FRS 102 changes for property companies

On 27 March 2024, the Financial Reporting Council (FRC) introduced significant changes to FRS 102 to better align with international reporting practices and improve the quality of financial reporting.

These changes are particularly important for property companies, as they affect lease accounting, investment property measurement and fair value guidance. The revised requirements apply to accounting periods beginning on or after 1 January 2026. If you’re preparing your first financial statements under the revised standard, it’s important to understand how the changes affect your reporting and disclosures.

In this article, we’ll set out the updated guidance and provide practical advice to help property businesses adapt.

Key changes for property companies

Lease incentives under the new lease accounting rules

The revised FRS 102 lease accounting rules, effective for accounting periods beginning on or after 1 January 2026 (with early adoption permitted), will also change how lease incentives are recognised.

Under the current operating lease model, incentives such as rent-free periods, cash contributions from landlords or fit-out contributions are typically spread over the lease term. Under the revised FRS 102 approach, these incentives will generally be reflected in the initial measurement of the right-of-use (ROU) asset and the corresponding lease liability.

As a result, property businesses may see changes in the timing of expense recognition and the presentation of lease-related costs within their financial statements. For example, rent-free periods may reduce the initial measurement of the lease liability, while landlord contributions towards fit-out costs could affect the carrying value of the ROU asset, depending on the terms of the lease.

To prepare for these changes, businesses should review their lease agreements to identify any lease incentives and assess how they will be accounted for under the revised rules, particularly where leases contain complex terms or variable payments.

Investment property valuation updates (Section 16)

The updates to investment property valuation place a stronger focus on fair value measurement to reflect current market conditions. The updated Section 16 incorporates this guidance, aligning with IFRS 13 principles.

Fair value approach: Investment properties should be measured at fair value, with changes recognised in profit or loss.
ROU investment property: Lessees with investment properties under leases can choose to measure them at fair value or as ROU assets at cost.

Transition guidance: When transferring properties between categories (e.g. from ROU assets to investment property), keep in mind that the fair value at the transfer date becomes the deemed cost.

Revenue from contracts with customers (Section 23)

The revenue recognition model reflects IFRS 15’s five-step approach. If you have complex lease arrangements or service contracts tied to property management, these changes could affect you.

Performance obligations: Revenue from bundled contracts, like leasing combined with facility management services, must be allocated based on the distinct components of the contract.
Variable consideration: Contingent rent or performance-based income should only be included in revenue when it is highly probable to be realised.

Impact: If you’re offering property-related services, you’ll need to review your contract terms and pricing to ensure compliance with the new requirements.

Other updates relevant to property companies

Business combinations (Section 19): If you’re acquiring assets or businesses, the updated guidance will help you figure out how to account for contingent payments and goodwill more clearly.
Borrowing costs (Section 25): The rules now make it clear that interest on lease liabilities counts as borrowing costs, which aligns with the new lease accounting rules.
Disclosures: Larger property companies will need to provide more detailed information about cash flows, fair value measurements and business risks. These disclosures will likely be more relevant to larger entities and may not apply to smaller companies.

Transition and practical considerations

Although the revised requirements are now in effect, many businesses will still be applying them for the first time.

Review and update your lease agreements: As leases will now need to be recognised on the balance sheet, you should carefully review your existing lease agreements. Focus on ensuring that all leases – apart from short-term or low-value leases – are accurately reported as right-of-use (ROU) assets with corresponding liabilities. Pay close attention to lease terms, maturity dates and any embedded lease options, as these will be critical for disclosure purposes and accounting compliance.
Assess fair value changes: The changes to investment property valuation mean you’ll need to reassess how these assets are measured. This involves understanding how fair value measurement affects both existing and newly acquired investment properties. Make sure fair value adjustments are captured in profit or loss, and consider how these changes impact your financial statements. And evaluate any transfers between ROU assets and investment property, because fair value at the transfer date is now the deemed cost.
Revisit your contracts: Break down your bundled arrangements to comply with the revenue recognition framework. Allocate revenue based on distinct components like leasing and facility management services. And take note of variable considerations, such as contingent rent or performance-based income – these should only be included in revenue when it’s highly likely they’ll be realised.
Use the right tools: By using portfolio-level lease calculations, you can simplify the transition process by managing multiple leases at once. A modified retrospective application, meanwhile, will help you adjust for past periods without needing a full retrospective restatement.

Note on tax implications

Keep in mind that changes to lease accounting, investment property valuation and revenue recognition could have tax implications, especially concerning deferred tax. If the tax treatment doesn’t align with the new accounting framework, deferred tax may need to be recognised. We recommend consulting a tax professional to understand the broader implications of this.

The revised FRS 102 rules have introduced significant changes to lease accounting, investment property measurement and revenue recognition for many property businesses.

If you’re unsure how the changes affect your financial reporting, lease arrangements or financial statements, our property specialists can help. We can review your current accounting approach, identify the practical implications of the revised standard and provide advice tailored to your business.

Get in touch with the Property team at Price Bailey to discuss how the revised FRS 102 requirements apply to your organisation.

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