Changes to UK accounting rules known as FRS 102 are now in effect and could impact many businesses, regardless of sector. While the changes are accounting-related, their impact may be felt more widely across a business, from how financial performance is reported to banking arrangements and key business decisions. Understanding whether your business is affected, and taking the right steps now, can help avoid surprises later down the line.

What are the key changes to FRS 102?

Two of the most significant changes relate to revenue recognition and lease accounting, and both could have a considerable impact depending on the nature of your business.

For revenue, FRS 102 introduces a new five-step model. Businesses will need to look carefully at their customer contracts, identify the promises being made to customers, determine the transaction price and establish when revenue should be recognised.

This may sound like a technical accounting change, but its effects can be much wider. Depending on the terms of your contracts, the timing and profile of reported revenue could change, potentially affecting profit margins and other key performance measures.

Lease accounting is also changing significantly. For most lessees, the distinction between operating and finance leases is being removed. Instead, a right-of-use asset and corresponding lease liability will generally be recognised on the balance sheet.

There are exemptions, including for certain short-term leases and leases of low-value assets, but businesses with property, vehicle or equipment leases should consider how the new requirements apply to them.

Why does this matter for SMEs?

The changes aren’t confined to accounting disclosures. They could affect reported revenue, EBITDA, profit margins, net current assets, balance sheet totals, gearing and liquidity ratios.

That means there could also be consequences for loan covenants, banking arrangements, earn-outs, bonus schemes or other agreements linked to financial performance.

Understanding the impact early is therefore important, particularly where accounts are used by lenders, investors, shareholders or other stakeholders to assess business performance.

What should businesses be doing now?

Businesses should review their customer contracts and lease arrangements and assess how the new rules affect their financial reporting.

This should include considering whether existing finance systems capture the information required under the revised standard. Accounting policies, technical documentation and financial statement disclosures may also need to be updated.

It is also worth looking beyond the finance team. Where the changes affect KPIs, banking covenants or commercial agreements, relevant stakeholders should understand the potential implications.

Where can I get further support?

Menzies has created a practical FRS 102 amendments guide and impact checklist to help businesses identify the areas likely to be affected and the actions they should consider.

Our team can also support businesses with understanding the new requirements, reviewing contracts and leases, assessing the financial impact and preparing for implementation.

Find out more: FRS 102 Amendments | Revenue Recognition, Lease Accounting