UK
Ireland
With FRS 102 amendments affecting the majority of sectors and firms, the impact on LLPs and professional service firms needs to be considered carefully. Here’s what they need to know.
The Financial Reporting Council (FRC) has introduced major updates to FRS 102, effective for accounting periods beginning on or after 1 January 2026. We provide detailed summaries and impacts of the accounting changes for leases and revenue recognition, as well as a technical overview of the FRS 102 amendments, in our helpful guides.
These changes aim to align UK GAAP more closely with international standards—particularly IFRS 15 (Revenue from contracts with customers) and IFRS 16 (Leases). This will significantly impact how LLPs and professional services firms report their financials.
While the goal is greater transparency and comparability, the practical implications are wide-ranging—from how revenue is recognised to how leases are reported on the balance sheet for lessees. Here’s a breakdown of what’s changing, how it affects LLPs and professional service firms and what steps you can take to prepare.
When will these changes apply?
The five-step model for revenue recognition
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Step 1: Identify the contract with the customer
A contract is an agreement between two or more parties that creates enforceable rights and obligations. For professional firms, this could include engagement letters, retainer agreements, or service-level contracts.
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Step 2: Identify the performance obligations
Break down the contract into distinct goods or services promised to the client. For example, a legal firm might provide general advisory, time-based services that result in a formal report, assistance with document drafting, and court representation—each promise needs to be assessed for whether it is distinct and represents a separate performance obligation.
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Step 3: Determine the transaction price
This is the total consideration the firm expects to be entitled to receive in exchange for fulfilling its obligations under the contract. Although fixed fee arrangements are common, there are often variable elements such as discounts, bonuses, or contingent fees.
When consideration is variable, the amount that can be recognised is limited to the extent it is highly probable that there will be no subsequent reversal in the amount recognised and so entities will need to carefully assess such consideration.
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Step 4: Allocate the transaction price
Allocate the total price to each distinct performance obligation, usually based on their standalone selling prices. For certain professional service organisations there may be one fee that covers multiple performance obligations and these will need to be considered when allocating the transaction price to each distinct performance obligation.
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Step 5: Recognise revenue when performance obligations are satisfied
Revenue is recognised either over time or at a point in time, depending on when control of the service transfers to the client. For ongoing services, revenue is typically recognised over time as services are provided, on the basis that the client is receiving and using the services simultaneously. However, entities will need to carefully assess individual contracts to determine the appropriate treatment, including, for example, where retainer arrangements are in place.
Lease accounting - Key impacts
How to calculate the lease discount rate
There are three options to determine which rate to apply when discounting the future lease payments: The interest rate implicit in the lease (IRIL), the incremental borrowing rate (IBR) and the obtainable borrowing rate (OBR). The information for IRIL is often not readily determinable so entities may defer to the IBR or OBR.
The IBR is the rate the lessee would pay to borrow funds over a similar term and security to obtain an asset of similar value to the right-of-use asset in a similar economic environment. This rate should reflect the entity’s credit risk, lease term, asset type and location and any relevant economic conditions.
The OBR is the rate of interest a lessee would have to pay to borrow, over a similar term, a similar amount to the total undiscounted value of lease payments included in the measurement of the lease liability.
Entities will need to determine an appropriate discount rate. Some practical tips to do so include:
- Consider the use recent borrowing rates from your bank
- Adjust for lease-specific risks (e.g., location, asset type)
- Document assumptions for audit trail
Disclosure requirements
What’s new: More detailed disclosures will be needed as a result of the above changes to revenue and leases, particularly around accounting policies, and consideration of key judgements and estimates disclosures.
Impact: Firms will need appropriate documentation and might consider upgraded systems to enable the necessary information to be collected for disclosures.
Steps to prepare
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Review contracts
Identify performance obligations and assess bundled services.
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Inventory of leases
List all leases and calculate RoU assets and lease liability.
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Consider whether systems update are needed
Ensure software and teams are ready for new rules.
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Assess impact
Model potential effects on EBITDA, KPIs and partner distributions.
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Plan transition
Choose your approach and document any expedients.
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Communicate early
Keep partners, lenders and stakeholders informed.
How we can help
Our team of experts is ideally positioned to support you through these FRS 102 changes. Whether you need help interpreting the new standards, assessing their impact, or implementing the necessary systems and processes, we’re here to guide you every step of the way.
If you’d like to discuss how these updates affect your firm or explore tailored solutions, please don’t hesitate to get in touch.
