FRS 102: UK Financial Reporting Standard and 2026 Changes

FRS 102 is the Financial Reporting Standard applicable in the UK and Republic of Ireland, issued by the Financial Reporting Council (FRC), and it is the default framework for entities preparing general-purpose financial statements that do not report under adopted IFRS, FRS 101, or the micro-entity standard FRS 105.¹ It replaced the older patchwork of UK GAAP with a single principle-based standard sitting closer to international expectations. A major set of amendments from the FRC’s 2024 periodic review took effect for accounting periods beginning on or after 1 January 2026, rewriting how entities recognise revenue and account for leases, so any accounts being prepared now are being prepared under a substantially updated version of the standard.

Who Uses FRS 102

FRS 102 applies to private limited companies, LLPs, partnerships, charities, and other non-profit organisations that are not using adopted IFRS, FRS 101, or FRS 105. Which parts of the standard you follow depends on your company’s size under the Companies Act 2006, and the thresholds were raised for financial years beginning on or after 6 April 2025.

A company is small if it meets at least two of the following:

Turnover not more than £15 million
Balance sheet total not more than £7.5 million
Not more than 50 employees

A company is medium-sized if it meets at least two of:

Turnover not more than £54 million
Balance sheet total not more than £27 million
Not more than 250 employees

Anything above the medium thresholds is large and carries the fullest reporting and disclosure obligations. Small entities can use Section 1A of FRS 102, a streamlined version with reduced disclosures. Companies below the small thresholds may qualify instead for FRS 105, the micro-entities regime, which permits only historical cost measurement and the tightest disclosure set. To qualify as a micro-entity for years beginning on or after 6 April 2025, a company must meet at least two of: turnover not more than £1 million, balance sheet total not more than £500,000, and not more than 10 employees.²

What Changed From 1 January 2026

The FRC completed its periodic review in March 2024, and most of the resulting amendments became mandatory for accounting periods beginning on or after 1 January 2026.¹ Early adoption was permitted, but only if all the amendments (except the new supplier finance disclosures) were applied together.³ Three changes matter most in practice.

Revenue Recognition Under the Revised Section 23

Section 23 is now titled “Revenue from Contracts with Customers” and introduces a five-step model closely aligned with IFRS 15:

Identify the contract with a customer.
Identify the separate performance obligations in the contract.
Determine the transaction price.
Allocate the transaction price to the performance obligations.
Recognise revenue as each performance obligation is satisfied.

For straightforward sales of goods the practical impact is modest. Businesses with bundled contracts, long-term service arrangements, or variable pricing will need a more structured contract-by-contract analysis, and that often requires input from people who understand the commercial terms rather than just the finance team.

Lease Accounting Under the Revised Section 20

The old split between operating and finance leases is gone for most lessees. Nearly all leases now sit on the balance sheet. A lessee recognises a right-of-use asset and a matching lease liability at commencement, measured at the present value of the future lease payments. The asset is depreciated and the liability accrues interest across the lease term.

Two optional exemptions survive: short-term leases and leases of low-value assets can still be expensed in the way operating leases used to be. Everything else is capitalised. For a company with a sizeable property lease portfolio, this materially reshapes the balance sheet and the ratios lenders and investors watch. The calculations bring in discount rates, indexation adjustments, and remeasurement when lease terms change.

Related Party Disclosures for Small Entities

Small entities using Section 1A must now disclose related party transactions for the first time, applying paragraphs 33.9 and 33.14 of FRS 102. Paragraph 33.7, on key management personnel compensation, is not extended to small entities.¹ Transactions with directors, shareholders, and connected parties will need identifying and reporting. Transactions outside normal market conditions already required disclosure under the Small Companies Regulations, but the new rule casts a wider net, and record-keeping practices may need tightening.

How FRS 102 Accounts Are Built

Two foundational assumptions shape every number in the accounts. Under the accrual basis, income is recorded when earned and expenses when incurred, regardless of when cash actually moves. A December sale paid in February still lands in the December accounts. The going concern assumption requires directors to assess whether the business will continue operating for at least twelve months from the date the financial statements are authorised for issue. If they cannot make that assessment with reasonable confidence, the accounts are prepared on a different basis and the notes must explain why.

Historical cost is the default measurement basis for most items, but certain assets require fair value. Investment properties are the clearest example, because carrying them at a purchase price from decades ago would mislead. Some financial instruments also trigger fair value depending on their complexity.

A complete set of FRS 102 accounts includes:

A statement of financial position (the balance sheet), showing assets, liabilities, and equity at the reporting date.
A statement of comprehensive income, showing profit or loss plus other gains and losses such as revaluation movements. This can be split into a separate income statement and a statement of other comprehensive income.
A statement of changes in equity, tracking share issues, dividends, and retained profits.
A statement of cash flows, covering operating, investing, and financing activities. Small entities under Section 1A are generally exempt.
Notes to the financial statements, explaining accounting policies, breaking down key balances, and covering unusual items. The notes often run longer than the primary statements.

Medium-sized and large companies must also prepare a strategic report under the Companies Act 2006, giving a fair review of the business and describing its principal risks and uncertainties. Large companies add analysis using financial key performance indicators and, where relevant, non-financial indicators covering matters such as environmental impact and employee issues.⁴ Small companies are exempt from the strategic report, though they may include one voluntarily.

Small Companies Under Section 1A

Section 1A cuts back both presentation and disclosure for small companies. Rather than the full suite of notes required of larger entities, small companies prepare a condensed set of minimum disclosures, and the exemption from producing a statement of cash flows is one of the most useful practical reliefs. Directors still bear legal responsibility for ensuring the accounts give a true and fair view, even in abbreviated form. The new related party transaction disclosure from January 2026 is the first significant expansion of Section 1A obligations, and small entities that previously reported very little about dealings with connected parties will need to catch up.

Groups and Consolidation

A parent company that controls one or more subsidiaries generally prepares consolidated financial statements under Section 9, combining the group’s results and position into a single set of accounts. The most commonly used exemption applies to small groups: if the group as a whole meets the small company size thresholds on an aggregate basis, the parent is not required to consolidate. Public companies, authorised insurers, and banking companies cannot use the small group exemption regardless of size.

An intermediate parent can also avoid consolidation if it is itself a subsidiary of a larger group that prepares consolidated accounts, provided those accounts are filed with the registrar and the required disclosures are made. That stops the same subsidiaries being consolidated repeatedly up a corporate chain.

Deferred Tax Under Section 29

Section 29 covers both current and deferred tax. Current tax is what is owed to HMRC for the period based on taxable profit. Deferred tax uses a timing difference approach: it arises when there is a gap between when income or expenses appear in the accounts and when they are taxed. Accelerated capital allowances are the classic case, because tax relief on an asset can run faster than accounting depreciation, creating a temporary mismatch that a deferred tax liability captures.

Deferred tax assets work the other way. Unused tax losses carried forward give rise to a deferred tax asset, but only to the extent it is probable those losses will be offset against future taxable profits. Optimistic assumptions about future profitability do not justify a large asset. Measurement uses the tax rate enacted or substantively enacted at the balance sheet date, and discounting is not permitted.⁵ HMRC operates specific corporation tax rules on loan relationships, derivatives, and intangible assets that can create additional timing differences on transition, and professional advice pays off in that area.

Transitioning to FRS 102 for the First Time

First-time adopters follow Section 35. The starting point is identifying the transition date, which is the beginning of the earliest period for which full comparative information is presented. For a company with a December year-end adopting FRS 102 for its 2026 accounts, the transition date is 1 January 2025.

The opening balance sheet at the transition date is then restated under FRS 102’s recognition and measurement rules. Every asset, liability, and equity item is reviewed against the new requirements. Adjustments commonly arise on goodwill, financial instruments, lease accounting (now substantially different under the revised Section 20), and holiday pay accruals. The comparative year is restated on the same basis, and the first set of FRS 102 accounts must include a reconciliation showing how the switch affected previously reported profit or loss and equity.¹ Section 35 also contains optional exemptions and mandatory exceptions that change how specific items are restated, so working through the transition rules line by line is unavoidable.

Filing Deadlines and Penalties

Getting the accounts right is only half the job. Missing filing deadlines with Companies House or HMRC triggers automatic penalties.

Companies House Late Filing

Private limited companies and LLPs must file annual accounts within nine months of their accounting reference date. The penalties are automatic and offer no grace period:⁶

Up to 1 month late: £150
1 to 3 months late: £375
3 to 6 months late: £750
More than 6 months late: £1,500

If accounts are filed late in two consecutive financial years, the penalty doubles. A company one month late in each of two years pays £300 rather than £150. The penalty applies regardless of company size or trading status.⁷

Corporation Tax Return Penalties

HMRC doubled the fixed penalties for late corporation tax returns (CT600) from April 2026. For any return with a filing deadline on or after 1 April 2026:⁸

Within 3 months late: £200 (previously £100)
More than 3 months late: an additional £200, taking the total to £400
Three consecutive late filings: £1,000 if within 3 months, or £2,000 if beyond

Fixed penalties are only the start. Where a return is more than six months late, HMRC estimates the tax bill and adds a 10 percent surcharge, with another 10 percent added at twelve months. Unpaid corporation tax accrues daily interest at 7.75 percent as of January 2026, with further late-payment penalties of 5 percent at 30 days, six months, and twelve months overdue.⁹ These charges stack. A company that ignores both its accounts and its tax return for a year can face thousands of pounds in combined penalties before any underlying tax liability is counted.

1
Financial Reporting Council. FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland
2
Financial Reporting Council. FRS 105 The Financial Reporting Standard Applicable to the Micro-entities Regime
3
Financial Reporting Council. FRS Factsheets and Explainers
4
Legislation.gov.uk. The Companies Act 2006 (Strategic Report and Directors Report) Regulations 2013
5
GOV.UK. FRS 102 Overview Paper – Corporation Tax Implications
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GOV.UK. Prepare Annual Accounts for a Private Limited Company: Penalties for Late Filing
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GOV.UK. Late Filing Penalties
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GOV.UK. Increases to Corporation Tax Late Filing Penalties
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GOV.UK. HMRC Interest Rates for Late and Early Payments