The differences between IFRS and UK GAAP have narrowed sharply for 2026. Amendments to FRS 102 that took effect on 1 January 2026 pulled UK GAAP’s approach to revenue and leases into line with IFRS, closing the two areas where the frameworks used to look most different. What remains are meaningful divides on goodwill, financial instruments, deferred tax, and the interaction between accounting numbers and the legal test for paying dividends.
Who Uses Which Framework
In the UK, the framework a company uses depends largely on whether its securities are publicly traded. All companies whose debt or equity securities trade on a regulated market must prepare their consolidated financial statements using IFRS.1IFRS Foundation. European Union – Use of IFRS Standards Since Brexit, the UK operates its own endorsement mechanism: the UK Endorsement Board reviews each new or amended IFRS standard before it can be applied in the UK. At the end of 2020, all EU-endorsed IFRS became “UK-adopted international accounting standards,” and any subsequent IFRS changes require separate UK endorsement.2ICAEW. UK Endorsement of IFRS
Unlisted companies, small and medium-sized entities, and smaller groups generally report under UK GAAP. The UK framework is tiered. FRS 102 is the main standard, covering most entities that do not use IFRS.3Financial Reporting Council. FRS 102 The Financial Reporting Standard FRS 101 offers a reduced disclosure option for subsidiaries of groups that already report under IFRS at the consolidated level, cutting the duplication of preparing full IFRS disclosures at entity level. At the smallest end, micro-entities meeting two of three thresholds (turnover no more than £1 million, total assets no more than £500,000, and no more than 10 employees) can use FRS 105, an even simpler regime with minimal disclosure requirements.
What Changed in FRS 102 on 1 January 2026
The amendments to FRS 102 effective for accounting periods beginning on or after 1 January 2026 are the biggest revision to UK GAAP in a decade. The two headline changes deliberately align FRS 102 with the logic of IFRS 15 and IFRS 16. Older comparisons between the frameworks that flag revenue recognition and leases as major differences are now out of date. Everything below reflects the post-amendment position.
Revenue Recognition
IFRS 15 uses a five-step model: identify the contract, identify the performance obligations, determine the transaction price, allocate the price to each obligation, and recognise revenue as each obligation is satisfied.4IFRS Foundation. IFRS 15 Revenue from Contracts with Customers The old FRS 102 approach was simpler, recognising revenue when the significant risks and rewards of ownership transferred to the buyer.
The revised Section 23 of FRS 102 now adopts a five-step model closely modelled on IFRS 15. Entities identify contracts and performance obligations, determine and allocate the transaction price, and recognise revenue as obligations are satisfied. The FRS 102 version includes some simplifications tailored to smaller entities, but the underlying logic is the same. Companies moving off the old risks-and-rewards approach should expect changes in the timing of revenue recognition, particularly for bundled contracts and long-term service arrangements.
Lease Accounting
IFRS 16 introduced a single lessee model that requires virtually all leases to appear on the balance sheet as a right-of-use asset and a corresponding lease liability. The old distinction between operating leases (off-balance sheet) and finance leases (on-balance sheet) was eliminated for lessees, though lessors still distinguish between the two.5IFRS Foundation. IFRS 9 Financial Instruments
The revised FRS 102 now implements on-balance-sheet lease accounting for lessees along the same lines. Lease expenses shift from a single operating lease charge to depreciation on the right-of-use asset plus interest on the lease liability, which changes EBITDA and other key ratios. FRS 102 does permit practical exemptions for short-term leases and low-value assets, keeping those items off the balance sheet. Companies with significant operating lease portfolios that used to show lower leverage under UK GAAP will now report balance sheets much closer to their IFRS counterparts.
Financial Instruments
Financial instruments remain a meaningful area of divergence. IFRS 9 classifies financial assets into three measurement categories based on the entity’s business model and the contractual cash flow characteristics of the asset: amortised cost, fair value through other comprehensive income, or fair value through profit or loss.5IFRS Foundation. IFRS 9 Financial Instruments The classification drives how gains, losses, and impairments flow through the accounts.
FRS 102 takes a simpler two-bucket approach. Financial instruments are classified as either “basic” or “other.” Basic instruments such as standard trade receivables, loans, and ordinary shares are measured at amortised cost. Everything else, including derivatives and complex debt instruments, goes to fair value through profit or loss. The simpler model avoids the detailed assessment IFRS 9 requires, but it also removes the option of routing certain movements through other comprehensive income to manage income statement volatility.
Impairment is the other persistent gap. IFRS 9 uses an expected credit loss model, which requires entities to recognise potential losses before they actually occur based on forward-looking estimates. FRS 102 still applies an incurred loss approach, recognising impairment only when there is objective evidence that a loss event has occurred. IFRS reporters typically recognise credit losses earlier and in larger amounts, especially on portfolios of trade receivables and loan assets.
Goodwill and Business Combinations
How goodwill is treated after a business combination is one of the most financially significant differences between the two frameworks. IFRS 3 requires the acquisition method, with goodwill recognised as an asset equal to the excess of consideration paid over the fair value of identifiable net assets acquired.6IFRS Foundation. IFRS 3 Business Combinations IFRS then prohibits amortising goodwill. It sits on the balance sheet indefinitely and must be tested for impairment at least annually. When impairment hits, the write-down can be abrupt and large.
FRS 102 also uses the acquisition method but takes the opposite approach to what happens next. Goodwill is amortised systematically over its useful economic life. Where management cannot reliably estimate that life, FRS 102 defaults to a maximum of five years. This produces a steady, predictable expense that gradually reduces the goodwill balance to zero. For users of UK GAAP financial statements, the trade-off is a lower reported profit each year but without the risk of sudden impairment shocks.
Contingent consideration also plays out differently. Under IFRS, once the measurement period closes, changes in the fair value of contingent consideration (earn-outs) are recognised in profit or loss rather than adjusting goodwill. FRS 102 takes a simpler line: changes to estimated contingent consideration typically adjust the cost of the combination, and therefore the goodwill figure.
Common Control Transactions
IFRS 3 explicitly excludes business combinations between entities under common control from its scope, and no other IFRS standard fills the gap.7IFRS Foundation. Business Combinations Under Common Control Entities must develop their own policy using the IAS 8 hierarchy, which in practice often leads to either the acquisition method or a book-value (predecessor accounting) approach depending on the circumstances. FRS 102 permits merger accounting for qualifying common control transactions, allowing the combining entities to use existing book values and avoid fair value adjustments entirely. That can be a real advantage for group reorganisations, where forcing a fair value exercise would create artificial goodwill.
Internally Generated Intangibles
Both frameworks distinguish between research (always expensed) and development (potentially capitalised). IAS 38 requires capitalisation of development costs once strict criteria are met, including demonstrated technical feasibility, the intention and ability to complete the asset, and the ability to measure costs reliably.8IFRS Foundation. IAS 38 Intangible Assets FRS 102 Section 18 applies similar criteria. Where the useful life of a capitalised intangible cannot be reliably estimated, FRS 102 caps the amortisation period at 10 years.9Chartered Accountants Ireland. FRS 102 The Financial Reporting Standard – Section 18 Intangible Assets Other Than Goodwill IAS 38 does not impose a default cap and permits indefinite useful lives for certain intangibles, with annual impairment testing rather than amortisation in those cases.
Deferred Tax
The deferred tax models under the two frameworks start from fundamentally different premises. IAS 12 uses a balance sheet approach based on temporary differences: the gap between an asset or liability’s carrying amount in the accounts and its tax base. This captures timing differences and items that never pass through profit or loss, such as revaluation gains recognised directly in equity.
FRS 102 Section 29 uses a profit-and-loss approach based on timing differences: the gap between when a transaction is recognised in the accounts and when it appears in the tax return. FRS 102 supplements this with a “timing difference plus” method that extends the scope to cover a limited number of other situations, but the starting point remains narrower than IAS 12. In practice, the IAS 12 approach picks up more deferred tax balances, particularly around fair value movements, revaluations, and business combinations. Entities transitioning from UK GAAP to IFRS should expect their deferred tax liabilities to increase.
Employee Benefits and Pensions
Both frameworks require defined benefit pension obligations to be measured using the projected unit credit actuarial method, discounted to present value.10IFRS Foundation. IAS 19 Employee Benefits The plan’s net position is the present value of the defined benefit obligation less the fair value of plan assets. Under IAS 19, actuarial gains and losses (remeasurements) are recognised immediately in other comprehensive income and never recycled to profit or loss. FRS 102 Section 28 also recognises actuarial gains and losses in other comprehensive income, so the broad approach is similar. Differences can arise in the discount rate methodology and the treatment of multi-employer plans, where FRS 102 provides more flexibility for smaller entities that lack access to detailed actuarial information.
Government Grants
IAS 20 allows government grants related to assets to be presented either as deferred income or by deducting the grant from the carrying amount of the asset, with the income recognised systematically over the asset’s useful life.11IFRS Foundation. IAS 20 Accounting for Government Grants and Disclosure of Government Assistance Both presentation approaches produce the same net effect on profit over time, but they change how assets and income appear on the face of the accounts.
FRS 102 Section 34 takes a different structural approach, offering two models: the performance model and the accrual model. Under the performance model, grants without future performance conditions are recognised in income when received; grants with performance conditions are recognised as those conditions are met. The accrual model works more like IAS 20, systematically matching grant income to the costs it compensates. Entities choose their model on a class-by-class basis. The flexibility means a UK GAAP entity could recognise certain grant income earlier than an IFRS reporter, depending on which model it selects.
Dividends and Distributable Profits
This is where the choice of framework has unexpectedly concrete consequences. UK company law restricts distributions to shareholders based on “realised profits.” IFRS frequently measures assets at fair value and recognises unrealised gains in profit or loss, but those gains may not qualify as realised profits under the distribution rules. Companies using IFRS for their individual accounts often need to perform additional adjustments to strip out non-distributable fair value movements before calculating the profits available for dividends.
Specific complications arise with instruments like convertible preference shares, which IAS 32 requires to be split into liability and equity components. The resulting interest expense recognised through the income statement is not a loss under company law but reduces net assets, potentially restricting a public company’s ability to distribute. Cash flow hedge accounting can create similar problems: losses recognised directly in equity may push net assets below the legal threshold for distributions. UK GAAP entities, which historically relied more on cost-based measurement, tend to encounter fewer of these complications, though the increasing use of fair value under the revised FRS 102 may narrow this advantage over time.
Switching Frameworks
An entity adopting IFRS for the first time must follow IFRS 1, which requires the first set of IFRS financial statements to include at least three statements of financial position, two statements of profit or loss and other comprehensive income, two statements of cash flows, and two statements of changes in equity.12IFRS Foundation. IFRS 1 First-time Adoption of International Financial Reporting Standards The third balance sheet is the opening position at the date of transition, and it provides the baseline for restating comparatives under the new framework. The general rule is retrospective application of all IFRS standards, though IFRS 1 provides mandatory exceptions and optional exemptions to ease the process for specific items such as business combinations that predate the transition.
A mandatory component of the first IFRS accounts is a reconciliation statement explaining the material adjustments between equity under the previous framework and equity under IFRS, both at the date of transition and at the end of the last period reported under the old standard. A separate reconciliation of total comprehensive income is also required. These reconciliations are the most scrutinised part of a first-time adoption. Goodwill treatment, lease capitalisation, and deferred tax scope changes are typically the largest reconciling items for companies moving from UK GAAP to IFRS.