How FRS 102 is evolving to align with international standards

The Financial Reporting Council (FRC) has completed its second periodic review of FRS 102, introducing the most significant changes since its publication in 2013. These amendments, effective for accounting periods beginning on or after 1 January 2026, aim to align Irish and UK GAAP more closely with International Financial Reporting Standards (IFRS), particularly IFRS 15 (Revenue) and IFRS 16 (Leases).

Businesses should now be applying the revised requirements and assessing first year impacts.

Why the changes?

The revisions reflect the FRC’s commitment to modernising Irish and UK GAAP while maintaining proportionality for smaller entities. By aligning with IFRS principles, the changes enhance comparability for companies operating internationally and improve transparency for investors and lenders. However, they also introduce complexity, requiring businesses to reassess contracts, leases, and internal systems.

Key changes at a glance

1. Revenue recognition – The five-step model

FRS 102 will adopt a model similar to IFRS 15, introducing a structured approach to revenue recognition:

1. Identify the contract with a customer
2. Identify performance obligations
3. Determine the transaction price
4. Allocate the price to performance obligations
5. Recognise revenue as obligations are satisfied

This approach demands greater judgment, particularly for businesses with long-term contracts, bundled services, or variable pricing. The timing of revenue recognition may shift which could affect reported profits and key performance indicators.

2. Lease accounting – on-balance sheet treatment

Another major change is the move to an on-balance sheet model for lessees, similar to IFRS 16. Most leases will now require recognition of a right-of-use asset and a corresponding lease liability.

This change means operating leases will no longer be treated as simple rental expenses; instead, they will be replaced by depreciation and interest charges. As a result, EBITDA and gearing ratios will change, which could impact loan covenants and investor perceptions.

While exemptions exist for short-term leases and low-value assets, businesses with significant lease commitments, such as those in retail or hospitality, should expect substantial adjustments.

3. Other amendments

Beyond revenue and leases, the review introduces several additional updates. Small entities applying Section 1A will face expanded disclosure requirements, including information on going concern, provisions, dividends, and related parties.

Guidance on fair value measurement has been updated to align with IFRS 13, and new cash flow disclosures for supplier finance arrangements will apply starting in 2025. The conceptual framework in Section 2 has also been revised to reflect IASB principles.

Transition and practical challenges

The transition provisions under FRS 102 are designed to ease implementation. For leases, prior-year comparatives do not need to be restated; adjustments can be made directly to equity. Optional measures are available, such as using hindsight when assessing lease terms.

For revenue, businesses can choose between a full retrospective or modified retrospective approach. Despite these simplifications, challenges remain. Companies will need to analyse contracts in detail, determine discount rates for lease liabilities, update accounting systems, and train finance teams to apply the new requirements effectively.

Preparation is crucial

Irish and UK businesses should be acting now. Start by assessing the impact of these changes on revenue recognition and lease accounting. Engage with auditors, lenders, and investors early to manage potential covenant implications. Ensure that accounting software and internal processes can accommodate the revised standards and invest in training for finance teams to build confidence in applying the new rules.

The 2026 changes to FRS 102 represent a major step toward international alignment, improving transparency and comparability across markets. While these updates bring clear benefits, they also introduce complexity, particularly for mid-market businesses.

Early preparation will be essential to ensure a smooth transition and maintain stakeholder confidence.

We’re here to help

If you would like to discuss how the revised FRS 102 may affect your business, please contact your usual Azets adviser or get in touch with our specialist team.