The business impact of UK GAAP changes
The Financial Reporting Council's (FRC) 2024 periodic review marked a pivotal moment in UK GAAP, with amendments to FRS 102 becoming mandatory for accounting periods beginning on or after 1 January 2026. These represent the most significant changes since FRS 102’s inception in 2013, aligning the standard more closely with IFRS, particularly around revenue recognition, lease accounting, fair value, and supplier finance, among others.
What are the changes?
The changes focus on these main areas:
- Lease accounting – Most leases will now appear on the balance sheet, with businesses recognising a right-of-use asset and a lease liability. This changes EBITDA and gearing ratios.
- Revenue recognition – A new five-step model (similar to IFRS 15) will apply, changing how and when revenue is recognised, especially for complex or bundled contracts.
- Supplier finance disclosures – From 2025, companies must disclose details of supply chain finance arrangements, improving transparency.
- Conceptual framework & fair value – Updates align UK GAAP more closely with IFRS, introducing clearer guidance on valuation and principles.
These changes will affect financial statements, tax timing, systems and covenant compliance, so early planning is essential.
What is the business impact of these changes?
These changes are a substantial overhaul, and with significant tax and cashflow implications tied to them, board-level awareness and financial preparation are essential. Below are the implications of these changes that business leaders should prepare for now.
1. Financial statement presentation
- Balance sheet growth: Lease accounting changes will bring most leases on balance sheet, increasing reported assets and liabilities. This can affect gearing ratios, net debt and covenant compliance.
- Profit & loss profile: Lease expenses will shift from a single rental cost to depreciation and interest, impacting EBITDA and interest coverage ratios. Revenue recognition changes may alter timing of income, affecting reported profitability.
2. Tax and cash flow
- Tax timing differences: Changes in revenue and lease accounting can create temporary differences, requiring deferred tax adjustments. Businesses may also face earlier or later tax liabilities depending on contract structures.
- Cash tax planning: Transition adjustments and revised expense profiles could influence quarterly instalment obligations and liquidity planning.
3. Operational and system changes
- Data and process overhaul: Businesses will need to capture detailed lease and contract data to apply new models. Systems may require upgrades to handle right-of-use assets, lease liabilities and revenue allocation.
- Judgment and documentation: Increased complexity in determining performance obligations, variable consideration and lease terms demands robust internal controls and technical documentation.
4. Governance and stakeholder communication
- Investor and lender dialogue: Changes to KPIs and covenant ratios require proactive communication with banks and stakeholders.
- Board-level awareness: Leadership teams must understand the strategic impact on financial metrics and decision-making.
5. Disclosure requirements
- Enhanced disclosures for revenue, leases and supplier-finance arrangements will require more narrative and quantitative detail, increasing compliance workload.
How can you prepare?
Businesses should prepare an impact assessment for the changes coming into effect from January 2026 to understand, quantify and operationalise the changes.
We’re here to help
These are significant changes and it is critical to prepare now. Our expert advisers can offer:
- Impact assessment: Model financial impacts.
- Workshops: Train your teams for a smooth transition.
- Technical guidance: Detailed papers on revenue and lease accounting judgments and calculations.
- Completeness review: Ensuring all changes - including tax impacts - are addressed.
- Tax planning: Assessing cash tax and deferred tax implications.
Contact a member of our team today.
