Imagine it’s 2026. You’re reviewing your financial reports and everything looks clearer, sharper and more transparent.
Your investors and lenders are more confident than ever because your business’ financial story is told in a way that makes sense.
This isn’t just a nice thought – it’s what the Financial Reporting Council (FRC) is aiming for with its 2024 updates to the Financial Reporting Standards (FRS).
While these changes won’t be mandatory until financial periods starting on or after 1st January 2026, they could affect your business much sooner. That’s why it’s worth getting ahead of the game now.
In this blog, we’re exploring what’s changing, why it matters and how it can actually benefit your business.
Changes to Leases
What’s new?
Say goodbye to the old split between “operating” and “finance” leases. The new rules mean that most leases will now appear on your balance sheet as both an asset and a liability.
But don’t worry – small-ticket items and short-term leases can still be kept off your balance sheet, keeping things straightforward.
Why this matters to you
This change will present a more accurate picture of your business’ finances, with two key benefits for your business:
- More transparency for lenders and investors will lead to greater confidence in your numbers, which could mean easier access to funding.
- Better alignment with global accounting standards, supporting businesses that trade internationally.
If you’re a small business using FRS 105, you don’t have to worry – these changes won’t apply to you.
If you’ve previously categorised leases as “operating” and kept them off your balance sheet, be aware that this change might shift how your financials look on paper. While it won’t necessarily change your cash flow, it could impact key financial rations, so it’s worth reviewing ahead of time.
Revenue Recognition
What’s changing?
The new FRS updates introduce a five-step model to standardise how revenue is recorded from contracts with customers. Here’s a quick overview of the model:
- Identify the contract: Revenue can only be recognised if there’s a contract with enforceable rights and obligations. This could impact businesses that start work before formal agreements are signed.
- Identify performance obligations: Firms must define distinct services in their contracts. This is straightforward for simple engagements but could be more complex for contracts covering multiple independent services.
- Determine the transaction price: For standard contracts, the price will be clear. But for variable fees like contingent fees or long-term contracts, firms will need to estimate the most likely amount.
- Allocate the transaction price: If a contract includes multiple services, the total price must be split fairly across them, reflecting their standalone value.
- Recognise revenue when (or as) performance obligations are met: Revenue is recognised either over time (e.g. fixed-fee work billed monthly) or at a point in time (e.g. contingent fees recognised when a case is settled).
Why this matters to you
This update gives businesses one consistent way to recognise revenue across all contracts. As a result, your revenue reports will be more reliable and easier to understand.
By removing grey areas in contract-based revenue, your reports will be more consistent and stakeholders will have more clarity and confidence in your numbers.
Again, micro-entities using FRS 105 will see similar changes – but with a simplified version that keeps reporting easy.
So, what’s next?
The goal of these updates is to make financial reporting clearer, more consistent and better aligned with international practices. But there are a few changes to keep in mind:
- Your processes may need adjusting, especially if you handle leases or contract-based revenue.
- Your financial statements might look different, even though the fundamentals of your business haven’t changed.
The good news is that you have time to prepare – planning ahead will make the transition easier and save you hassle in the long run.
Need help preparing?
If you’re unsure how these updates will impact your business or you want a head start in getting prepared, we’re here to help.
Get in touch with our team today.
