FRS 102 changes: what do they mean for small businesses?

In March 2024, the periodic review of FRS 102 introduced significant changes that small business owners need to understand.

These changes include a five-step revenue recognition model and an “on balance sheet” lessee lease accounting model, both based on IFRS, that will apply in full to small businesses. These changes could significantly impact the presentation of your accounts, the timing of profits and might even impact whether your business can still qualify for the small company provisions.

Section 1A of FRS 102 continues to focus primarily on the disclosure regime for small businesses but now includes additional minimum disclosures (often via mandatory cross-reference to other sections of FRS 102) to provide greater clarity on what is needed to give a true and fair view.

Whilst the revisions to FRS 102 are effective for periods commencing on or after 1 January 2026, it is important to understand the impact on your accounts and any existing or potential contracts, as you are now potentially in the comparative period for these changes.

All small businesses that prepare accounts in accordance with UK GAAP, including both incorporated and unincorporated businesses, will need to consider the changes.

The periodic review has also introduced a number of changes for micro-entities applying FRS 105, including a new five-step revenue recognition model and updates to the concepts and pervasive principles section of the standard, but there are no changes to lease accounting, nor any additional disclosures. Please speak to your usual 91̽»¨contact for further details on the changes for micro-entities.

How will this impact the financial information of small businesses?

Small entities applying Section 1A of FRS 102 need to consider:

• The impact of recognition and measurement changes in FRS 102, particularly revenue recognition and lease accounting, the latter bringing most leases and associated liabilities on balance sheet.
• Changes to the associated disclosures.

Section 1A of FRS 102 previously only mandated disclosures required by company law, with an overarching need to consider both a list of encouraged disclosures as well as any other disclosures necessary to give a true and fair view of the entity’s assets, liabilities, financial position and profit or loss.

Non-small UK entities applying FRS 102 have always been required to make certain disclosures about the going concern status of the business. The 2024 periodic review has extended this requirement to small UK entities, which must now disclose the fact that the accounts have been prepared on a going concern basis. Additionally, they must confirm that management have considered the relevant future period and disclose any significant judgements made in assessing the entity’s ability to continue as a going concern. Disclosure must now also be made of any material uncertainties that may cast significant doubt on the entity’s ability to continue as a going concern. However, these disclosures would likely have been disclosed before the periodic review, because the omission of material uncertainties about going concern would rarely have satisfied the existing requirement to present a true and fair view.

The FRC have also made several of the disclosures, which were previously only “encouraged”, into mandatory requirements and introduced additional minimum disclosures, several of which are cross-referenced directly to those required by medium and large businesses.

Alongside the need for an explicit, unreserved statement of compliance, areas with additional disclosures include:

• Revenue
• Leases as a lessee
• Related party transactions
• Dividends declared and paid or payable
• Current and deferred tax
• Provisions and contingencies
• Share-based payment transactions
• Going concern, including requiring disclosure in all accounts.

Is there anything else you should be aware of as a small business owner?

The changes are effective for accounting periods commencing on or after 1 January 2026. Early adoption is permitted and we have already discussed some of the benefits of early adoption of FRS 102 amendments in our September 2024 article.

We have also highlighted the interaction between the periodic review implementation and the increases to the size thresholds in our January 2025 article. These increases in turnover and gross asset size thresholds are effective for periods commencing on or after 6 April 2025 and so should be effective at the same time as, or earlier than, the periodic review changes, thereby providing some headroom against increases to revenue and increases to gross assets from bringing leases on balance sheet.

We also expect small entities to be required to file their statutory profit and loss account at Companies House in the next couple of years, meaning that the disclosures around revenue recognition, along with allocations between gross profit and operating profit, will be visible to suppliers, competitors, customers and employees.

What should management be doing first?

The changes to revenue and leases are significant, and it is important that management start to assess the impact of these changes now to ensure they are ready for the first reporting period to which the changes apply. As a practical starting point, you might wish to identify the different types of customer contracts you currently have in place and understand key terms in your operating leases.

Management should also identify which of the numerous new mandatory disclosures are relevant to their small business accounts and how information will be collated to make those disclosures.

What impact will FRS 102 changes have on the management information systems?

Steve Railton, Partner at 91̽»¨, advised: “Assessing the impact of the new revenue and lease accounting models can take time and may be complex, so it makes good business sense to consider the requirements now. The earlier you start, the better prepared you will be to manage the transition.”

He continued: “Even though a business is small, most of the recognition and measurement requirements of full FRS 102 apply, and so the changes to the measurement basis in the standard will need to be considered, along with all the new disclosure requirements in section 1A.”

In the context of small businesses with limited resources available, Steve added: “Change is a constant in business, and being ready for change is a competitive advantage. Our finance function optimisation review can not only identify automation and efficiency opportunities, thereby freeing up your finance team to take on new projects, but it can also help you consider whether your system will be ready (or can be made ready) for the new revenue and lease accounting models.”

What are the wider considerations for small businesses when implementing FRS 102 changes?

Whilst pre-tax cashflow is unlikely to be affected, the recognition and measurement changes could significantly affect profits chargeable to taxation, and hence the amount and timing of tax payments, as well as the profits available for distribution as dividends to a director/shareholder.

In addition, with leases coming on balance sheet, the gross assets of the company are likely to increase. It is important to monitor the headroom available against the turnover and gross asset company size thresholds and understand how new lease agreements (or extensions) might impact this.

It is also crucial to identify and assess any contractual arrangements impacted by figures in the annual accounts, such as lending covenants and employee pay. Understanding how these arrangements will be affected will help facilitate informed discussions with lenders, employees, customers, suppliers, and other parties that may use your accounts.

Danielle Stewart OBE, Head of Financial Accounting Advisory Specialists at 91̽»¨, said: “The 2024 periodic review is the most significant change to accounting faced by small businesses since the original transition to FRS 102 back in 2013. Through separate legislation, these businesses will soon be required to include the income statement in their annual accounts lodged at Companies House, and so the changes to revenue, profits and tax reported by them will be visible to competitors, employees, customers, suppliers, and lenders. It is therefore vital that small businesses understand how their financial performance and position shown in their accounts will be affected, so that they can manage stakeholder expectations.”

To explore how we can support your finance team with understanding the impact and timing of the changes, please contact Steve Railton, Danielle Stewart OBE, or your usual 91̽»¨contact.