Businesses feel impact as new UK accounting rules take effect

Yorkshire businesses are beginning to feel the impact first hand of the biggest shake-up to UK accounting rules in more than a decade, as changes to FRS 102 come into force for accounting periods starting from January 2026.

Whilst much of the discussion last year focused on preparation, accountants say the conversation has now shifted to implementation issues, management decisions and, in some cases, unexpected consequences appearing in draft accounts.

The revised standard introduces a new five-step model for revenue recognition and requires most leases to be brought onto the balance sheet. Together, these changes are altering how profits, assets and liabilities are presented, with implications reaching far beyond the finance function. These changes have been made to more closely align with international reporting standards.

Rick Dunkley, partner at independent accounting firm Saffery in Leeds, said: “Many businesses are only now fully appreciating the scale of the changes. Now that companies are applying the new rules to live data, the differences are becoming much more tangible. We’re seeing shifts in reported profits, changes to balance sheet strength and, in some cases, challenging conversations with lenders and investors who are trying to understand what has actually changed.”

Revenue recognition has proved particularly complex for businesses with long-term or multi-element contracts. Some Yorkshire manufacturers and service providers are finding that income is being recognised later than under the old rules, creating volatility in reported results despite stable underlying trading.

Rick added: “The new model forces businesses to be much more precise about what they are delivering and when. That’s good discipline, but it does mean some companies are reporting lower revenue in the early stages of contracts, which can come as a surprise if it hasn’t been clearly explained to stakeholders.”

The impact of lease accounting is even more visible. Retailers, logistics firms and professional services businesses with property or vehicle leases are reporting significantly higher liabilities, as right-of-use assets and lease obligations appear on balance sheets for the first time.

Rick added: “For many, EBITDA may increase overnight because rental payments are now split between depreciation and interest, rather than being recognised as operating expenses. That can look positive on the surface, but it’s essential that boards and lenders understand this is an accounting change, not a sudden improvement in cash generation.”

There are also knock-on effects for loan covenants, earn-out arrangements and employee incentive schemes that are linked to profit or asset-based metrics that are impacted by the accounting changes. In some cases, businesses may need to renegotiate terms or reset benchmarks to reflect the new accounting reality.

Rick concluded: “The key lesson from the first wave of implementation is the importance of communication. The businesses coping best are those that have taken time to explain the numbers, both internally and externally. FRS 102 isn’t just a technical exercise – it’s influencing how performance is perceived.

“As the first full year under the new rules begins, we expect continued scrutiny from banks, investors and regulators, making clarity and consistency in reporting more important than ever.”