2026 the year of accounting change

First published on 11 July 2024 by Alastair

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• Accountancy
• Accounts News

2026 will be a year of change for small businesses in relation to accounting. In addition to those changes outlined in my recent article there will also be further changes coming into force for the accounting period starting on 1^st January 2026.

Why are these changes being introduced?

Some of them are to make specific items in your accounts simpler; however, the primary reason is to align the UK more closely with the international accounting standards recognised worldwide.

The changes to the UK standards will affect a number of areas:

Revenue recognition

FRS 102 1A (the framework for small and micro entities - most of our clients use this)

Leases

The intention behind these changes is to give greater clarity to both businesses and other stakeholders as to what must be shown in these accounts. Previously, HMRC ‘encouraged’ everyone to add explanatory notes to certain items in their accounts: now, some of these ‘encouraged’ notes are going to be mandatory, as outlined below (and I have included the expected impact on our clients).

1. A statement of compliance with FRS 102 specifically referring to Section 1A – No change.
2. Statement that the entity is a public benefit entity – No effect likely: this is specific to only certain entities most of which already comply with this.
3. Disclosures relating to material uncertainties about events or conditions that cast doubt on the entity’s ability to continue as a going concern, Essentially, you’ll need to state any reasons which may mean the company cannot continue to exist. Any such disclosure will be included in the accounting policies, however most clients who require this will already have it included.
4. Dividends declared, paid or payable during the period. No change: this information is included in the income statement for members (directors and shareholders) already

There have been other changes mooted but at this time no actual guidance has been produced.  We’ll keep you posted as and when this changes.

Leases

This will be a fairly technical change and could have a major effect on the balance sheet and profit and loss accounts of businesses.  It will have the effect of capitalising almost all operating leases, thus increasing the balance sheet by showing assets and reducing expenses through the profit and loss, at least initially. Only low value and short-term leases will be exempt from coming onto the balance sheet.

Under the proposals, “right of use assets” (an asset where the business does not own an asset but is entitled to be the sole user) will be created onto the balance sheet and a lease liability will also be created. Rather than expensing the full lease payment to the profit and loss, and subsequently getting tax relief over the life-time of the lease, relief would come in the form of implied interest on the lease expenditure (a technical adjustment requiring something most accountants dislike, viz, net present value).

There will be no net change in the tax treatment for leases but there will be more work involved for our tax team as the accounting and tax treatments will be different.

As always, if you have any questions or concerns, please get in touch.

 

Callum McKinnon, M&S Accountancy and Taxation