FRS 102: Changes for property companies in 2025/26
On 27 March 2024, the Financial Reporting Council (FRC) introduced significant changes to FRS 102 to better align with international reporting practices and improve the quality of financial reporting.
These changes are particularly important for property companies, as they affect lease accounting, investment property measurement and fair value guidance. They’ll take effect for accounting periods starting on or after 1 January 2026- but getting ahead now can help you avoid last-minute challenges.
In this article, we’ll set out the updated guidance and provide practical advice to help property businesses adapt.
Key changes for property companies
Lease accounting overhaul (Section 20)
If you lease properties, you’ll now need to recognise most leases on the balance sheet. This new model mirrors IFRS 16.
● Lessee accounting: The distinction between operating and finance leases is gone. Most leases, except short-term or low-value leases, will be reported as a right-of-use (ROU) asset with a corresponding liability.
● Lessor accounting: For lessors, the existing system remains the same, but there are adjustments for how variable lease payments and initial direct costs are handled.
Impact: If you’re leasing spaces like offices, warehouses or retail properties, you’ll need to review your lease agreements and prepare for new disclosure requirements. These include details about lease maturity, interest costs and ROU assets
Investment property valuation updates (Section 16)
The updates to investment property valuation place a stronger focus on fair value measurement to reflect current market conditions. The updated Section 16 incorporates this guidance, aligning with IFRS 13 principles.
● Fair value approach: Investment properties should be measured at fair value, with changes recognised in profit or loss.
● ROU investment property: Lessees with investment properties under leases can choose to measure them at fair value or as ROU assets at cost.
Transition guidance: When transferring properties between categories (e.g. from ROU assets to investment property), keep in mind that the fair value at the transfer date becomes the deemed cost.
Revenue from contracts with customers (Section 23)
The new revenue recognition model reflects IFRS 15’s five-step approach. If you have complex lease arrangements or service contracts tied to property management, these changes could affect you.
● Performance obligations: Revenue from bundled contracts, like leasing combined with facility management services, must be allocated based on the distinct components of the contract.
● Variable consideration: Contingent rent or performance-based income should only be included in revenue when it is highly probable to be realised.
Impact: If you’re offering property-related services, you’ll need to review your contract terms and pricing to ensure compliance with the new requirements.
Other updates relevant to property companies
● Business combinations (Section 19): If you’re acquiring assets or businesses, the updated guidance will help you figure out how to account for contingent payments and goodwill more clearly.
● Borrowing costs (Section 25): The rules now make it clear that interest on lease liabilities counts as borrowing costs, which aligns with the new lease accounting rules.
● Disclosures: Larger property companies will need to provide more detailed information about cash flows, fair value measurements and business risks. These disclosures will likely be more relevant to larger entities and may not apply to smaller companies.
Transition and practical considerations
Adapting to new standards can feel overwhelming, but if you take the right steps now, you’ll be well-positioned to manage these changes smoothly. Here’s how you can get started:
● Review and update your lease agreements: As leases will now need to be recognised on the balance sheet, you should carefully review your existing lease agreements. Focus on ensuring that all leases—apart from short-term or low-value leases—are accurately reported as right-of-use (ROU) assets with corresponding liabilities. Pay close attention to lease terms, maturity dates and any embedded lease options, as these will be critical for disclosure purposes and accounting compliance.
● Assess fair value changes: The changes to investment property valuation mean you’ll need to reassess how these assets are measured. This involves understanding how fair value measurement affects both existing and newly acquired investment properties. Make sure fair value adjustments are captured in profit or loss, and consider how these changes impact your financial statements. And evaluate any transfers between ROU assets and investment property, because fair value at the transfer date is now the deemed cost.
● Revisit your contracts: Break down your bundled arrangements to comply with the new revenue recognition framework. Allocate revenue based on distinct components like leasing and facility management services. And take note of variable considerations, such as contingent rent or performance-based income—these should only be included in revenue when it’s highly likely they’ll be realised.
● Use the right tools: By using portfolio-level lease calculations, you can simplify the transition process by managing multiple leases at once. A modified retrospective application, meanwhile, will help you adjust for past periods without needing a full retrospective restatement.
Note on tax implications
Keep in mind that changes to lease accounting, investment property valuation and revenue recognition could have tax implications, especially concerning deferred tax. If the tax treatment doesn’t align with the new accounting framework, deferred tax may need to be recognised. We recommend consulting a tax professional to understand the broader implications of this.
By taking these steps today, you can transition smoothly to comply with the new FRS 102 rules without disrupting your business operations.
Get in touch with the property team at Price Bailey to help you understand how your business may be affected. We can provide guidance and advice on how to manage the transition into the new reporting and accounting framework.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
Sign up to receive exclusive business insights
Join our community of industry leaders and receive exclusive reports, early event access, and expert advice to stay ahead – all delivered straight to your inbox.