FRS 102 changes: Real estate

The Financial Reporting Council (FRC) has issued substantial amendments to FRS 102, aligning UK GAAP more closely with international standards particularly in revenue accounting and how leases are accounted for.

For more resources and detail on the changes themselves, visit our Financial Reporting Standards hub. For the real estate sector, the impacts require close attention from not just investors but also tenants.

These changes are more than technical updates. As lessors, real estate investors may consider that the impact on their financial reporting is contained, but the changes cannot be ignored. A detailed assessment will still be needed, and there could be a wider impact than anticipated.

Real estate investors are still required to assess all lease agreements where they are the lessee (e.g. if they rent the office space that they occupy themselves), paying attention to key lease terms. Apart from short-term or low-value leases, operating leases where the entity is the lessee will now need to be recognised on the balance sheet as right-of-use assets with corresponding lease liabilities. This might include ground rent on leasehold investment properties.

Variable revenue, such as turnover rent, should only be recognised when it is highly probable that it will be received. Any bundled arrangements, for example the provision of property maintenance services alongside rent arrangements, will need to be broken down into distinct components and an assessment will be needed to ascertain how different recognition requirements apply.  

The exemption for lessees from the requirement to separate the lease and non-lease components within an arrangement does not apply to lessors. For example, if service charges are bundled with other services or goods, they must be separated into distinct performance obligations, potentially changing the timing of income recognition.

The impact of the changes is not limited to a real estate investor’s own lessee arrangements and income recognition. Other potential impacts for investors and tenants to consider include:

• The requirements for lessees to bring operating lease arrangements onto their balance sheet will have a significant impact on real estate investors’ tenants. Companies should be prepared to answer requests for information from tenants they might not previously have had (e.g. relating to the initial costs and the fair value of the underlying property)
• Tenants might seek to renegotiate or adjust lease terms to reduce the impact on their balance sheet, particularly where balance sheet metrics are linked to financing covenants, for example
• Real estate investors will also need to ensure that they are able to access relevant data for lease arrangements where they are the lessee (for example, discount rates relevant to leases)

The practical implications of these changes need to be carefully considered. Finance teams and trustees should start preparing now, if they haven’t already, to avoid last-minute compliance challenges.

Here’s what we recommend:

• Review your income recognition policies, especially for variable rent and bundled arrangements
• Assess arrangements where you are the lessee to understand how new rules will affect your balance sheet
• Engage with auditors and advisors early to clarify how the changes apply to your organisation
• Update internal systems and train staff to ensure smooth implementation

At S&W, we understand the unique challenges facing the real estate sector. Our team is already working with clients to interpret the new standards and prepare for the changes.

Whether you need help reviewing policies, assessing leases or planning your transition, we’re here to collaborate and support you every step of the way.