FRS 102 changes from 2026: what small companies must do

In short: FRS 102 changed for accounting periods beginning on or after 1 January 2026 (HMRC BLM50005). Small companies using Section 1A must now put most leases on the balance sheet as a right-of-use asset and a lease liability, and recognise revenue using a five-step model. Early adoption is allowed only if every amendment is applied together.

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Key facts (checked on 29 September 2026)

What are the FRS 102 changes from 2026 for small companies?

The FRS 102 changes from 2026 are the Financial Reporting Council's Periodic Review 2024 amendments, issued in March 2024. For small companies the biggest are a lease model that puts most leases on the balance sheet and a five-step revenue model. They apply to accounting periods beginning on or after 1 January 2026 (HMRC BLM50005).

This table compares each area of change with what a small company must do:

The FRC describes the new Section 20 Leases, Section 23 Revenue from Contracts with Customers and Section 2A Fair Value Measurement as proportionate alignment with the international standards IFRS 16, IFRS 15 and IFRS 13 (FRC explainer, June 2026), and its press release estimates the standards are used by 3.4 million businesses (FRC press release). The amendments document also lists clearer disclosure rules for UK small entities, a rewritten Section 2 and removal of the option to newly adopt IAS 39 (FRC amendments). The changes reach Corporation Tax because a company's trading profits are calculated in accordance with generally accepted accounting practice, subject to tax adjustments (CTA 2009 s46). Micro-entities are affected less. The FRC made consequential changes to FRS 105, including a new revenue section, but made no amendments to its Section 15 Leases, so micro-entity operating leases stay off the balance sheet (FRS 105 Basis for Conclusions, paragraphs 54 and 55). The guide to FRS 105 vs FRS 102 Section 1A explains which regime a company can use.

When do the FRS 102 periodic review amendments take effect?

The FRS 102 Periodic Review 2024 amendments take effect for accounting periods beginning on or after 1 January 2026. A company with a 31 December year end first applies them in the year to 31 December 2026, and one with a 31 March year end starts with the year beginning 1 April 2026 (HMRC BLM50005).

This table works out the first period under the new rules for four common year ends, with the Companies House deadline of 9 months after the year end (GOV.UK: Accounts and tax returns for private limited companies):

Paragraph 1.37 of the amended FRS 102 sets two dates. The supplier finance disclosures in paragraphs 7.20B and 7.20C apply to periods beginning on or after 1 January 2025, and all the other amendments apply to periods beginning on or after 1 January 2026 (FRC amendments). Early application of the 2026 amendments is permitted only if they are all applied at the same time, so a company can't adopt the new revenue rules early and keep the old lease rules. Paragraph 1.38 requires an entity that applies the amendments early to disclose that fact; only small entities in the Republic of Ireland are merely encouraged to, so a UK small company adopting early says so in its notes. The date of initial application is the start of the reporting period in which the company first applies the amendments (paragraph 1.40). HMRC's leasing manual confirms the same mandatory date and that early adoption is an option (HMRC BLM50005).

Do small companies have to put leases on the balance sheet?

Yes. For periods beginning on or after 1 January 2026, a small company applying FRS 102 Section 1A must recognise a right-of-use asset and a lease liability for most leases it holds as lessee. Only short-term leases and leases of low-value assets can stay off the balance sheet (HMRC BLM52005).

Section 1A reduces what a small company presents and discloses, not how it recognises and measures transactions. The FRC's Basis for Conclusions says that, in general, the recognition and measurement requirements for small entities are the same as for larger entities entering into transactions of the same substance (paragraph B26.12), and the new Section 1A paragraphs 1AC.31A and 1AC.32A ask a small lessee to describe its significant leasing arrangements and disclose short-term, low-value and variable lease payments (FRC amendments). The revised Section 20 applies to all leases except a short list in paragraph 20.1, such as leases to explore for or use minerals, leases of biological assets and certain licences. The operating and finance lease distinction is removed for lessees only; accounting by lessors remains largely unchanged (FRC explainer, June 2026). HMRC's leasing manual notes that property leases are not exempt (HMRC BLM50010).

Paragraph 20.5 lets a lessee choose to keep two kinds of lease off the balance sheet: short-term leases and leases of low-value assets (FRC amendments). A short-term lease has a lease term of 12 months or less at the commencement date, and a lease with a purchase option never qualifies. The short-term election is made by class of asset, and the low-value election lease by lease (paragraph 20.7). Low value depends on the asset itself, not on whether the lease is material to the company, and paragraph 20.11 lists assets that are never low value, including cars, vans, lorries, forklifts and land and buildings. An office, shop or warehouse lease longer than 12 months therefore goes on the balance sheet. The Basis for Conclusions notes that IFRS 16 gives tablets, personal computers, small items of office furniture and telephones as examples of low-value assets (paragraph B20.10). Exempt leases are expensed on a straight-line or other systematic basis (paragraph 20.6), as HMRC also describes (HMRC BLM52005).

How does one office lease look under the old and new rules?

Taxley's illustration: a 5-year office lease at £12,000 a year, paid at each year end, with an assumed 5% discount rate. Under the old rules the company expensed £12,000 a year. Under the new rules it records a £51,954 right-of-use asset and lease liability, then charges depreciation plus interest: £12,989 in year 1, falling to £10,960 in year 5.

The figures are an illustration, not a real company, and every amount is rounded to the nearest pound. The lease liability starts at the present value of five payments of £12,000 discounted at 5%: £12,000 × 4.3295 = £51,954. Paragraph 20.49 says the discount rate is the rate implicit in the lease if it can be readily determined, and otherwise the lessee's incremental or obtainable borrowing rate, chosen lease by lease (FRC amendments); 5% is an assumption only. The right-of-use asset starts at the same £51,954, because there is no prepaid or accrued rent and no set-up cost, and is depreciated straight-line over 5 years at £10,391 a year (£10,390 in year 5 after rounding). Interest is 5% of the liability at the start of each year, so year 1 interest is £51,954 × 5% = £2,598. Each £12,000 payment covers that year's interest first, and the rest reduces the liability. HMRC describes the same mechanics: the cash rentals usually equal depreciation plus interest over the lease (HMRC BLM50005).

This table compares the profit and loss charge for the lease under the old and new FRS 102:

Over the 5 years the total charge is £60,000 under both treatments, so only the timing changes. The new charge is higher than the old £12,000 in years 1 to 3 and lower in years 4 and 5, because interest is highest while the liability is largest. The FRC's explainer describes the same front-loaded pattern, and notes that the lease liability will typically exceed the right-of-use asset during the lease (FRC explainer, June 2026). In the illustration, at the end of year 1 the liability is £42,552 (£51,954 + £2,598 − £12,000) and the asset is £41,563 (£51,954 − £10,391), where the old balance sheet showed neither. Year 5 interest is £570 after rounding so that the liability ends at nil. Because the asset and the liability start at the same figure, the illustration has no adjustment to opening retained earnings, which HMRC expects to be the common FRS 102 outcome (HMRC BLM52005).

What is the new five-step model for revenue in FRS 102?

The new FRS 102 Section 23 makes a company recognise revenue from contracts with customers in five steps: identify the contract, identify the performance obligations, set the transaction price, allocate it, and recognise revenue when or as each obligation is met. It applies from periods beginning on or after 1 January 2026 (FRC amendments).

The five steps in FRS 102 paragraph 23.4:

1. Identify the contract or contracts with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price the company expects to receive
4. Allocate the transaction price to each performance obligation
5. Recognise revenue when or as each obligation is satisfied

Under the model, revenue is recognised when, or as, control of the promised goods or services passes to the customer. The FRC says whether a company's revenue changes in timing or amount depends on its business model and contracts, and that FRS 102 includes accommodations to keep the model proportionate (FRC explainer, June 2026). Contracts that bundle several goods or services, run across more than one period or have variable prices are sensible ones to review first. On transition, paragraph 1.61 lets a company apply the revised Section 23 either fully retrospectively, restating comparatives, or with the cumulative effect taken to opening retained earnings; under that second route it applies the section only to contracts not completed at the date of initial application (paragraph 1.62). A small entity must also now disclose information about its performance obligations under paragraphs 23.135(a) to (c) (paragraph 1AC.32B). Any change in the timing of revenue feeds into taxable profit, because trading profits follow the accounts (CTA 2009 s46).

What else changed in FRS 102 in January 2026?

Beyond leases and revenue, the January 2026 FRS 102 changes add a new Section 2A on fair value measurement, rewrite Section 2 on concepts and pervasive principles, add rules on uncertain tax treatments and make many smaller clarifications. Supplier finance disclosures started a year earlier, for periods beginning on or after 1 January 2025 (FRC amendments).

Section 2A replaces the old fair value appendix to Section 2 and reflects IFRS 13. The FRC's explainer says the fair value of a liability is now based on its transfer value rather than its settlement value, and Section 2A applies prospectively from the date of initial application, with no restatement (paragraph 1.41) (FRC explainer, June 2026). Section 2 is rewritten to reflect the International Accounting Standards Board's Conceptual Framework issued in 2018. New paragraphs 29.17A to 29.17C cover uncertain tax treatments, applied either retrospectively where that is possible without hindsight, or with a cumulative adjustment to opening retained earnings (paragraph 1.68). The option to newly adopt IAS 39 for financial instruments is removed, although entities already using it may continue. A small trading company with no investment property, derivatives or disputed tax positions may find these changes make little practical difference, but its accounting policies note still needs to reflect the amended standard; the guide to accounting policies and notes covers that note. HMRC's leasing manual confirms that the amended standard replaces the previous FRS 102 version (HMRC BLM50005).

What changes in Section 1A for small entities in 2026?

Section 1A now lists, in its Appendix C, the minimum disclosures a UK small entity must give where relevant, instead of leaving most of them to judgement. New notes cover significant leasing arrangements, exempt lease payments, performance obligations in customer contracts, and current and deferred tax. A small entity still needs no cash flow statement (FRC amendments).

Before the review, Section 1A reflected the EU Accounting Directive, which stopped member states imposing specific disclosures on small entities beyond company law, so directors had to judge which extra notes a true and fair view needed (Basis for Conclusions, paragraphs A.78 and A.79). After the UK left the EU, the FRC specified for UK small entities the additional disclosures it expects a true and fair view to need (FRC amendments). Paragraph 1A.16A says a UK small entity shall give the Appendix C disclosures when relevant to its transactions, and paragraph 1A.17A still lets it omit an immaterial disclosure unless the Companies Act requires it. The new paragraphs include 1AC.31A, a general description of significant leasing arrangements; 1AC.32A, short-term, low-value and variable lease payments; 1AC.32B, performance obligations; and 1AC.32C, current and deferred tax. Paragraph 1A.7A confirms that a small entity need not follow Section 7 on cash flow statements. Small companies still prepare annual accounts for Companies House under company law (GOV.UK: Accounts and tax returns for private limited companies).

The transition paragraphs, 1.39 to 1.68, give no separate relief to small entities, so they use the same reliefs as every FRS 102 company. For leases, a lessee doesn't restate comparatives and instead takes the cumulative effect to opening retained earnings (paragraph 1.47). It need not reassess whether existing contracts contain a lease (paragraph 1.45). For a former operating lease it measures the liability at the present value of the remaining payments and the asset normally at the same amount, adjusted for prepaid or accrued rent (paragraph 1.51). Paragraph 1.53 adds practical expedients: one discount rate for a portfolio of similar leases, relying on an earlier onerous-lease assessment, treating leases ending within 12 months of the date of initial application as short-term, and using hindsight on the lease term. In the first year the company describes the transitional provisions it used (paragraph 1.50) and, where practicable, the effect on profit (paragraph 1.44). HMRC's manual summarises the same reliefs (HMRC BLM17050).

How do the FRS 102 changes affect Corporation Tax?

Corporation Tax on trading profits follows the accounts, so the new lease rules change the timing of tax relief but not its total. HMRC says that in most cases the depreciation of a right-of-use asset plus the interest on the lease liability is deductible each period, and that lease rentals remain revenue expenditure (HMRC BLM51005).

A company's trading profits are calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law (CTA 2009 s46). HMRC's leasing manual says the Schedule 14 Finance Act 2019 changes were designed so that lessees get no tax advantage or disadvantage from reporting right-of-use assets, and that the only change should be timing differences (HMRC BLM50010). In the office illustration, the deduction would normally be £12,989 in year 1 instead of £12,000, and £10,960 in year 5 instead of £12,000, with £60,000 in total either way. HMRC warns that some of the cost of a right-of-use asset, such as lease premiums, stamp taxes or costs of restoring a property at the end of the lease, may be capital, and the matching part of the depreciation should then be added back when it is charged (HMRC BLM51010). HMRC also says the long funding lease test still applies to a right-of-use lease (HMRC BLM50005).

Transitional adjustments for leases have their own rule. Where a right-of-use asset for an existing lease is first recognised on adopting an accounting standard in a period of account beginning on or after 1 January 2019, paragraph 13 of Schedule 14 to the Finance Act 2019 spreads the resulting adjustments over a period based on the weighted remaining terms of the leases concerned (FA 2019 Sch 14 para 13). HMRC applies the rule to FRS 102 (2024 amendments) and expects fewer adjustments, because the lease liability generally equals the right-of-use asset on transition (HMRC BLM52005). The HMRC guidance checked for this guide shows no equivalent spreading rule for revenue or other changes. For a trade, under the general change-of-basis rules, a positive or negative adjustment is treated as arising on the first day of the first period of account on the new basis (CTA 2009 s181). Whether an adjustment arises at all, and its size, depends on the company's own contracts, so an accountant's review is worth having where the amounts are material.

How should a small company prepare for the FRS 102 changes?

A small company should start by listing every lease and major customer contract, then fix the start date of its first period beginning on or after 1 January 2026. Most leases longer than 12 months need a right-of-use asset and a lease liability measured at that date, so early figures avoid a year-end rush (HMRC BLM50005).

How to prepare for the FRS 102 changes:

1. Check the start date of your first affected period
2. List every lease, hire and rental agreement the company holds
3. Mark leases of 12 months or less and low-value assets
4. Choose a discount rate for each remaining lease
5. Calculate the lease liability and right-of-use asset at transition
6. Review customer contracts with several deliverables or variable prices
7. Update the accounting policies note and Section 1A disclosures
8. Ask an accountant to review material leases and tax adjustments

Preparation matters most for companies with property or vehicle leases, because paragraph 20.11 of the amended standard lists land and buildings, cars and vans among assets that are never low value (FRC amendments). Gathering each lease's start date, end date, break or extension options and payment schedule is the slowest part, and paragraph 1.53(d) allows hindsight when judging the lease term at transition. The first period's accounts must still reach Companies House within 9 months of the year end (GOV.UK: Accounts and tax returns for private limited companies), so a company with a 31 December 2026 year end has until 30 September 2027. Keeping the calculation with the accounting records makes the tax deduction easier to support, because HMRC's guidance treats the accounts as the starting point for lease relief (HMRC BLM51005).

What do Taxley's FRS 102 Section 1A accounts support today?

Taxley (taxley.co.uk), UK online software that prepares and files the Company Tax Return (CT600) with HMRC and the annual accounts with Companies House, prepares FRS 102 Section 1A accounts but has no separate inputs for right-of-use assets, lease liabilities or the new lease and revenue notes.

Taxley's balance sheet inputs cover lines such as intangible assets, investments, stock, debtors, cash at bank, creditors and provisions, with no right-of-use asset or lease liability line. Its default FRS 102 accounting policy note describes turnover, tangible fixed assets and, where relevant, deferred tax, but not leases or the five-step revenue model. Its written notes cover secured debts, advances to directors, financial commitments, government grants and a free-text additional information note of up to 2,000 characters. Directors can replace the default policy text with their own. A company with material leases in a period beginning on or after 1 January 2026 therefore needs to prepare the lease figures and notes itself or with an accountant. Taxley is software, not an accountant, and doesn't give accounting or tax advice. Trading profits for the Company Tax Return still follow whatever the accounts show (CTA 2009 s46), so the lease figures need to be right before any return is filed.

A company that adopted the amendments early for an earlier period can upload its own iXBRL accounts, which Taxley checks against the return before filing to HMRC; the company then files those accounts at Companies House itself (GOV.UK: Accounts and tax returns for private limited companies). For a small company within scope, a return costs £84.50 (promotion price until 31 Dec 2026; £169.00 from 1 Jan 2027), including filing the accounts at Companies House. Take the 30-second check to see whether Taxley fits your company.

Frequently asked questions

Does a car lease go on a small company's balance sheet?

Usually, yes. Paragraph 20.11 of the amended FRS 102 lists cars and vans among assets that are never low value, so a car lease longer than 12 months is recorded as a right-of-use asset and a lease liability. A lease of 12 months or less can use the short-term exemption.

Do last year's figures need restating for leases?

No. A lessee applies the new lease rules without restating comparatives, taking the cumulative effect to opening retained earnings at the start of its first period on the new rules (paragraph 1.47). The prior-year column keeps the old operating lease accounting, and the notes describe the transition.

Can a micro-entity stay on FRS 105 and avoid the lease change?

Yes. The FRC made no amendments to the leases section of FRS 105 in the 2024 review, so a micro-entity using FRS 105 keeps operating leases off its balance sheet. Its revenue section was rewritten, applied only to contracts beginning after the company first applies the amendments.

Which discount rate does a small company use for a lease?

It uses the rate implicit in the lease if that can be readily determined. Otherwise it chooses, lease by lease, its incremental borrowing rate or its obtainable borrowing rate: the rate it would pay to borrow a similar amount over a similar term (paragraph 20.49 and the glossary).

Could the lease change affect a company's bank loan covenants?

It could. The FRC's June 2026 explainer says measures such as gearing, interest cover, the current ratio and EBITDA may change when leases move onto the balance sheet, which can affect covenant tests. Some companies may want to renegotiate covenants with their lender.