Beyond accounting: Why the new FRS 102 could disrupt UK manufacturing businesses

Most commentary on FRS102 focuses on the technical aspects of revenue recognition, leases and financial instruments. This is important, but for business leaders, these represent only the tip of the iceberg.

For UK manufacturing CFOs and FDs , the real challenge isn’t how the numbers change, but

the impact as those changes ripple across the business.

The new FRS 102 impacts revenue profiles, profit metrics and balance sheet size.

However, contracts, incentive plans, conversations with lenders and investors, and company size assessments often remain tied to the old interpretations. Fundamentally, these changes do not stop within finance; the wider impact extends to other business functions, such as HR, procurement, legal and IT. It’s the combination of these factors where risk quietly creeps in.

Revenue may move due to timing, judgement or revised recognition criteria. Board and management teams, however, may read trends as performance signals. If reported revenue changes but underlying activity doesn’t, what conclusion will be drawn?

Irrespective of whether a significant proportion of your revenue is from point-in-time or over-time contracts or agent and not principal led, being able to articulate the impact of the new reporting requirements to suppliers, investors and wider stakeholders will still be critical. Getting ahead with both the quantum of the impact and the timing of the reversal of the impact (as no changes will be made to underlying cash flows) is essential.

Many manufacturers still link incentives to revenue, EBITDA or profit before tax. Under new FRS 102, some teams may miss bonuses despite strong delivery, while others may benefit purely due to accounting changes. This isn’t a remuneration issue but a governance one, which CFO and FDs are well placed to lead on.

Lenders and investors often anchor on EBITDA, profit and net assets as indicators of business performance. However, when these numbers move due to accounting changes but cash generation and operations haven’t changed, confidence and credibility can be tested. This has two clear implications:

• There is a need for proactive engagement on covenant definitions and headroom calculations

• Clear performance narratives are needed to distinguish accounting effects from trading reality

Similarly, where there are contracts for revenue sharing, cost apportionment and other similar agreements understanding the impact of these changes ahead of time, to enable sensible discussions or re-drafting of legal agreements is a must.

It is on this second point that many companies may realise the consequences far too late. No one is advocating changing commercial contracts for accounting gain, but just ensuring companies are aware of the consequences, from an accounting perspective, of not getting all departments involved when negotiating new commercial contracts.

The move away from “risks and rewards” and back to more contractual positions can have dire consequences for manufacturing companies, specifically for those where the manufacturing process is over a period of time. Currently, a manufacturer may recognise revenue based upon the percentage of completion of a contract, so the revenue is spread over a contract period and may be more closely aligned to the incurrence of costs by the manufacturer.

The contractual negotiations may be left up to the procurement department on one side and the sales manager on the other side (with respective legal teams involved, too). Consequently, these may be negotiated to suit targets or metrics that those teams are rewarded against. Neither may involve the finance team.

If the contractual obligations, the invoicing and right to payment does not align with the stage of completion (incurrence of costs) then there could be a vast difference between revenue recorded under the old and new methods, and all because the manufacturer has no legal right to payment for services incurred (plus a reasonable margin) through the entirety of the production process.

Changes to reported revenue or gross assets can push entities over company size thresholds, triggering:

• Additional disclosures

• Increased challenge from the auditors

• Higher governance expectations

For your average December year end company, if this is identified during the audit, maybe several months after the balance sheet date, then it may have already eaten significantly into the bumper period given in the two-year rule within the Companies Act, where changes in size criteria have to apply for two years consecutively before they become required.

While the size criteria increased for the first time in a while in 2025, for some companies with significant lease portfolios (such as retail companies) and with one other metric already well above the threshold, this could come as an unwelcome surprise. The change could result in you requiring an audit for the first time or having to consolidate for the first time, which has considerable time as well as cost implications.

New standards can introduce wider timing differences, deferred tax volatility and unexpected impacts on distributable reserves. Early modelling of tax and reserves impacts is critical. When understanding the impact, it is also important to cover the tax consequences of these changes at the same time to avoid any late surprises.

Most implementations are ineffective because insufficient attention is paid to the implications outside the finance team.

Existing bonus schemes and performance scorecards may no longer be using appropriate measures under the new accounting framework, requiring businesses to reassess how performance is measured and rewarded.

This can be an overlooked challenge during an accounting transition. Older contracts may contain accounting-based covenants, earn-outs or performance measures drafted under previous accounting standards. Businesses should assess whether these provisions continue to operate as intended under the new framework, as relying on dual-GAAP reporting or "constant GAAP" clauses can be complex, inefficient and prone to interpretation issues over time.

Existing systems may not be capable of capturing, tracking and reporting the additional information required, creating a risk of operational inefficiencies and weakened controls.

Understanding the contracts across the business is critical, as management will need to assess whether future service contracts contain embedded leases after the transition to new lease accounting. This is likely to be an area of auditor focus, particularly in manufacturing businesses where subcontracting arrangements may effectively provide the right to use dedicated production facilities or assets. Early identification of these contracts and robust contract data management will be key, making procurement an important stakeholder in the transition process.

These are not edge-case issues; we’re already seeing them emerge.

The most effective finance leaders aren’t treating this as a disclosure exercise. They are working closely with trusted advisors to answer questions such as:

• Which strategic and operational decisions rely on the reported numbers?

• What behaviours and incentives do those numbers influence?

• What needs to be adjusted now to avoid unintended consequences later?

• What evidence will auditors expect to enable an efficient adoption audit?

• What is the impact not just now but into the future, and how can the reliability of data be secured, whilst the right economic decisions are still made?