FRS 102 changes: what the new lease and revenue rules mean

If your company prepares accounts under FRS 102, two major updates apply for accounting periods beginning on or after 1st January 2026:

• Leases (for lessees): most leases are now recognised on the balance sheet.
• Revenue: a new five-step model applies to revenue from customer contracts.

These FRS 102 changes were introduced by the FRC as part of its Periodic Review 2024. This had the stated aim of improving consistency while keeping financial reporting proportionate to a business’s size and complexity.

Note on micro-entities (FRS 105). The Periodic Review introduced a simplified revenue model into FRS 105, but it did not align FRS 105 lease accounting with the new on-balance-sheet lease model in FRS 102. This article therefore focuses specifically on FRS 102.

The key date (and which accounts are affected)

The FRS 102 changes apply to accounting periods beginning on or after 1st January 2026. That means the first affected accounts depend on your year-end. For example, for year-ends on these dates:

• 31st December. First affected accounts are for the year ending 31st December 2026.
• 31st March. First affected accounts are for the year ending 31st March 2027.

Will you notice a difference?

All companies using FRS 102 (including Section 1A) are in scope, but the impact usually increases with complexity.

• Smaller businesses with few leases and uncomplicated sales will often see little change. However, a premises lease can still introduce new balance sheet figures.
• Larger businesses, and those with significant lease portfolios (such as retailers with multiple premises), are more likely to see visible changes in reported assets and liabilities. These firms may also need to revisit revenue timing for their more complex contracts.

1) Leases: what changed from 1st January 2026 (for lessees)

The headline change – most leases move onto the balance sheet

Under the revised Section 20, lessees generally recognise:

• a right-of-use asset (your right to use the leased item), and
• a lease liability (your obligation to make lease payments).

This replaces the old approach, in which many leases were treated as “operating leases” and remained off-balance sheet.

Two optional exemptions that keep things proportionate

The revised Section 20 includes two voluntary recognition exemptions, which can keep some leases off-balance sheet:

1. Short-term leases: a lease that, at the commencement date, has a term of 12 months or less and does not contain a purchase option. This must be applied by class of underlying asset.
2. Leases of low-value assets: FRS 102 does not set a fixed threshold. Instead, “low value” is assessed in absolute terms. Real estate and motor vehicles are explicitly not considered low value. This exemption can be taken lease-by-lease.

What changes in the profit and loss account?

For leases recognised on the balance sheet, the cost is no longer presented simply as rent. Instead, it is typically split between:

• depreciation of the right-of-use asset, and
• interest expense on the lease liability.

This can affect key data points like operating profit and EBITDA.

Discount rates: what rate is used?

To measure the lease liability, a lessee uses the interest rate implicit in the lease if it can be readily determined. If not, the lessee can choose, on a lease-by-lease basis, either the incremental borrowing rate or the obtainable borrowing rate.

Intangible assets (software and IP)

Many common software arrangements (for example, subscriptions or licences to access a platform) often do not give control over an identified asset, so they are not lease contracts. Even where an arrangement is a lease of an intangible asset, FRS 102 states that Section 20 may be (but is not required to be) applied.

2) Revenue recognition: what changed from 1st January 2026

The headline change – a single five-step model

Section 23 has been rewritten and now uses a structured five-step model:

1. Identify the contract(s) with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations.
5. Recognise revenue when (or as) the entity satisfies a performance obligation.

Where businesses most often see change

• Variable consideration. Rebates or refunds payable or performance bonuses receivable are included in revenue only to the extent that they are “highly probable”.
• Principal vs agent. If another party is involved in providing goods, you must decide if you are a principal (recognise revenue gross) or an agent (recognise revenue as a commission).
• Costs to obtain a contract. There is an accounting policy choice to recognise certain costs (like sales commissions) as an asset if they were only incurred because the contract was obtained.

What you may need to do (checklist)

To implement these FRS 102 changes efficiently, we may ask you for the following:

For leases:

• Copies of key lease agreements (property, vehicles and equipment).
• Key terms: start and end dates, break clauses, renewal options and rent reviews.
• A list of leases you believe might qualify as short-term or low value.

For revenue:

• Your standard customer terms and any major bespoke contracts.
• Details of variable pricing: rebates, returns, refunds and performance bonuses.
• Arrangements involving third parties (to assess gross vs commission revenue).

A note on covenants and KPIs

Lease liabilities can increase reported debt, and revenue timing can change. If you have bank covenants or KPIs based on net assets, debt, EBITDA or revenue patterns, please let us know as soon as you can. This will allow us to help you assess the impact.

How THP will support you

As your accountants, we can help you identify where the changes are likely to be material, collect and validate the necessary inputs, and then apply the correct transition approach to ensure your accounts and disclosures remain fully compliant.

If you’d like any more help or information, please speak to your THP account manager today.