FRS 102 Update 2026: What Every Accountant Needs to Know About Leases, Revenue and Section 1A

The biggest overhaul of FRS 102 since it was introduced is now in force for accounting periods beginning on or after 1 January 2026, and small companies applying Section 1A are not exempt from it.

FRS 102 is the financial reporting standard used by the majority of UK companies that don't apply full IFRS, and it has just undergone its most significant revision in over a decade.

Following the Financial Reporting Council's (FRC) Periodic Review 2024, issued in March 2024, a new suite of amendments takes effect for accounting periods beginning on or after 1 January 2026; meaning any December 2026 year-end will be the first to reflect them in full, ahead of filing in 2027. For firms managing Annual Accounts production, this isn't a distant compliance date. It's a live capacity question for the next filing season.

This article walks through the three changes with the biggest practical impact on Annual Accounts work: the move to on-balance-sheet lease accounting under Section 20, the new five-step revenue recognition model under Section 23, and the expanded mandatory disclosures now required of small entities under Section 1A.

We'll also look at where firms most commonly underestimate the workload; and how to build capacity ahead of the deadline rather than during it.

In this article

• The scale of the change, and who's in scope
• Section 20: leases move onto the balance sheet
• Section 23: the five-step revenue model
• Expanded Section 1A mandatory disclosures
• Where firms are underestimating the workload
• Building capacity ahead of December 2026 year ends

The Scale of the Change, and Who's in Scope

Every entity reporting under FRS 102 is within scope of the Periodic Review 2024 amendments, including small companies applying Section 1A.

There is no carve-out for size. The FRC has been explicit that the revised lease and revenue requirements apply across the standard, with Section 1A adjusted to add proportionate; but still mandatory, disclosures for smaller entities.

Early adoption has been permitted since periods beginning on or after 1 January 2025, provided every amendment is applied together; selective adoption isn't allowed.

On transition, entities apply a modified retrospective approach: prior year comparatives aren't restated, and instead a cumulative adjustment is booked to retained earnings at the date of initial application. Groups already reporting under IFRS can carry forward existing IFRS 16 lease balances, which meaningfully reduces the transition workload where that applies.

Section 20: Leases Move Onto the Balance Sheet

The distinction between operating and finance leases for lessees has been removed entirely.

Under the revised Section 20, lessees must now recognise a right-of-use (ROU) asset and a corresponding lease liability at commencement for substantially all leases; a model that largely mirrors IFRS 16, with some simplifications built in for FRS 102 reporters.

What was previously a commitments note and a straight-line charge through the P&L becomes a balance sheet entry from day one. That single change affects gearing ratios, EBITDA, and any bank covenants calculated off reported figures; even where the underlying cash flows haven't moved at all.

What still qualifies for the exemption

Two narrow exemptions remain, and both continue to be expensed on a straight-line basis:

• Short-term leases: 12 months or less at commencement, with no purchase option.
• Low-value assets: Small-ticket items such as IT peripherals and office equipment.

New Section 1A disclosure requirements for leases

Small entities aren't spared the disclosure burden here. Under the revised standard, Section 1A preparers need to:

• Present ROU assets within the fixed asset reconciliation note, alongside owned assets.
• Give a general description of significant leasing arrangements (paragraph 1AC.31A)
• Disclose total expense recognised under the short-term and low-value lease exemptions.

Section 23: The Five-Step Revenue Model

Revenue recognition under FRS 102 moves from a risk-and-reward test to a control-based, five-step model, aligning Section 23 with the structure of IFRS 15.

For straightforward, single-deliverable contracts the practical outcome may not shift much. For anything bundled; software plus support, goods plus installation, retainer plus deliverables, it changes both the timing and the mechanics of when revenue hits the P&L.

What changes in practice

The practical shift is in unbundling. Where a contract contains more than one distinct good or service, each must be identified as a separate performance obligation, priced individually, and recognised as it's satisfied; either at a point in time or over time, depending on when control transfers to the customer. Contracts that were previously recognised on delivery or on invoice may now need to be split and spread.

New Section 1A disclosure requirements for revenue

Small entities must now explicitly state, in narrative form: 

• When performance obligations are typically satisfied.
• Significant payment terms attached to contracts.
• The nature of the goods or services being delivered.

Expanded Section 1A Mandatory Disclosures

Several disclosures that small entities could previously treat as optional are now mandatory, and this is the change most likely to catch firms off guard, because it isn't confined to leases or revenue; it touches related parties, provisions, dividends, going concern and tax.

Director loans and shareholder arrangements are now firmly in scope

This is the change worth flagging to clients directly. Director loan accounts, shareholder arrangements and non-wholly-owned intra-group transactions must now be disclosed, even where they were conducted on ordinary commercial terms.

For owner-managed businesses; a large share of the UK small company population; that's a meaningful change in what the notes to the accounts will say about how the business is run.

Where Firms are Underestimating the Workload

The UK isn't the first market to go through an on-balance-sheet lease transition; and the US experience under ASC 842 is instructive on how workload perception tends to move.

That gap between expectation and reality is the pattern to plan around. The technical accounting; calculating a ROU asset, applying a discount rate, unbundling a contract, is well documented and increasingly supported by updated software.

None of that is a one-off task. It's a per-client, per-engagement workload increase that lands at exactly the point in the year when Annual Accounts teams are already at capacity; which is precisely why treating it as a systems and resourcing question, not a purely technical one, tends to separate the firms that manage the transition smoothly from the ones firefighting it in March.

Building Capacity Ahead of December 2026 Year Ends  

The firms handling this well are treating it as a structural resourcing decision made in advance, not a technical problem solved client-by-client under deadline pressure.

That means building the extra review layer; lease population verification, contract unbundling checks, expanded Section 1A disclosure drafting; into the production process now, with defined ownership and a clear review rhythm, rather than absorbing it into an already stretched busy season.