As the countdown begins toward January 2026, a seismic shift is brewing for entities applying FRS 102. The Financial Reporting Council (FRC)’s Periodic Review is bringing sweeping changes – aligning more closely with international standards, introducing more transparency, and redefining how businesses will present key metrics like EBITDA and cash flows.
These updates are part of the FRED 82 proposals and mark the biggest shake-up to FRS 102 in nearly a decade. Whether you’re a finance leader, business owner, or adviser.
Understanding what’s changing, what it means, is crucial.
We’ve been tracking this closely and you’ll find all the relevant advice here – MEET FRED, where we dive deeper into the rationale, technical implications, and preparation tips.
If you haven’t explored it yet, we recommend starting now. The sooner you understand what’s ahead, the better placed you’ll be to leverage the benefits and manage the risks.
THE KEY FRS 102 UPDATES YOU SHOULDN’T MISS
The new proposals simplify, align, and modernise the framework, with three headline changes:
Revenue Recognition: A Five-Step Model
The updated revenue recognition model will more closely resemble IFRS 15: Revenue from Contracts with Customers, but with thoughtful simplifications for smaller entities. The model introduces a five-step process to recognise revenue, bringing greater consistency and clarity to financial statements.
Why it matters: Clearer, more consistent revenue reporting improves transparency for investors and makes it easier to compare financial performance across international boundaries.
Lease Accounting: Bringing Leases On-Balance Sheet
Leases will no longer hide in the notes or off-balance sheet. Much like IFRS 16, lessees must now recognise a right-of-use asset and a corresponding lease liability.
Why it matters: This change increases visibility into long-term financial commitments. It also alters how key financial metrics – like liabilities, net assets, and debt ratios – are presented.
Other Improvements: Better Valuation, Clarity on Uncertainty, and More
Several additional upgrades are coming too:
- Enhanced guidance on fair value measurement
- More explicit treatment of uncertain tax positions
- Updates around business combinations
These all aim to improve financial statement reliability and comparability.
THE EBITDA ILLUSION: A BOOST WITH A HIDDEN CATCH
One of the most eye-catching impacts of these changes will be on your EBITDA – a critical performance metric for investors, acquirers, and lenders.
How Will EBITDA Change?
Under current rules, lease payments sit in operating expenses, reducing EBITDA. But under the new FRS 102:
- Lease costs are split into interest and loan repayments
- Neither of these are included in EBITDA calculations
The result? A higher EBITDA – at least on paper. This may look like a financial improvement, which could impress investors or inflate valuation multiples.
But Watch Out…
That uplift comes with strings attached. While EBITDA increases, so does the interest expense – and that has implications for your:
- Loan covenants
- Debt service ratios
- Refinancing negotiations
If covenants are based on pre-change EBITDA, you’ll need to reassess and possibly renegotiate to avoid unintentional breaches.
CASH FLOW CHANGES: SHIFTING THE NARRATIVE
The shake-up doesn’t stop at revenue and EBITDA. Your cash flow statement is getting a makeover, too.
Old Approach vs New Reality
Before: Lease payments were included fully in operating cash flows
Now: Payments are split: interest goes to operating cash flow, capital repayments go to financing activities
This means your operating cash flow will appear stronger, but financing cash outflows will rise. Net cash flow remains the same, but investors and analysts will need to understand the story behind the shift.
WHY THESE FRS 102 CHANGES MATTER
These are more than compliance updates. They’re a strategic opportunity to enhance your reporting, boost credibility, and modernise how you present your business to the world.
The Benefits
- International alignment: Reduced GAAP differences increase comparability
- Investor confidence: More transparent lease and revenue data
- Capital access: Lenders and investors favour clearer, standardised financials
- Stronger governance: Clearer obligations help improve internal decision-making
The Challenges
- Metrics shift: EBITDA, net income, and key ratios will move – this affects everything from M&A valuations to bonus schemes
- Covenant recalibration: Loan and pension agreements may need renegotiation
- Sensitive disclosures: The new revenue recognition model may expose forecasts or deferred revenue positions
- System updates: Your chart of accounts, reporting tools, and financial systems may need revamping to remain compliant
WHAT SHOULD YOU BE DOING NOW?
Preparation is key. Here’s how to get ahead:
- Assess the Impact on Your Metrics
Run shadow accounts to simulate how your EBITDA, net assets, and ratios will look post-change. Use this to inform discussions with your lenders, investors, and internal stakeholders.
- Review Your Leases and Contracts
Gather all your lease data and ensure it’s centralised and up to date. You’ll need to classify each lease correctly and understand the financial reporting implications.
- Educate Your Teams and Board
Training sessions, workshops, and cross-functional collaboration will help bring everyone on the journey. These changes touch finance, tax, legal, systems, and strategy.
- Speak to Your Advisors
Professional advice is essential. From assessing technical compliance to updating systems and communicating changes externally, your advisers can help you navigate the journey confidently.
FINAL THOUGHTS: A NEW ERA OF FINANCIAL REPORTING
The 2026 changes to FRS 102 are a big moment for UK and Irish entities. Yes, they require time and effort. But they also offer a chance to bring your financial reporting into the modern world – clearer, fairer, and more aligned with international expectations.
This isn’t just about staying compliant. It’s about staying competitive.
Want to feel fully in control of what’s ahead?
Sign up for our upcoming virtual training webinar, where we’ll break down everything you need to know about the latest FRS 102 changes. From lease accounting and revenue recognition to all the finer details that could impact your business.
Our team will share practical tips, real-world examples, and help you tackle the changes with confidence. It’s your one-stop shop for getting prepped, without the jargon.
Register now and take the guesswork out of 2026.
