As care home operators grapple with a 4.1% rise in the National Living Wage and significant changes to FRS 102, finance teams must look beyond group-level figures and consider what these pressures mean for margins, forecasts, asset values, and banking covenants.
KEY FACT: From 1 April 2026, the National Living Wage increased to £12.71 per hour for workers aged 21 and over, a 4.1% increase.
Care home operators continue to face pressure from rising employment costs. For a labour-intensive sector, the implications extend beyond the immediate increase in payroll. Squeezed margins and tightening cash flows, may affect some of the key judgements and estimates underpinning the annual accounts.
Where increases in resident fees and local authority funding fail to keep pace with the escalating cost base, profitability can come under pressure. Care home operators should therefore consider performance at an individual home level. A profitable group can mask underlying underperformance, where declining margins, lower occupancy or increasing staffing costs at individual sites mean that forecasts and underlying assumptions warrant closer scrutiny.
This becomes particularly relevant where those forecasts support asset values, goodwill or other significant accounting estimates. Where cash-generating units (CGUs) show signs of strain, management should consider whether historical margin assumptions remain appropriate and supportable.
Higher payroll costs also place greater importance on robust cash flow forecasting.
Management should ensure forecasts reflect current pay rates and realistic assumptions around occupancy, fee increases, agency costs and other operating expenditure.
From an audit perspective, management should be prepared to support the key assumptions underlying its forecasts and demonstrate how the business performs under reasonable downside scenarios such as delays in achieving anticipated fee increases, prolonged reductions in occupancy or further increases in staffing costs.
For care home businesses with significant property assets, changes in trading performance may also be relevant to valuations and impairment assessments.
Where margins are being squeezed or individual homes are underperforming, management should consider whether the assumptions supporting carrying values remain consistent with current and forecast trading.
These commercial pressures coincide with significant changes to FRS 102, most of which apply for accounting periods beginning on or after 1 January 2026. For finance teams, two of the most significant changes concern lease accounting and revenue recognition.
Under revised Section 20, lessees will generally recognise a right-of-use asset and lease liability for most leases, subject to exemptions for short-term leases and leases of low-value assets. For care home operators with significant leased property portfolios, this could have a material impact on reported assets, liabilities and key financial metrics.
The Financial Reporting Council specifically notes that the revised lease requirements can affect measures including gearing, interest cover, current ratio and EBITDA, with potential implications for loan covenant assessments.
Revised Section 23 also introduces a five-step model for revenue from contracts with customers. Care providers should therefore consider whether the new requirements affect the timing or amount of revenue recognised under their particular contractual arrangements. The impact will depend on the individual business model and contracts rather than necessarily resulting in a change for every operator.
With cost pressures coinciding with significant accounting changes, 2026 places increased importance on the quality of forecasts, assumptions and supporting evidence used in care home accounts.
For care home owners, finance teams and their advisers, addressing these issues early should help identify potential financial reporting and audit issues well before the year-end.
Our experts are on hand to help you navigate the changes.
We’d love to hear from you. To book an appointment or to find out more about our services:
