📢 Upcoming Changes
The Financial Reporting Council (FRC) is introducing some of the most significant updates to FRS 102 since its launch. From January 2026, the way businesses recognise revenue and leases will fundamentally change, bringing Irish and UK GAAP more closely into line with international standards (IFRS 15 and IFRS 16).
These updates will affect every business preparing accounts under FRS 102, with similar requirements also introduced under FRS 105 for micro-entities.
So, what’s changing — and what does it mean for your business?
🔎 Why the Change?
The updates aim to:
- Make financial reporting more consistent and reliable across all industries and sizes of entity.
- Provide clearer, more useful information about revenue, assets, liabilities, and cash flows.
- Support improved access to capital, with higher-quality financial information building trust with lenders and investors.
- Reduce GAAP differences, aligning Irish and UK GAAP more closely with international principles.
While some businesses may see only minimal changes, others — particularly those with complex contracts or significant lease arrangements — will experience a big shift in how and when transactions are reported.
📊 Revenue: The New 5-Step Model
The old Section 23 Revenue is being replaced with a new framework: Revenue from Contracts with Customers. At its core is a structured 5-step model:
- Identify the contract with the customer.
- Identify performance obligations — the distinct goods or services promised.
- Determine the transaction price, including variable elements like discounts or bonuses.
- Allocate the price to each performance obligation.
- Recognise revenue when (or as) obligations are satisfied.
This may sound simple, but applying it will often require detailed judgement. For example, bundled contracts, extended warranties, loyalty schemes, and variable consideration (like performance bonuses) all need careful review.
🏗️ Who Will Feel It Most?
Industries likely to be most affected include:
- Construction – where projects span years and involve staged payments.
- Telecommunications & Technology – with bundled contracts (e.g. phone + service package).
- Aerospace & Engineering – where contracts often include multiple deliverables and long-term obligations.
- Retail & Hospitality – particularly those offering loyalty schemes, vouchers, or promotions.
For these sectors, revenue recognition could shift from upfront recognition to staged recognition, or vice versa, altering reported profits and KPIs.
⚠️ Practical Challenges Ahead
Implementing the new model isn’t just about updating accounting policies — it may touch every part of the business:
- Contracts: Reviewing terms to identify performance obligations and variable pricing.
- Systems & processes: Capturing more detailed data on how and when revenue should be recognised.
- Training: Upskilling finance teams to apply judgement and manage more complex recognition rules.
- Revenue changes require robust documentation of judgements, especially around allocation and timing.
- KPIs and covenants: Changes in revenue timing could affect EBITDA, dividend policies, staff bonuses, and bank covenants.
Even businesses with “simple” revenue will need to prove that they’ve assessed the changes properly.
⏳ Transition Options
From 1 January 2026, businesses can adopt one of two methods:
- Modified retrospective – apply to new contracts only, with an adjustment to opening reserves.
- Full retrospective – restate comparatives as if the new rules had always been applied.
Each option has pros and cons, but both require careful planning and clear communication with stakeholders.
📊 Leases: From Off-Balance Sheet to On-Balance Sheet
🔎 The Current Rules
At present, leases are split into two categories:
- Finance leases – recognised on the balance sheet, with both an asset and a liability.
- Operating leases – kept off balance sheet, with rental payments simply expensed.
This distinction has allowed many businesses (especially in retail, hospitality, and transport) to keep large commitments out of their reported liabilities.
📊 What’s Changing?
From 2026, this distinction disappears. With just a few exceptions, all leases will be brought on balance sheet:
- Businesses will recognise a right-of-use asset (what you’re leasing).
- And a lease liability (the payments you owe).
The only exemptions will be:
- Short-term leases (12 months or less).
- Low-value assets (like laptops, printers, or small equipment).
For everything else — property, vehicles, machinery, and more — you’ll now see them reported directly in the accounts.
In addition to the above, the amendments also include enhanced disclosure requirements that are based on IFRS for SMEs.
📈 Impact on Your Financials
Bringing operating leases on balance sheet will affect key numbers:
- EBITDA will rise, since rent costs are replaced with depreciation and finance costs.
- Assets and liabilities will both increase.
- Gearing ratios may worsen, as debt levels appear higher.
- Net current assets may reduce, as lease liabilities are split into current and non-current portions.
- Company size thresholds could be breached due to larger balance sheets.
This doesn’t change the economics of your leases — but it does change how banks, investors, and other stakeholders view your business.
⏳ Transition Rules
When the new standard takes effect (for accounting periods beginning 1 January 2026):
- Existing operating leases will be brought on balance sheet using a modified retrospective approach. Comparatives won’t be restated, but a one-off adjustment will be made to reserves.
- Existing finance leases will be reclassified as right-of-use assets.
⚠️ Implementation Challenges
The changes are more than an accounting exercise. Businesses will need to:
- Review lease agreements to calculate present values and obligations.
- Gather data on all existing leases — often scattered across departments.
- Engage lenders early, since covenants may be impacted.
- Update systems and processes to handle new recognition and reporting requirements.
- Educate stakeholders, who may see sudden shifts in reported results.
Industries heavily reliant on leasing (e.g. retail, transport, healthcare) will feel this most, and for some, adoption may influence strategic decisions like whether to lease or buy.
🚀 Next Steps for Businesses
To prepare for 2026, businesses should:
- Revenue: To get ready for the new revenue rules under FRS 102, businesses should start by reviewing their contracts to spot any changes in recognition, update systems and processes to capture the right data, , and upskill finance teams to manage the more complex judgements and disclosures.
- Leases: Businesses should identify all existing leases, assess the impact on financial statements and KPIs, run sensitivity models to understand effects on EBITDA, gearing, and covenants.
- For both: Engage advisors and auditors early to plan the transition and communicate early with banks, investors, and other stakeholders to manage expectations about the likely impact on reported numbers.
🤝 How Xeinadin Can Help
At Xeinadin, we’re already working with clients to navigate these changes. Whether it’s modelling the effect on revenue recognition, assessing lease portfolios, preparing disclosures, or managing communications, our experts can help you prepare with confidence.
📅 With the new rules effective from January 2026, the time to act is now.
👉 Want to understand how these changes will affect your business? Get in touch with our team today.
This insightful article was written by Silpy Kedia, Associate Director based in our London Head Office.
