FRS 102 revisions

The Financial Reporting Council (FRC) has published revisions to FRS 102, the financial reporting standard that underpins charity accounting. Effective from 1 January 2026, the changes include new rules for revenue recognition and lease accounting.

Under the revised standard:

– Charities will need to adopt a new ‘five step’ revenue recognition model for contracts with customers. This will entail identifying contracts, identifying ‘performance obligations’, determining and allocating a transaction price to performance obligations and finally recognising revenue as and when performance obligations are satisfied. There will also potentially be a requirement to recognise a contract asset based on stage of completion for individual projects or contracts. This will involve forecasting and estimating balances and, as such, can be a highly subjective area of accounting.

– Operating leases will now need to be recognised on the balance sheet via recognising a liability for future lease payments and a corresponding ‘right of use’ asset. For longer term leases there will also be a requirement to discount future cash flows to present value in order to account for the time value of money. These are potentially complex calculations which could significantly alter the presentation of financial statements, including balance sheet composition, for charities with substantial lease commitments.

– However, the updated rules on leases will still retain some options for exemptions. Short-term leases (those with terms of less than 12 months and without a purchase option), low value leases (note: the definition of ‘low value’ is a question of judgment for reporting entities) and service contracts with no identifiable asset or where the customer does not control or substantially obtain all economic benefits from the asset’s use will continue to be exempt from capitalisation.

These updates aim to improve transparency and comparability across sectors. Charities will need to assess the impact of these changes on their financial position and consider updating their accounting policies and systems accordingly. It is also recommended that they engage early with auditors or other advisers as appropriate in order to assess the scale of change, identify any problems and avoid delays to publication of the financial statements.

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If you have any questions, then please feel free to get in touch with Michaela Johns on 023 8046 1256 or email Michaela Johns.