From January 2026, the accounting standard that underpins financial reporting under Irish/ UK GAAP has changed and the implications reach beyond the audit file.
Naazneen Moosa, Director in KPMG's Accounting Advisory practice, sets out what this means for business owners.
FRS 102 is the core accounting standard applied by Irish and UK companies that don't report under full or EU/ UK adopted International Financial Reporting Standards (IFRS). It sets out how businesses must prepare and present their financial statements.
Following the Financial Reporting Council's FRS 102 Periodic Review 2024, the amendments apply to accounting periods beginning on or after 1 January 2026. FRS 102 has been amended to bring accounting treatment of revenue and leases into closer alignment with IFRS, amongst other revisions.
The changes may impact EBITDA, gearing ratios and other metrics behind banking or loan covenants and remuneration schemes. According to Naazneen Moosa, a director in KPMG's Accounting Advisory practice, under the old rules a lessee could classify a lease as either a finance lease or an operating lease.
"The new requirements remove that distinction, and effectively all leases now come onto the balance sheet, with exemptions for low-value or short-term leases," she explains.
Lease assets are categorised as 'right-of-use assets' (PDF, 292KB). With a right-of-use asset you do not own the underlying asset itself but you have the right to use that asset for a specified period.
"For example, take an office lease. You do not hold legal title to the building but you have the right to access and use it for your operations. That is essentially what a right-of-use asset is," says Moosa.
"Under the new FRS 102 lease accounting requirements, these commitments will now be reflected on the balance sheet. Previously, lease payment commitments sat off balance sheet, buried in a disclosure note at the back of the financial statements. Now there's an asset and a liability on the balance sheet, with depreciation and interest running through the P&L."
The second major change in accounting requirements concerns revenue recognition. This now aligns with the five-step revenue recognition model (PDF, 293KB) 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, which occurs when or as control of the goods or services transfers to the customer.
The impact will be most pronounced for companies with complex contracts, bundled goods/ service offerings, or variable pricing structures. The timing of revenue recognition is of particular significance for technology and construction businesses.
The judgement required has moved further up the contract.
"Under the old rules you generally assessed when the significant risks and rewards of ownership transferred or, for services, when the outcome of the transaction could be measured reliably," says Moosa. "Now you have to look at the promises in the contract and how each performance obligation is satisfied, which introduces more judgement and estimation."
The revised FRS 102 requirements, and the lease accounting changes in particular, affect how EBITDA is calculated. "You're removing the rental expense, which would have previously reduced EBITDA, and your depreciation and interest now sit below that line, so the company's EBITDA may be higher than in previous years."
For businesses with lending or remuneration arrangements linked to EBITDA, turnover, net debt or other metrics, Moosa advises that covenants with lenders and remuneration policies should be reviewed early to assess potential covenant impacts.
Where covenant headroom is tight, KPMG's Debt Advisory services can support discussions with lenders on covenant adjustments and facility terms.
"You need to check whether they're set on a frozen GAAP basis or whether they move with the accounting standards as they change. For example, if EBITDA is now higher, does that mean larger employee bonuses resulting purely from a change in accounting standards? That needs to be considered."
The FRS 102 amendments, including the revised FRS 102 disclosure requirements, are designed to improve financial reporting transparency. With the amendments, Moosa sees an upside for businesses raising capital, refinancing, or preparing for sale.
"From a balance sheet perspective there is now more visibility of contractual arrangements and greater transparency generally. As an international buyer, these updates close the gap between internationally recognised IFRS and our local standards here in Ireland and the UK, this reduces the due diligence burden because you have clearer sight of the different arrangements and how they affect the balance sheet and quality of earnings."
That structure carries through into acquisitions too.
"In terms of intangible assets and purchase price allocation, from an accounting perspective you bring the fair value of assets and liabilities acquired onto the balance sheet," Moosa explains. "Because you now have a lease asset and a lease liability, those form part of what's acquired, which may affect the amount attributable to goodwill."
For acquisition accounting, financial reporting valuations can support purchase price allocation and the valuation of acquired assets and liabilities.
Moosa advises that different departments in a business need to understand the impact of the FRS 102 accounting changes. "We often see a disconnect between the finance team and other functions, without much communication between them.
So much of this comes down to data. If your sales team is pricing deals and writing contract terms, finance needs to understand those terms because they affect how the contract is accounted for".
"Gathering and validating contract data is a real challenge," Moosa adds. "Lease registers are often incomplete or don't exist at all. Assembling all this information for auditors is quite a manual task so companies need to allocate the right resources to manage the changes."
The main Periodic Review 2024 amendments apply to accounting periods beginning on or after 1 January 2026, with early application permitted. Businesses reporting under FRS 102 should now assess how the revised requirements affect their financial reporting, contracts, systems and key financial metrics.
Two of the most significant changes affect leases and revenue recognition. Revised Section 20 introduces on-balance-sheet lease accounting for lessees, subject to specified exemptions, while revised Section 23 introduces a five-step revenue recognition model based on IFRS 15 principles.
No. FRS 102 remains a separate financial reporting standard. The Periodic Review 2024 amendments bring parts of its lease and revenue requirements into closer alignment with IFRS principles.
Businesses applying FRS 102 may need to assess the changes, particularly where they have significant lease commitments, complex customer contracts, lending covenants or remuneration arrangements linked to financial metrics.
Reported EBITDA may increase for affected leases because expenses previously recorded as operating lease costs may instead be presented as depreciation and interest. Businesses should review how their covenant and remuneration arrangements define relevant financial metrics.
KPMG Private Enterprise advises private and family businesses on FRS 102 transition and implementation, financial reporting and accounting advisory services. To discuss how KPMG can support your business, contact Naazneen Moosa, Director, Accounting Advisory.
Partner, Head of Private Enterprise, National Chairperson of Audit Committee Institute
KPMG in Ireland
