18th July 2025FRS 102 Amendments: Implications for Business Valuation and M&A Transactions

The 2024 revisions to FRS 102, effective from 1 January 2026, introduce significant changes to revenue recognition and lease accounting. These updates, aligning FRS 102 more closely with IFRS 15 and IFRS 16, are expected to materially affect how businesses are valued and how M&A deals are structured and negotiated. The changes, which bring FRS 102 closer to international standards, will influence key financial metrics that underpin business valuations and deal terms.

This article will discuss the key changes to FRS 102 and their practical impact on business valuation, M&A transactions, and provide guidance on how businesses can best prepare for January 2026.

Key Changes and Their Impact

1.Revenue Recognition (Section 23):
The adoption of a five-step model for revenue recognition (mirroring IFRS 15) may lead to changes in the timing of revenue recognition for service-based and long-term contract businesses. In some cases, this could reduce reported earnings and EBITDA in the short term, affecting valuation multiples and potentially lowering deal prices

2. Lease Accounting (Section 20):
The requirement to capitalise most leases on the balance sheet introduces right-of-use assets and lease liabilities. This change inflates both assets and liabilities, impacting net debt and leverage ratios—metrics often scrutinised in due diligence and used in pricing negotiations

3. Fair Value Measurement and Financial Instruments (2a):
Updates to fair value measurement principles and the removal of IAS 39 options may alter how certain assets and liabilities are valued, influencing net asset value and purchase price allocations

Implications for Valuation and M&A

• More Transparent Valuations: Buyers and sellers will have a clearer, more consistent basis for valuing assets and liabilities, reducing ambiguity in negotiations.
• Increased Scrutiny of Level 3 Inputs: Subjective valuations (e.g., goodwill, intangibles) will require more robust documentation and justification.
• Impact on Purchase Price Allocations: Acquirers must reassess how they allocate purchase consideration to acquired assets and liabilities, potentially affecting post-deal amortisation and earnings.
• Due Diligence Complexity: Enhanced fair value disclosures may reveal risks or opportunities not previously visible under the old standard.

• Valuation Adjustments: Buyers may need to adjust valuation models to reflect the new accounting treatments, particularly for EBITDA and net debt calculations.
• Deal Structuring: Earn-outs and performance-based payments tied to revenue or EBITDA may need to be recalibrated to account for the timing differences introduced by the new standards.
• SPA Considerations: Share Purchase Agreements (SPAs) may require revised definitions of financial metrics and covenant thresholds to avoid post-deal disputes
• Due Diligence: Increased scrutiny will be needed to assess the impact of accounting changes on historical and forecast financials.

Preparing for the Transition

Companies planning to engage in M&A activity should:

• Model the impact of FRS 102 changes on key financial metrics.
• Engage advisors early to reassess valuation methodologies.
• Update SPA templates to reflect the new accounting landscape.

The 2024 FRS 102 revisions will fundamentally reshape UK business valuations, with potentially material changes to revenue recognition and lease accounting impacting important metrics like EBITDA and net debt.

Businesses can’t afford to wait until application to start understanding the . It’s essential to model the impact on key financial metrics now, engage with experienced advisors early, and update deal documentation to avoid costly disputes and maintain a competitive edge in negotiations.