There is lots changing in the world of UK Corporate Reporting, not least the changes to UK accounting standards that will come into effect for periods beginning on or after 1 January 2026, following recent amendments to FRS 102. This new standard, along with the recent changes to Company size limits means there is plenty to consider in the coming financial year.
These updates could have a meaningful impact on how your business keeps its records and prepares its financial statements.
Below is a summary of the key changes which will impact the Professional Practices sector which will help you to begin planning. We would encourage you to engage in conversation with your professional advisors to discuss the impact further, noting that we will also be publishing further articles in Abacus throughout 2026 which will delve deeper into the impact of the changes to FRS 102.
Lease Accounting (FRS 102, Section 20)
The background
- Lessees will now be required to recognise all leases on the Balance Sheet, rather than expensing operating leases through Profit and Loss.
- The Balance Sheet will need to include a right-of-use asset (Fixed Asset) and a lease liability (Current and long-term liability).
- Operating lease costs previously expensed to the Profit and Loss account will be replaced with depreciation of the right-of-use asset and interest expense on the lease liability.
- Exemptions are available only for short-term leases or low-value assets.
The impact
- The increase in assets and liabilities may:
- trigger audit requirements for companies previously below the threshold
- lead to potential breaches of loan covenants or affect borrowing capacity
- influence credit ratings and financial ratios.
- Lease expenses will now be split between depreciation and interest, rather than recognised on a straight-line basis. This may:
- front-load expenses in earlier years
- affect EBITDA, which could influence performance metrics, bonus calculations and loan covenants or restrictions based on the entity’s performance ratios.
- Significantly more disclosures will be required in the financial statements. Such disclosures include a description of the leasing arrangements and details about the discount rates used.
- The comparative figures will not need to be restated. Instead, existing operating leases are recognised as right-of-use assets and lease liabilities using the remaining lease payments at transition date. Any difference arising from transition is recognised in equity.
Next steps
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Revenue Recognition (FRS 102, Section 23)
The background
- Revenue will now be recognised using a five-step model based on the identification of the ‘performance obligation’ of any contracts or engagements in place.
- A ‘performance obligation’ is a distinct promise to transfer goods or services to the customer or client, where distinct means that the customer or client can benefit from the item on its own and is separately identifiable from other items included in the same contract or engagement.
- The amendments introduce the need to identify all services provided in a contract or engagement and assess whether:
- the client can benefit from the service on its own
- the service is separately identifiable from other promises in the contract.
- This may alter the timing and amount of revenue recognised, particularly where variable or contingent consideration is involved.
The impact
- Revenue may be recognised earlier or later than under current rules – including the recognition of work in progress on incomplete engagements.
- This could affect profitability, tax planning, and cash flow forecasting.
- More detailed disclosures will be required, especially around:
- judgements made in revenue recognition
- contract balances and performance obligations.
- An entity has an accounting policy choice to apply either the modified retrospective approach or full retrospective approach on initial application of the revised Section 23.
Next steps
- Start reviewing client engagements to identify the ‘performance obligations’ of each type of engagement.
- Determine whether the client can benefit from each service on its own, and allocate the transaction price to that service.
- Assess how fixed fees, contingent success fees and work in progress on incomplete engagements are impacted.
Part two will explore practical lease accounting examples, a deeper examination of revenue recognition and its impact on common Professional Practice work types, statutory reporting considerations in the transition year, specific implications for LLPs including distributable profits and member arrangements, and key tax considerations.
To find out more please reach out to your usual Crowe contact.
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