Written for accounting periods beginning on or after 1 January 2026. Rules and guidance are correct at the time of writing (September 2026).
For most owner-managed businesses, accounting standards are something the accountant worries about once a year. The 2026 changes to FRS 102 are different. They change when profit is recognised and what appears on the balance sheet, and for architects, engineers, consultancies and other project-based firms, that can move reported profit, bank covenants and even tax payments.
The changes apply to accounting periods beginning on or after 1 January 2026. For a December year end, the year to 31 December 2026 is the first affected. For a March year end, it is the year to 31 March 2027. Small companies reporting under Section 1A are included.
What has changed
The Financial Reporting Council's periodic review of FRS 102 is the biggest update to UK accounting standards in a decade. Two changes matter most for service firms:
- A new revenue model. Revenue is now recognised using a five-step model aligned with IFRS 15, based on when you satisfy your promises to the client rather than when you invoice or reach a milestone.
- Leases on the balance sheet. Most leases, including office leases and many vehicle and equipment leases, now appear on the balance sheet as an asset and a matching liability, instead of as a rent cost in the profit and loss account.
Revenue: why project firms feel it most
The five steps are: identify the contract, identify the separate promises within it, set the price, allocate the price across those promises, and recognise revenue as each one is delivered. For a simple sale, little changes. For a project business, several common arrangements need a fresh look:
- Stage payments. Invoicing at the end of a RIBA or design stage does not decide when revenue is earned. If the work transfers value to the client as it progresses, revenue is recognised over time, which affects how you value work in progress.
- Bundled services. A fee that covers design, planning support and site visits may contain several separate promises, each with its own timing.
- Variations and scope changes. How and when an agreed change is added to the contract price now follows specific rules.
- Retainers and upfront fees. Money received before the work is done is more likely to sit on the balance sheet as a liability until it is earned.
None of this changes your cash. It changes the timing of reported profit, which in turn affects management accounts, bonuses tied to profit, and the story your accounts tell a lender or buyer. Our articles on work in progress and WIP value cover the practical side.
Leases: the balance sheet gets bigger
Under the new rules, a five-year office lease becomes a right-of-use asset and a lease liability on day one. The rent cost disappears from the profit and loss account and is replaced by depreciation and an interest charge. The practical effects:
- EBITDA rises, because rent is replaced by depreciation and interest, which sit below EBITDA.
- Liabilities rise, which can change gearing and other ratios your bank watches.
- Gross assets rise, which can matter for tax schemes with asset limits, such as share option schemes for employees.
- Serviced offices need checking, as some are licences rather than leases and are treated differently.
Short-term leases and leases of low-value assets can still be kept off the balance sheet under practical exemptions.
The tax side
The accounting change does not create new tax rules, but it does change the profit figure that tax starts from.
- Transition adjustments. When a company changes its accounting basis, the corporation tax rules generally bring the net adjustment into account in the first period under the new standard. The rules are in Chapter 14 of Part 3 of the Corporation Tax Act 2009, with HMRC guidance in the Business Income Manual at BIM34000.
- Leases. HMRC's guidance on how the new lease accounting interacts with tax relief is in the Business Leasing Manual at BLM50005. For lessees, spreading rules stop the one-off transition adjustment from being taxed all at once.
- Quarterly instalments. Larger companies paying corporation tax in instalments should estimate the transition effect early, rather than discovering it when the computation is prepared.
- Deferred tax may need recognising where adjustments are spread.
What to do now
- Review your main client contracts for bundled services, stage payments, variations and upfront fees.
- List every lease and licence, including vehicles, equipment and serviced offices.
- Model the effect on profit, EBITDA and net assets for the first year under the new rules.
- Check your bank covenants and speak to your lender before the accounts land, not after.
- Update your KPIs, so management reporting and statutory accounts tell the same story.
- Agree the transition approach with whoever prepares your accounts, as the choices affect comparatives and tax.
Not sure how the changes affect your numbers? Book a free strategy call and we'll look at your contracts and leases with you.
This article is general information, not advice for your specific circumstances.
