UK accounting standards changed on 1 January 2026. If your business has not yet considered the implications, now is the time to do so – for many businesses, the first affected accounts are already being prepared. For some the impact will be minimal. For others, the changes could affect reported profits, EBITDA, balance sheet size and, importantly, banking covenant calculations.
There are two main areas to be aware of: revenue recognition and lease accounting. Here is what each change means and how to tell whether your business is likely to be affected.
Which businesses are most likely to be affected?
Businesses with long-term customer contracts, subscription revenue, leased premises, vehicle fleets, equipment leasing arrangements or bundled service contracts are most likely to feel the impact. If your business has significant lease commitments or complex revenue arrangements, it is worth understanding the changes before your next set of accounts.
What is changing with revenue recognition?
The revised standard introduces a five-step approach to recognising revenue. In practical terms, this means businesses need to consider when revenue has actually been earned and whether it should be recognised at a specific point in time or spread across a period.
For businesses selling straightforward goods or services, the changes may make relatively little difference. The impact is more likely to be felt where contracts are more complex.
To illustrate: consider a business that sells a two-year software subscription bundled with an implementation service for a total of £24,000. Under the new rules, the subscription income and the implementation income may need to be recognised separately and at different points in time. One might be recognised upfront, the other spread over the contract period. The total income is the same, but when and how it appears in the accounts changes.
What is changing with lease accounting?
Under the revised rules, most leases will need to appear on the balance sheet. This covers leases for offices, warehouses, vehicles, equipment and similar arrangements.
Previously, many businesses simply recorded rental payments as an operating expense. Under the new approach, a business will generally recognise a right-of-use asset (reflecting the value of what it has the right to use) alongside a corresponding lease liability (reflecting the obligation to make future payments). The lease cost then flows through the accounts as depreciation on the asset and interest on the liability, rather than as a single rental expense.
The practical effect can be significant. Take a business paying £50,000 per year for an office under a five-year lease. Under the previous treatment, it may simply have recognised a £50,000 rental expense each year. Under the revised rules, it could instead recognise a right-of-use asset and lease liability of approximately £230,000 at the outset, with depreciation and interest then recognised over the lease term.
The cash payments remain exactly the same. What changes is how the lease appears in the accounts.
One specific point worth noting: cars are excluded from the low-value asset exemption, meaning vehicle leases generally need to be brought onto the balance sheet regardless of the value of the vehicle. Businesses with fleets should factor this in when assessing their overall lease exposure.
How will this affect reported figures?
For businesses with significant leases, the changes are likely to mean increased EBITDA (because lease costs no longer sit as a single operating expense), a larger balance sheet, and higher reported liabilities. Revenue timing may also shift for businesses with complex contracts.
The important thing to remember is that these are changes to how transactions are presented in the accounts. They do not reflect a change in underlying business performance. However, for businesses that report against banking covenants, investor metrics or internal KPIs based on accounting figures, the changes in reported numbers can have real consequences even if the commercial position is unchanged.
If your business has covenants tied to net debt, EBITDA, or balance sheet ratios, it is worth reviewing whether the revised accounting treatment could affect your position before the accounts are prepared.
What should businesses do now?
The changes apply to accounting periods beginning on or after 1 January 2026, so for many businesses the first affected accounts are already in progress. The most useful steps are:
Review your lease commitments. Identify all leases currently held and consider the likely balance sheet impact once they are brought on.
Review your revenue arrangements. If you have long-term, bundled, or subscription-based contracts, consider whether the timing of revenue recognition is likely to change.
Check your banking covenants and reporting metrics. If your covenants or KPIs reference accounting figures, understand whether the revised treatment could affect compliance or reported performance.
How can Caldwell Penn help?
If you are a Caldwell Penn client, you do not need to work this out on your own. We are already considering the impact of these changes across the businesses we work with and will reflect the updated requirements as part of our usual accounting process.
Where we think the changes are likely to have a material effect on how your accounts look, we will discuss this with you directly and explain what it means in the context of your business.
