The UK GAAP Transition to the Periodic Review 2024 amendments of FRS 102 brings two big accounting shifts effective for periods beginning on or after 1 January 2026—a five-step, IFRS-15-style revenue model and an IFRS-16-style, on-balance-sheet lease model. New supplier finance arrangement disclosures kick in from 1 January 2025. These changes will alter EBITDA, net debt, leverage and interest cover metrics, with knock-ons for debt documentation, tax computations and Internal Controls.

What’s changing in 2025/26 UK GAAP

• Revenue (Section 23): A comprehensive five-step model aligned to IFRS 15 replaces legacy guidance; timing and pattern of revenue may change for bundled goods/services, variable consideration, warranties and significant financing components. Effective for periods beginning 1 Jan 2026 (early adoption permitted).
• Leases (Section 20): Lessees move to an on-balance-sheet approach similar to IFRS 16; most leases create a right-of-use asset and lease liability. Adoption affects EBITDA (typically up), net debt (up), and optics of indebtedness. Effective 1 Jan 2026 transition uses a modified retrospective mechanism.
• Supplier finance arrangements: New cash-flow and note disclosures for periods beginning 1 Jan 2025 (ahead of the wider amendments).

Debt Covenant Impacts: what to assess, remodel and renegotiate

Metric re-calibration

• EBITDA uplift (rent replaced by depreciation + interest) can improve interest cover but inflate leverage (Net debt/EBITDA) and alter fixed-charge cover. On-balance-sheet leases also raise reported debt. Expect visible shifts from 2026 opening balances.
• Lenders and advisors are already flagging Debt Covenant Impacts, urging early modelling and lender dialogue.

Documentation traps: “frozen GAAP”, “floating GAAP” and resets

• Many agreements include “frozen GAAP” clauses (test covenants under the accounting rules at signing) or “floating GAAP” (tests follow current GAAP). Frozen GAAP can avoid technical breaches but may require parallel calculations or reconciliations; ultimately most deals still renegotiate thresholds to reflect the new basis.
• Lenders are signalling that while frozen GAAP can work for lease impacts, it’s harder for revenue timing differences under the new Section 23—so plan resets where needed.

Supplier finance arrangements in covenants

• From 2025, disclose key terms and payment ranges for supplier finance. Some covenants (e.g., net debt, working-capital definitions) may need clarifying to avoid unintended Debt Covenant Impacts from these programmes.

Practical covenant playbook

• Inventory your leases and revenue contracts now; quantify the deltas on EBITDA, net debt, leverage and interest cover.
• Map definitions in loan agreements to new GAAP line items (e.g., whether lease liabilities count as “Financial Indebtedness”).
• Engage lenders early with modelled outcomes; seek revised thresholds or explicit carve-outs if ratios tighten under the UK GAAP Transition.

Tax Implications: modelling the downstream effects

Lease accounting – tax

• HMRC guidance for right-of-use lessees explains that while accounting moves on-balance-sheet, commercial cash rentals don’t change and tax rules continue to apply (including long-funding lease tests). Transitional accounting adjustments may be spread; in practice, the FA 2019 framework used for IFRS 16 remains relevant for UK GAAP’s revised lease model. Expect deferred tax effects on transition and timing differences between book interest/depreciation vs tax deductions.

Corporation tax baseline for 2025/26

• Main rate 25%, small profits rate 19% (≤£50k), with marginal relief up to £250k—confirm for modelling deferred tax and post-transition earnings.

Capital allowances & investment planning

• Full expensing is permanent for main-pool plant and machinery, supporting faster in-year deductions—factor into 2026 capex and effective tax rate planning alongside new lease decisions (lease-vs-buy).

Interest deductibility (CIR)

• The Corporate Interest Restriction caps deductions broadly at 30% of tax-EBITDA (or group ratio). Lease interest brought to the P&L can interact with CIR headroom—re-forecast groups likely to be close to the cap.

R&D regime alignment

• From periods starting on/after 1 April 2024, the merged R&D scheme provides a 20% taxable expenditure credit (RDEC-style). For 2025/26 models, ensure the accounting presentation (above-the-line credit) and tax offset/cash-out rules feed correctly into covenant EBIT(DA) and cash metrics.

Pillar Two visibility (for larger groups)

• UK has enacted domestic and multinational top-up taxes to deliver a 15% minimum; disclosures and effective tax rate optics can influence rating and covenant headroom even if cash impact is nil under safe harbours in early years.

Bake Tax Implications into your lease vs buy decisions, CIR forecasts, deferred tax on transition entries, and post-transition dividend capacity analyses.

Internal Controls: readiness for the new reporting reality

The UK Corporate Governance Code 2024 introduces Provision 29, requiring boards to declare the effectiveness of material internal controls for periods beginning on or after 1 January 2026 (Principle O applies from 2025). The UK GAAP Transition multiplies control points—contract identification, variable consideration estimates, lease data capture, and discount rates—so testing and documentation need to keep pace.

Control hot spots to address now

1. Revenue controls: contract review gates, performance-obligation mapping, price allocation, variable consideration thresholds, significant financing component assessments.
2. Lease controls: central lease register, incremental borrowing rate governance, term/option judgments, impairment triggers for right-of-use assets.
3. Supplier-finance reporting: data lineage for payment ranges, counterparties and presentation in cash flow statements.

A structured impact-assessment plan (12–18 weeks, scalable)

1. Scoping & diagnostics (Weeks 1–2)
   • Map contracts and leases; shortlist high-impact areas for the UK GAAP Transition.
2. Technical policy decisions (Weeks 2–4)
   • Determine practical expedients and transition options (e.g., modified retrospective for leases; revenue expedients).
3. Quantification & covenant modelling (Weeks 4–8)
   • Re-forecast EBITDA, leverage, interest cover and working capital; quantify Debt Covenant Impacts under frozen vs floating GAAP scenarios; design lender briefing packs.
4. Tax workstream (Weeks 4–10)
   • Model Tax Implications: deferred tax on transition, CIR headroom, full-expensing profiles, R&D credit presentation, and any Pillar Two disclosures.
5. Internal Controls uplift (Weeks 6–12)
   • Update process narratives, key controls, and evidence to support the 2026 Internal Controls declaration.
6. Stakeholder sign-offs (Weeks 10–18)
   • Audit pre-clearance, lender engagement (covenant resets where needed), and board training on the UK GAAP Transition effects.

FAQs

1. What exactly is the UK GAAP Transition for 2025/26?

It’s the move to the latest FRS 102 amendments (revenue and leases), plus new disclosures (e.g., supplier-finance). It affects recognition, measurement, presentation, and Internal Controls across the reporting cycle.

2. Do SMEs get reliefs?

Yes—FRS 102 retains proportionality, and transition options exist. But the substance—new revenue and lease models—still requires planning, system updates, and control changes.

3. How long does a typical implementation take?

Plan on a multi-workstream effort (accounting policy, systems, tax, covenants, training). Even lean projects need several sprints to gather data, model impacts, and obtain auditor and lender alignment.

4. Which ratios are most sensitive to the UK GAAP Transition?

Leverage (Net debt/EBITDA), interest cover, fixed-charge cover, and sometimes working-capital tests. Definitions in agreements may not map neatly to new GAAP line items.

5. How do “frozen GAAP” vs “floating GAAP” clauses affect us?

• Frozen GAAP can avoid immediate breaches but often requires parallel calculations
• Floating GAAP moves ratios to the new basis and may need threshold resets.

6. Does lease capitalisation change our cash tax?

Accounting changes don’t automatically change tax cash flows. But timing differences (depreciation vs rental deductions) drive deferred tax and can interact with the Corporate Interest Restriction.

7. How does CIR interact with new lease interests?

Recognised lease interest increases the interest line used in CIR calculations. Groups near the 30% tax-EBITDA cap should re-forecast headroom.