UK SME’s warned about upcoming accounting changes

9th January 2024

SMEs in the UK are soon to experience added complexities to the way they maintain their accounting records. The International Framework (IFRS), typically used by public or larger companies, has always been a complex accounting framework particularly with changes introduced in 2018. HMRC has now updated its guidance on the tax implications of changes to the UK Generally Accepted Accounting Practice (UK GAAP) – the body of accounting standards published by the UK’s Financial Reporting Council (FRC) – to ensure it is more aligned with IFRS in 2025, creating challenges for UK SMEs.

The Financial Reporting Exposure Draft 82 (‘FRED 82’) was announced in December 2023 and proposed a suite of changes to UK GAAP. The aim of the periodic review was to greater align FRS102 with IFRS, incorporating The International Accounting Standards Board’s (IASB’s) latest proposed changes to IFRS.

The proposals will be effective for accounting periods beginning on or after 1 January 2026. The public comment deadline for the proposed changes was 30 April 2023.

Are you prepared for the changes?

The key changes in the proposals relate to lease and revenue arrangments.


The proposed changes align UK GAAP lease accounting to the key principals of IFRS 16, with some simplifications especially in relation to transition. The proposed changes would only apply to FRS 102 reporters (including those under section 1A).

Lessees are required to recognise any lease with a term of more than 12 months on the balance sheet through corresponding right of use assets and lease liabilities being the present value of remaining payments under the lease. Lease expenses will then be presented as depreciation and interest.

Exemptions are available for low value or short-term assets and these can continue to be accounted for on a straight line basis over the lease term, and without recognition of a lease liability on the balance sheet.

Key simplifications from IFRS 16:

  • Multi component contracts treated as singular leases.
  • Discount rates based on the lessees “obtainable” borrowing rate if rate implicit in the lease and incremental borrowing rates cannot be readily determined. In exceptional cases, this may be a gilt rate.

Simplifications on transition:

  • No restatement of comparatives is required but this is an optional choice
  • Entities who already produce IFRS 16 numbers for consolidation purposes will also be able to use those carrying amounts as opening balances.
  • Any cumulative effect of initially applying the standard is recorded as an adjustment to opening retained earnings.


The proposed changes to UK GAAP are based on IFRS 15 Revenue from Contracts with Customers: Five-step revenue recognition model.  The proposed changes would impact businesses who adopt  FRS 102 (including those under section 1A).

The proposed changes use “promises” rather than “performance obligations” as in IFRS 15. The five-step model under UK GAAP will require businesses to perform the following assessment of their revenue generating contracts:

  • Identify the contract with a customer
  • Identify promises in the contract
  • Determine the transaction price
  • Allocate the transaction price to the promises in the contract
  • Recognise revenue when (or as) the entity satisfies a promise

A “promise” is defined as an obligation to transfer a good or service (or bundle of goods or services) that is distinct.

Disclosures are enhanced under the proposed changes although they are not quite as extensive as those under IFRS 15.

Key simplifications from IFRS 15:

  • Costs to obtain a contract remain an accounting policy choice
  • Simplified agent vs principal decisions
  • Accounting policy choices on allocating discounts across periods
  • Simplifications on contract modifications

Simplifications on transition:

  • No restatement of comparatives is required but this is an optional choice
  • Only need to assess and review contracts open at transition date and thereafter

 What does this mean for your business?

Key reporting metrics, such as Earnings before interest, taxes, depreciation, and amortization (EBITDA), profit and net debt may be impacted by the amendments.

Businesses will need to consider in greater detail contracts that have bundles of goods/services, variable consideration, warranties, customer options, or significant financing components and consider the impact on timing of revenue.

Covenants may need to be reset or reconsidered as EBITDA/net debt/profit are adjusted for those affected by lease accounting changes or the new revenue recognition model.

Other performance linked metrics may be changed and require being reconsidered, such as earnout payments, bonus agreements or other performance linked remunerations such as share options.

Dividend payments could be restricted by the impact on distributable reserves.

Complying with the proposed amendments may require changes to systems and processes and updates to your charts of accounts.

Increased disclosure will be required in your financial statements from previous years, some of this may be sensitive around future revenue.

Businesses need to decide if they wish to take the exemptions on retrospective application and live with inconsistency between periods in the first year of adoption, or whether to restate comparatives fully.

How you can prepare for the future

We encourage companies to plan ahead for these changes, ensuring that your business has all the required information collated and systems set up in advance of the transition date to capture all relevant information.

Performing an initial assessment of your customer contracts and leases will allow for assessment of the impact on your financial statements, be that profit and loss or balance sheet. This will enable you to review the related impact on reporting metrics, covenants, dividends, earnouts and remuneration linked to performance metrics and potentially get ahead of renegotiation or changes required.

How we can help you

Our expert team of trusted advisors at haysmacintyre has significant experience in accounting standard changes, including the adoption of IFRS 15 and IFRS 16 for IFRS adopters. We’re on hand to support you with the transition and explain how these changes will affect you and your business. Please reach out if you require support or further information.

Jon Dawson

Partner, Head of Creative, Media & Technology
+44 20 7396 4374
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