In September 2024 the Financial Reporting Council published a new consolidated edition of FRS 102, with significant implications for compliance and reporting which becomes effective for accounting periods commencing on or after 1 January 2026
While significant across all sectors, the FRS 102 overhaul presents a more immediate challenge for FCA regulated Financial Services (FS) businesses. Because FCA regulatory returns (such as MIF and FSA submissions) must reflect these changes as early as January 2026, regulated firms cannot wait until their first annual audit to implement adjustments. To avoid inaccuracies in capital adequacy, liquidity ratios, and covenant compliance, FS firms must ensure accounting systems are compliant from Day 1.
This briefing explores the primary changes to lease accounting, fair value, and revenue recognition and implications for FS businesses.
Lease accounting: change for balance sheets
A significant change is the new lease model for lessees. All leases are now regarded as finance leases, meaning that financial services firms will capitalise the asset as a right-of-use (ROU) asset and recognise the related lease commitments as a liability. Rent charges in the profit and loss account will be replaced by depreciation and lease interest expense. There are some exceptions for short term arrangements and low value leases.
Firms will need to ensure proper documentation of inputs and judgements used for these calculations. For example:
Given the administrative burden of identifying “embedded leases” within broader service contracts, firms face a tight window to ensure data accuracy.
Fair value: streamlined guidance on measurement
The guidance on fair value measurement has been substantially expanded in new Section 2A of FRS102 to align with IFRS13. It introduces the concept that the asset or liability transaction will take place in either its principal market or in the absence of one, the most advantageous market.
While this may not fundamentally change what a fair value is for most items, it introduces three-level fair value hierarchy (ranging from “Level 1” quoted prices to “Level 3” unobservable inputs). This provides clearer insight into how to work out valuations for items such as investment in unlisted securities, derivative instruments, and lending portfolios. Assets classified as “Level 3” (such as private equity or bespoke derivatives) will likely face heightened scrutiny from auditors and regulators regarding the subjective assumptions used to reach the “exit” price.
Revenue: 5-step approach
The revised model gives a more structured 5-step approach to recognise revenue. There is likely to be increased documentation for financial services firms about judgements used, so firms should still review their internal processes to ensure compliance. For example:
Fund managers
An end-of-year performance fee based on exceeding an AUM target is a variable consideration that under new FRS102 will have to be estimated and recognised in line with the ‘over time’ satisfaction of the fund manager’s performance obligations, meaning such revenue will be recognised over the reporting period and not at the end of the year.
Investment advisory
An advisory firm which is charging its fees in instalments, will need to set clearer policies and documentation to identify when the services were transferred, and determine whether revenue is recognised at a point in time or over time.
Corporate finance and brokerage firms
Where retainer contracts are bundled, containing several distinct services, each having their own performance obligations, a firm will consider the treatment of upfront fees as over time revenues, the time value of money when work is delivered more than 12 months of receiving payment, and the accounting of contingency fees as a variable consideration.
E-money firms
An E-money firm offers a bundle of distinct services and revenue recognised: a monthly account maintenance fee – over time; transaction fees – at point in time. Judgement may be required to determine if the initial account setup and onboarding fees should be recognised upfront or spread.
Portfolio lender
A lender earns revenue from arrangement fees, ancillary services (e.g valuations, legal documentation), interest for the ongoing lending activity. Such revenues are spread over the term of the loan. Judgement may be required to determine how penalty charges and loan extensions affect revenue recognition.
Mortgage broker
Expected refunds and rebates will have to be estimated at the outset.
Regulatory: KPIs and FCA reporting
The changes may have an impact on firms’ financial and compliance with external covenants. The recognition of ROU asset may cause small company audit exemptions to be breached.
FCA regulated firms will need to update their FSA and MIF workings, especially for the first set of submissions that will need to reflect the transition adjustments.
Other changes – shift to the disclosure of material accounting policies
As part of the periodic review amendments, an entity is no longer required to provide a summary of “significant accounting policies applied” but instead should disclose “material accounting policy information”.
The emphasis here is that financial services firms should focus on entity-specific information instead of boilerplate language.
In Summary
For financial services businesses, the new FRS 102 will primarily affect:
| Area | Key consideration |
| Leases | The On Balance Sheet approach significantly affects how the Balance Sheet is portrayed, with regards to gearing, EBITDA, regulatory ratios |
| Fair value | The alignment with IFRS13 gives clearer insight on fair value calculations |
| Revenue | There will be some impact on the recognition of ‘over time’ revenue and estimating performance fees and rebates |
| Regulatory | FCA firms will need to review their FSA and MIF workings for the first Q1 submission. |
| Accounting policies | There is a move to the disclosure of material accounting policy information |
Guiding you through the changes
At HW Fisher, our FRS 102 experts can help guide your business through the changes.
Contact us for support.
For more guidance on preparing for the changes, visit our FRS 102 Resources Hub.
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