Technology businesses thrive on disruption, but how will the FRS 102 changes impact the sector?

The UK’s tech startups raised more than $11 billion in venture capital investment in H1 2026, setting a new annual record in just those six months. The government has also reinforced its commitment to the sector by launching the Sovereign AI Fund, expected to invest £500m of committed public capital.

Given the level of concentration, there will no doubt be scrutiny over how the money is being spent and how this will provide a return, begging the question of how the changes to FRS 102 affects businesses across the sector and what the pain points for technology businesses will be.

The latest amendments to FRS 102 align UK reporting with IFRS in several areas, with the key changes related to accounting for revenue recognition and moving in scope operating leases for lessees onto the balance sheet. Entities are required to apply the new FRS 102 standard for periods commencing on or after 1 January 2026.

Changes are expected to impact key reporting metrics such as EBITDA, net debt and profit profiles, as well as drive increased reporting complexity. However, for technology businesses the greatest challenge may not be the accounting, but the implementation effort required. Businesses with high contract volumes, subscription-based billing models or multiple legal entities may require significant system and process changes to ensure compliance with the revised standard.

Some of the key challenges technology businesses should consider as part of the transition are as follows:

Many technology businesses generate revenue through subscription, cloud-hosted or consumption-based models. These arrangements often contain variable pricing mechanisms, automatic renewals and stand-ready obligations that may require significant judgement when assessing performance obligations and determining the timing of revenue recognition.

It is common practice for technology businesses to bundle products and services into a single license agreement that may form distinct performance obligations. When SAP implemented IFRS 15 Revenue from contracts with customers in its 2018 report, it noted an adjustment of €170 million to software license and support revenues. This was driven by revised recognition patterns for on-premise software contracts and treatment of purchase options granted, as well as a further €239 million benefit from higher capitalisation of sales commissions.

Technology businesses will need to identify and disaggregate performance obligations, applying the five-step model in allocating the contract revenue to each distinct performance obligation on a stand-alone selling price basis.

Some of the common areas of complexity arising when assessing distinct performance obligations include:

• Interdependence of promises – Where one or more promises in the contract are interdependent, this is often indicative of one single performance obligation. For example, the delivery and installation of a complex system comprised of multiple hardware and software components could be assessed as a single performance obligation. This is the case even if the equipment, software and installation could be sold separately, as long as each component only operates once integrated with the others, or it is common industry practice for the items to be delivered as a single project

• Upgrades – The challenge is whether upgrades form a distinct performance obligation or not. This requires consideration of how upgrades to the products impact on their ability to function (for example, are they expected to significantly modify future versions of the technology?) and how these will be charged for and are expected to be delivered by the company. All of this may significantly affect whether it’s assessed as a distinct performance obligation with revenue allocated to it

• Customer options – Sales teams may include options within agreements that provide access to additional modules or services at a discount, resulting in a distinct performance obligation to which revenue should be allocated

• Product warranties –Warranties provided to customers that exceed assurancetype warranties or provide additional assurance (beyond the standard warranty that products comply with agreed specifications) may also represent a separate performance obligation to which revenue should be allocated. One indicator of this is where such warranties can be sold on a stand-alone basis

In addition, technology contracts frequently evolve through renewals, upgrades and module additions. Businesses should establish clear policies for determining whether changes represent new contracts or modifications of existing arrangements.

The revised FRS 102 introduces further guidance and principles around recognising revenue at a point in time vs over time. Some of the key technology specific considerations are:

• Right-of-use vs right-to-access licenses – Software licenses can be provided to customers on a right-of-use (eg IP can be utilised on end users’ own devices with no or limited ongoing obligations) or, as is more commonly the case, on a right-to-access basis (eg IP is self-hosted and users are given access through an internet connection, as with SaaS). This may change the revenue recognition between a point in time or overtime

• Specified upgrades roadmaps versus non-specified upgrades (stand-ready obligations) – It is common practice for IP sales to include a promise to access future upgrades. This may be at a specific time based on a roadmap or on a non-specified basis. Analysis of the significance of the upgrade to the functionality of the software, customer expectations, published development roadmap and contractual release agreements may change how revenue is recognised and should be considered carefully

Many businesses price their products to include several potentially variable revenue streams, including volume or performance-based pricing (eg transactional volume, compute time), penalties, incentives or price concessions that may run on an annual or multi-year basis.

The revised FRS 102 introduces a concept of constraining variable revenue where it is highly probable that the business will be entitled to the cumulative amount of revenue recognised when an uncertainty associated with the variable consideration is subsequently resolved. Therefore, this assessment may involve a critical judgement based on an appropriate and consistent method.

In today’s operating model, assets are frequently accessed through service-based arrangements rather than traditional ownership. This shift increases the risk that contracts unintentionally meet the definition of a lease, with accounting implications often overlooked.

For technology organisations, the risk extends beyond conventional leases such as property and vehicles. Attention should be given to data centre arrangements, server provisioning and infrastructure contracts, where specified assets may be dedicated to the business. In these cases, even if the contract is labelled as a service, it may still fall within lease accounting requirements if control criteria are met.

However, the new standard does allow for a practical expedient on transition, referred to as the “grandfathering” expedient. This means contracts previously identified as leases under the old Section 20 continue to be treated as leases under the new rules, while contracts not previously identified as leases stay outside the new on-balance-sheet model. The expedient applies only to contracts already in place at the date of initial application.

The changes to FRS 102 will reshape key financial metric reporting, with direct implications for performance-based incentives. Lease costs for lessees will be reclassified from operating expenses to depreciation and interest, increasing EBITDA. This could unintentionally trigger incentive schemes, even if the underlying performance hasn’t changed.

Similarly, as noted, the new revenue recognition model may change the timing or amount of revenue recognised in one financial period, despite no change in the overall contract value or delivery timelines.

These shifts highlight the importance of reviewing KPIs and incentive structures to ensure they remain aligned with actual business performance.

Debt covenants may be tied to metrics such as EBITDA, interest cover and net debt. The FRS 102 changes will bring lease liabilities for lessees onto the balance sheet and increase reported interest expenses, while boosting EBITDA. Although cash lease payments remain unchanged, these accounting adjustments could trigger covenant breaches.

It’s imperative to review loan agreements and engage with lenders to ensure covenant terms reflect the true performance of the business under the revised standards, or clarify what reporting adjustments may be required.

A recent review highlighted that UK technology investment recovered strongly in 2025 after two subdued years, marking the first sustained rebound since the 2021–22 peak. UK startups raised roughly £19bn in 2025, up 35% year‑on‑year, making it Europe’s most active technology investment market. With valuations often based on revenue or EBITDA multiples (actual or forecasted), the upcoming changes could significantly change how these figures are reported, potentially affecting investor perceptions and deal negotiations.

Early awareness and clear communication will be essential to support robust, defensible valuations in this evolving reporting landscape, and to ensure value when exploring exit opportunities.

While accounting standards don’t change the cash in your business, they can impact when and how much tax is paid. Shifts in the timing or amount of revenue recognised may increase reported profits, potentially triggering higher tax liabilities before cash is received, which in turn can create short-term cashflow pressure.

This can be particularly important where R&D support is material. If a company would otherwise qualify for Enhanced R&D Intensive Support (ERIS), a move from a tax loss to a tax profit can remove ERIS entitlement for that period and push the company into the merged RDEC regime instead, heavily reducing the value and cash profile of such support.

Reviewing your tax position and forecasting cashflow under the new standards is essential to avoid unexpected costs and safeguard your business.

Boards and investors should receive transition impact assessments in advance of implementation to ensure that changes in reported results are clearly understood and appropriately communicated.

Although the revised FRS 102 standard does not change the economics of a business, it may materially affect how performance is reported and investor perceptions.

Businesses should consider whether their systems capture the information required to support the new requirements. Manual workarounds may create unnecessary operational risk and reduce audit efficiency.

Technology businesses planning fundraising, acquisitions, exits or refinancing activities should proactively assess these impacts to avoid unintended consequences during stakeholder discussions and financial due diligence reviews.

At S&W, we understand the unique challenges facing the technology sector, and we are already working with clients to interpret and prepare for the revised standard. Whether you need help reviewing policies, assessing leases or planning your transition, we’re here to support you every step of the way.

We have developed an FRS 102 health check tool, providing a high-level overview of the potential impact the revisions to FRS 102 may have on your business. It only takes minutes to complete.

Our FRS 102 hub and accounting advisory experts can also help you transition smoothly to the new standards.