What do the FRS 102 changes mean for retail businesses?

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Business
Corporate
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On 27 March 2024, the Financial Reporting Council (FRC) announced significant changes to FRS 102 to align more closely with international standards. These updates will apply for accounting periods beginning on or after 1 January 2026 and are likely to have a meaningful impact on retailers — particularly around lease accounting, revenue recognition and financial disclosures.

Getting to grips with these changes early will help avoid surprises and give you time to adjust systems, contracts and reporting processes.

Key changes for retail businesses

Lease accounting overhaul (Section 20)

The most significant change for many retailers is how leases are accounted for.

If your business leases retail units, warehouses or offices, you’ll now need to recognise most leases on the balance sheet by recognising the right of use assets and corresponding liabilities – a shift that mirrors the IFRS 16 model.

Lessee accounting: The old distinction between operating and finance leases is gone. Most leases (apart from short-term or low-value ones) will be shown as a right-of-use (ROU) asset with a corresponding lease liability.
Presentation impact: This change affects how your accounts present gearing and EBITDA — which could, in turn, affect loan covenants, credit ratings or perceptions of financial health.

Other practical considerations:

Non-fixed lease payments (e.g. where rent is linked to turnover) will require more complex calculations when assessing lease liabilities.
You’ll need to determine the appropriate discount rate — if there’s no implicit rate in the lease, you’ll need to use your incremental borrowing rate.

Investment property valuation updates (Section 16)

For retailers holding investment property (such as surplus retail units or mixed-use sites), updated rules place greater emphasis on fair value measurement.

Fair value changes will go through profit and loss.
Where property use changes – for example, from right-of-use to investment – the fair value at the date of transfer becomes the deemed cost.

Other key updates

Revenue from contracts with customers (Section 23)

Retailers offering bundled products or loyalty services should take note of the revised revenue recognition model, which adopts IFRS 15’s five-step approach.

Key areas include:

Performance obligations: Revenue must be split between distinct elements in a contract — for example, if you sell a product with aftercare, delivery, or reward points.
Variable consideration: Discounts, refunds or performance-based incentives must only be recognised when it’s highly probable they’ll be realised.

This change requires careful contract analysis, especially if your business operates reward schemes, deferred revenue, or bundled promotions.

Business combinations (Section 19): If you’re acquiring another retail business or a chain of stores, updated rules clarify the treatment of contingent payments and goodwill.
Borrowing costs (Section 25): Interest on lease liabilities is now explicitly included as a borrowing cost, in line with the updated lease treatment.
Disclosures: Larger retailers will need to disclose more detailed information around cash flows, financial risks and fair value estimates — but smaller businesses may be exempt from some of these requirements.

Practical steps to prepare

Review your lease portfolio

Identify all active leases, including shorter arrangements or turnover-linked rent.
Prepare to calculate and recognise right-of-use assets and lease liabilities.
Think about the impact on your balance sheet, EBITDA, and financing arrangements.

Also consider:

What discount rate will you apply?
Do your systems allow for the tracking of variable rent or embedded options?

Plan your transition

The new standard allows for a modified retrospective approach, which simplifies implementation by avoiding a full restatement of prior years.
You may wish to use portfolio-level lease calculations to manage high volumes of leases efficiently.

Consider tax implications

If your tax treatment differs from the new accounting approach, you may need to recognise deferred tax – particularly on lease liabilities or fair value adjustments.
Early dialogue with your tax advisers is key to avoid unexpected outcomes.

How can Price Bailey help you?

Although these changes don’t take effect until 2026, understanding them now will help you make informed decisions — particularly around leases, revenue contracts and future acquisitions.

If you’d like tailored advice, our team can guide you through the technical changes and help ensure a smooth transition.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.