FRS 102 changes to the energy sector: What you need to know

The FRS 102 updates are effective for accounting periods beginning on or after 1 January 2026, so are in force now. They align UK GAAP more closely with international standards particularly in the accounting for revenue and leases.

Within the energy industry, there were significant changes to revenue recognition and balance sheets when the international standard, IFRS 15 Revenue from contracts with customers, was implemented. With the FRS 102 changes, energy companies will need to assess all their revenue contracts and arrangements to determine the impact.

Revenue contracts within the industry can be complex. Power purchase agreements (PPAs) are contracts under which an energy generator (supplier) agrees to sell energy to a purchaser (customer) which vary in form. These contracts may bundle multiple products in relation to energy produced and can include variable price components such as renewable energy certificates (ROCs).

Energy infrastructure contracts, including electric vehicle (EV) and renewable projects, may have ongoing maintenance within the contract as well as the initial build. This can lead to complexities in the revenue recognition including:

• Bundled services – The changes require revenue to be recognised based on distinct promises (performance obligations) in the contract. Any bundled arrangements, such as PPAs that include multiple products or EV infrastructure contracts that include ongoing maintenance, will need to be broken down into distinct performance obligations

• Variable pricing – The final transaction price can be complicated by variable elements. For example, ROCs have variable elements that may not be known until after the month of generation, such as recycle prices and late payment distributions. PPAs can vary significantly within the industry and therefore must be reviewed to determine how much revenue should be recognised and when

The changes may impact when and how revenue is recognised, which will likely affect key performance metrics such as revenue and profitability.

Companies are required to assess all lease agreements where they are the lessee, 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 land or offshore seabed leases (for offshore assets), from which the companies’ key assets are operated.

Lease accounting complexities for energy businesses may include:

• Embedded leases – Energy sector contracts often contain embedded leases due to, for example, PPAs or dedicated facility contracts. Should a contract include clauses that give the purchaser control over the majority of the output throughout the period of use and the right to control the underlying asset, then these are indicators that an embedded lease may exist

• Lease terms: The lease term represents the total period, including renewal options reasonably certain to be exercised, during which the lessee has the right to use the leased asset. For energy businesses, companies will also need to consider the decommissioning date of the asset, where applicable, and whether it is reasonably certain that renewal options or break clauses will be exercised

The changes are more than a compliance exercise, and there may be a wider impact on your business. For lessees, bringing leases on balance will impact EBITDA metrics, as the operating lease expense is no longer recognised within operating expenses, but replaced with an interest charge and depreciation of the right-of-use asset.

Similarly, the balance changes with the introduction of a lease liability and right-of-use asset. Should your finance agreements include covenants directly or indirectly linked to EBITDA, this may impact compliance with loan covenants.

When similar changes were made to IFRS standards for both revenue and leases, it was noted that in certain instances clients renegotiated their financial covenants with lenders as there were material changes to revenue, profitability liabilities and reserves.

The practical implications of these changes need to be carefully considered. Finance teams and business leaders should start preparing now, to avoid last-minute challenges.

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At S&W, we understand the unique challenges facing the renewable energy and storage sectors. Our team is already working with clients to interpret the new standards and prepare for the changes.