needs to be ready before the change actually starts to bite in its accounts.

The lease change

Under the current version of FRS 102, most leases a small company holds as a lessee are "operating leases": the rent is simply expensed as it is paid, and the commitment sits in a note rather than on the balance sheet. The amended standard replaces that with a single, on-balance-sheet model closer to what large companies already do under IFRS 16.

In practice, that means:

• Most leases, including many property and equipment leases previously treated as operating leases, are recognised as a right-of-use asset and a matching lease liability at the start of the lease.
• The right-of-use asset is depreciated, and the liability is reduced as payments are made, with an interest charge running through the profit and loss account rather than a flat rent expense.
• Balance sheets get longer on both sides: more assets, more liabilities, and a different shape to profit in the early years of a lease, even where the actual cash paid has not changed at all.

Short leases and low-value assets keep a simpler treatment, closer to the old operating-lease approach, so not every rental arrangement needs the full on-balance-sheet model. Working out which of your leases fall into which category is worth doing well ahead of your transition date, not in the weeks before your accounts are due.

The revenue change

The revised standard also moves FRS 102 revenue recognition onto a five-step model built around identifying performance obligations in a contract and recognising revenue as each one is satisfied, rather than the more general "risks and rewards" test the current standard uses. For a straightforward business selling goods on delivery, the practical result may be small. For companies with bundled contracts, retainers, subscriptions, or services delivered over time, such as software, professional services, or long-running supply agreements, the timing of when revenue is recognised can genuinely shift.

What this means for your bookkeeping

These are financial reporting changes, not new taxes, but they start with the numbers in your ledger. A company moving to the new lease model needs a full list of its leases, including terms, payments and any options to extend, pulled from clean records rather than reconstructed at year end. A company reassessing revenue timing needs contracts and billing records that clearly show what was delivered and when.

Monthly bookkeeping that stays reconciled through the year makes both of these exercises far more manageable when your first FRS 102 periodic-review year arrives. Monthly bookkeeping from Finbryn gets you to a clean, reconciled starting position before that transition year begins and keeps it that way afterwards. The accounts themselves, prepared under the amended standard, are a job for your accountant; we keep the underlying ledger reconciled and ready for whoever prepares and files them. If you want to talk through timing for your year end, get in touch.

FAQ

Does this affect micro-entities reporting under FRS 105?

No. The Periodic Review 2024 changes apply to FRS 102, not FRS 105. A genuine micro-entity, within the current turnover, balance sheet and employee thresholds, can continue reporting under FRS 105 without the new lease or revenue model.

When exactly do the changes start for my company?

For accounting periods beginning on or after 1 January 2026. A company with a calendar year end starts applying the changes from 1 January 2026; a company with, say, a 30 September year end starts from its year beginning 1 October 2026.

Will my leased office or equipment appear on the balance sheet now?

Most leases previously treated as operating leases will move onto the balance sheet as a right-of-use asset and a lease liability, unless the lease is short-term or for a low-value asset, which keep a simpler treatment.

Do I need to restate prior year figures?

Transition approaches vary by company and are set out in the amended standard itself. This is a question for whoever prepares your statutory accounts, since the right transition method depends on your specific leases and contracts.

This article is general information, not preparation support or filing advice for your specific company.