The Financial Reporting Council (FRC) has announced significant updates that will impact businesses, accountants, and auditors. These changes cover auditing standards, new company size thresholds, and lease accounting under FRS 102, aligning UK financial reporting with international standards. Understanding these updates is essential to ensure compliance and avoid any unexpected challenges.
Key Financial Reporting Changes: What Your Business Needs to Know
Auditing Standards
The FRC’s updated auditing standards reinforce the importance of consistency, transparency, and reliability in financial statements. These standards, based on International Standards on Auditing (ISAs), provide clear guidelines on auditors’ responsibilities, risk assessment, and evidence gathering.
For companies, compliance enhances financial credibility, providing stakeholders with greater confidence. For auditors, these standards help maintain quality and mitigate risks, ensuring audits meet ethical and regulatory expectations.
New Company Size Thresholds (Effective April 2025)
Changes to company size classifications will redefine audit and reporting requirements.
The updated thresholds are:
- Micro: Turnover ≤ £1.0m (was £632k) | Assets ≤ £0.5m (was £316k) | Employees ≤ 10 (unchanged)
- Small: Turnover ≤ £15.0m (was £10.2m) | Assets ≤ £7.5m (was £5.1m) | Employees ≤ 50 (unchanged)
- Medium: Turnover ≤ £54.0m (was £36.0m) | Assets ≤ £27.0m (was £18.0m) | Employees ≤ 250 (unchanged)
Impact on Businesses
Fewer audits will be required – More companies will now qualify as small, reducing mandatory audit obligations and compliance costs.
Reporting simplifications – Medium-sized businesses may benefit from fewer disclosure requirements, while large companies remain subject to full reporting.
Transitional rules – A company must meet new thresholds for two consecutive years before reclassification applies.
FRS 102 Lease Accounting: On-Balance Sheet Recognition (Effective January 2026)
One of the biggest shifts in UK GAAP is the adoption of IFRS 16-style lease accounting under FRS 102. This change means that most leases will now be recognised on the balance sheet, affecting financial statements and key business metrics.
Key Changes:
- A lease must record a right-of-use asset and a lease liability for most leases.
- Increased reported assets and liabilities, affecting gearing ratios and EBITDA.
- Lessor treatment remains largely unchanged, but disclosure requirements are expanded.
- Exemptions apply for short-term leases (less than 12 months) and low-value assets.
For businesses with significant lease commitments, such as property or equipment, this change will materially impact balance sheets and could affect loan covenants tied to financial ratios.
What Businesses Should Do Next
To navigate these changes effectively, businesses should take proactive steps now:
Review company size classification – Check whether your business will be reclassified and assess its impact on audit and reporting obligations.
Assess lease agreements – Identify all operating leases and model the impact of the new accounting requirements on financial statements.
Check debt covenants – Businesses with financial agreements tied to profit and/or gearing ratios should review their contracts to prevent unexpected breaches.
Plan for compliance – Start discussions with auditors and advisors to ensure a smooth transition.
These updates reflect the FRC’s efforts to modernise UK financial reporting, reducing the compliance burden for smaller businesses while increasing transparency through new lease accounting rules.
If your business needs guidance on how these changes will affect you, our expert team is here to help. Get in touch to discuss your next steps.
