FRS 102 Financial instruments: What’s changing under UK GAAP

As part of the Financial Reporting Council’s (FRC) 2024 amendments to UK GAAP, significant changes to the accounting for financial instruments under FRS 102 are on the way. These updates are mandatory for accounting periods beginning on or after

1 January 2026 and are designed to bring UK GAAP more closely in line with IFRS 9, particularly in areas of classification, measurement, and impairment.

This is one of the most technical and easily underestimated areas of the 2024 FRS 102 overhaul, and one that will have a major impact on many UK businesses.

Key Changes to Financial Instruments Under the New FRS 102

1. Updated Classification and Measurement

The familiar “basic” versus “non-basic” test remains, but the criteria have been updated to align more closely with IFRS 9’s business model and contractual cash flow tests.
As a result, some instruments may move categories, changing how they’re measured (amortised cost vs. fair value).

2. Expected Credit Loss (ECL) Model for Impairment

The incurred loss model is being replaced.
Under the new Expected Credit Loss (ECL) approach, impairment must be recognised earlier, even if there’s no objective evidence of a loss. This requires a more forward-looking assessment, using reasonable and supportable forecasts.

3. Simplifications for UK GAAP Preparers

Although based on IFRS 9, the new FRS 102 version remains simplified for smaller entities:

• No mandatory three-stage impairment tracking
• Reliefs for smaller entities and intra-group balances
• Reduced complexity in hedge accounting requirements

4. Enhanced Disclosures

Entities will need to provide greater transparency around:

• Credit risk management practices
• Impairment assumptions
• The effect of changes in credit risk on financial performance

5. Potential Volatility in Financial Results

Because impairment is now more forward-looking, the ECL model could increase profit volatility, especially for businesses with long-term receivables or significant intercompany lending.

Preparing for 2026: What Businesses Should Do Now

• Review all financial assets and liabilities to determine their classification under the new rules
• Build internal capability to estimate expected credit losses
• Assess the impact on loan covenants, KPIs, and distributable profits
• Engage early with auditors and lenders to anticipate and address any issues

The updated FRS 102 aims to make financial instrument reporting more forward-looking, transparent, and comparable, but it will demand more judgement, data, and systems from preparers.

Will your first ECL calculation be ready for 2026?

If you’d like to understand how these upcoming FRS 102 changes could affect your financial reporting, or discuss how Ballards can support your transition to the new standard, get in touch with our team today.

If you found this useful, you can also read the other insights in our FRS 102 series, where we explore key updates to Lease Accounting and Revenue Recognition, and what they mean for your business.

Disclaimer. This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.