Recent changes to Financial Reporting Standard 102 (FRS 102), the Financial Reporting Standard applicable in the Republic of Ireland and the UK, have implications for businesses stretching beyond financial reporting and the audit file.

FRS 102 is the core accounting standard applied by Irish and UK companies that do not report under full, or EU/UKadopted, International Financial Reporting Standards (IFRS), setting out how these businesses must prepare and present their financial statements.

For accounting periods beginning on or after 1 January 2026, FRS 102 has been amended to bring the accounting treatment of revenue and leases into closer alignment with IFRS, among other revisions.

For the relevant businesses, responding appropriately to these changes will require a coordinated approach, led by the board, to ensure clear communication and alignment between finance, commercial and other relevant functions.

Impact of FRS 102 lease accounting updates

Businesses should be aware that the revised lessee lease accounting requirements under FRS 102 may impact earnings before interest, taxes, depreciation and amortisation (EBITDA), gearing ratios and other metrics used in banking or loan covenants and remuneration schemes.

Under the old rules, a lessee could classify a lease as either a finance lease or an operating lease. The new requirements remove this distinction, effectively bringing all leases onto the balance sheet, with exemptions for low-value or short-term leases.

Lease assets are categorised as “right-of-use assets”, whereby a business does not own the underlying asset itself but does have the right to use this asset for a specified period.

One example of a right-of-use asset is an office lease. Here, the business does not hold legal title to the building but does have the right to access and use the office for operations.

Previously, operating lease payment commitments sat off balance sheet and reflected in a disclosure note in the financial statements with a single rental charge recognised in the Profit and Loss statement. Under the revised accounting requirements, there is now an asset and a liability recognised on the balance sheet, with depreciation and interest running through the Profit and Loss statement.

Revenue recognition demands more judgement

The second major change in FRS 102 requirements concerns revenue recognition. This now aligns with the five-step revenue recognition model introduced by IFRS 15 Revenue from Contracts with Customers, with some simplifications provided.

Businesses must identify the distinct performance obligations within customer contracts, determine the transaction price and allocate the transaction price across the relevant performance obligations.

Revenue is only recognised when, or as, each performance obligation is satisfied.

The impact of these requirements is likely to be most significant for companies with complex contracts, bundled goods and service offerings, or variable pricing structures. In particular, the timing of revenue recognition may be of significance for technology and construction businesses.

Under the old rules, businesses generally assessed when the significant risks and rewards of ownership transferred or, for services, when the outcome of the transaction could be measured reliably.

Now, they must consider the promises in the contract and how each performance obligation is satisfied. As a result, this introduces the need for greater judgement and estimation with key accounting decisions being made earlier in the revenue recognition process.

EBITDA and covenants

The revised FRS 102 requirements may affect how EBITDA and/or other metrics are calculated.

For example, the rental expense – which would previously have reduced EBITDA – is no longer recognised and has now been replaced by depreciation and interest which sit outside EBITDA. This means the company’s EBITDA may change when compared to previous years.

In response, businesses with lending or remuneration arrangements linked to EBITDA, turnover, net debt or other metrics, are advised to review covenants with lenders and remuneration policies.

They must check whether they are set on a frozen GAAP basis or whether they move with the accounting standards as they change.

Consider, for example, employee bonuses: if EBITDA is now higher, will these bonuses be bigger, resulting purely from a change in accounting standards?

Transparency benefits The FRS 102 amendments are designed to improve the transparency of financial reporting and there is a potential upside for businesses raising capital, refinancing or preparing for sale.

From a balance sheet perspective, for example, there is now greater visibility of contractual arrangements and greater transparency generally.

For international buyers, these updates close the gap between internationally recognised IFRS and local standards in Ireland and the UK. This reduces the due diligence burden because there is clearer sight of the different arrangements and how they affect the balance sheet and quality of earnings.

This structure also carries through into acquisitions, where – in terms of intangible assets and purchase price allocation – the fair value of identifiable assets acquired, and liabilities assumed, have been brought onto the balance sheet.

Practical implementation Businesses may encounter challenges in the implementation of the FRS 102 updates where there is inconsistent understanding and communication between different functions within the company.

In practice, we often see a disconnect between the finance team and other functions, particularly where communication is limited.

Much of this comes down to data. For example, if the sales team in a business is pricing deals and writing contract terms, the finance team will need to fully understand these terms because they will affect how the contract is accounted for. Gathering and validating the necessary contract data can be challenging. Businesses may struggle to obtain the information needed to support accounting judgements where lease registers and/or customer contract data are incomplete or do not exist at all.

Assembling this information for auditors requires significant manual input so businesses are advised to allocate sufficient resources to manage the process.

Here are three steps we recommend your business takes today to prepare for the smooth implementation of the FRS 102 changes:

1. Start your impact assessment now Review lease and customer contracts, quantify the balance sheet impact and effect on EBITDA/other metrics, and assemble audit-ready documentation.

2. Talk to stakeholders before EBITDA/metric changes Confirm whether covenants and remuneration policies sit on a frozen GAAP basis and agree any adjustments before the higher EBITDA, or changes in other metrics, shows up in the accounts.

3. Fix the data and systems gap Centralise lease and contract data across finance, sales and operations so the numbers hold up under scrutiny.