Transition to FRS 102

An entity adopting FRS 102 for the first time applies Section 35. It restates its opening balance sheet at the date of transition, which is the start of the earliest comparative period, as if FRS 102 had always applied, and takes the adjustments to retained earnings. Section 35 then softens this with a few mandatory exceptions and a menu of optional exemptions, such as using fair value as deemed cost for property, and requires reconciliations explaining the effect of the change.

Who is a first time adopter of FRS 102?

Paragraph 35.1 applies Section 35 to a first time adopter whatever its previous framework: adopted IFRS, another GAAP including FRS 101 and FRS 105, or something else such as a local income tax basis. Under paragraph 35.4, the first FRS 102 financial statements are the first in which the entity makes an explicit and unreserved statement of compliance with FRS 102. That includes an entity that did not present financial statements before, or whose most recent ones were under adopted IFRS, FRS 101 or FRS 105.

Common real situations are:

• a micro entity that outgrows FRS 105, or chooses to leave it;
• a subsidiary moving from FRS 101 or IFRS to FRS 102, for example after a change of group; and
• an entity that applied FRS 102 in the past but whose latest accounts did not state compliance, which under paragraph 35.2 must either apply Section 35 or apply FRS 102 retrospectively under Section 10 as if it had never stopped.

Section 35 is not for existing FRS 102 reporters adopting the Periodic Review 2024 changes. Those follow the transitional provisions in paragraphs 1.39 to 1.68 (see FRS 102 changes from January 2026).

When does a micro entity have to move?

Under section 384A of the Companies Act 2006, a company qualifies as a micro entity if it meets two or more of: turnover not more than £1 million, balance sheet total not more than £500,000, and not more than 10 employees. After the first year, meeting or ceasing to meet the conditions only changes the company’s status if it happens in two consecutive financial years. So a company that exceeds the limits once does not immediately lose FRS 105, but planning the move a year ahead is sensible.

A company moving off IFRS also has to check company law. Section 395(4A) lets the directors switch from IAS individual accounts to Companies Act individual accounts for any reason, provided they have not made such a switch in the five years before the first day of that financial year, ignoring switches caused by a relevant change of circumstance under section 395(4).

What is the date of transition?

Paragraph 35.6 defines the date of transition as the beginning of the earliest period for which the entity presents full comparative information under FRS 102 in its first FRS 102 financial statements. With the usual single year of comparatives:

First FRS 102 year end	Comparative period	Date of transition
31 December 2026	Year to 31 December 2025	1 January 2025
31 March 2027	Year to 31 March 2026	1 April 2025

The opening balance sheet at that date does not have to be presented (paragraph 35.7), but it has to be prepared, because the comparatives and the reconciliations are built from it.

How are opening balances restated?

Paragraph 35.7 requires the opening balance sheet to:

1. recognise all assets and liabilities that FRS 102 requires;
2. remove items that FRS 102 does not allow to be recognised;
3. reclassify items that are a different type of asset, liability or equity under FRS 102; and
4. measure all recognised items using FRS 102.

Paragraph 35.8 takes the resulting adjustments directly to retained earnings, or another category of equity if appropriate, at the date of transition. They are not profit or loss in the first FRS 102 year.

Two policy points are spelt out. If the entity chooses to expense borrowing costs or development costs but had capitalised them before, those amounts come out of asset cost on transition (paragraphs 35.8A and 35.8B). Paragraph 35.8C governs the financial instruments policy choice in paragraphs 11.2 and 12.2.

What cannot be changed with hindsight?

Paragraph 35.9 lists mandatory exceptions where the old accounting stands:

• Derecognition of financial assets and liabilities. Items derecognised before the date of transition are not brought back. Items that FRS 102 would have derecognised but the old framework did not can be derecognised on adoption or kept until settled.
• Accounting estimates. Estimates are not revised using later information.
• Non controlling interests. Certain requirements apply prospectively from the date of transition.

Which optional exemptions are most useful?

Paragraph 35.10 lists exemptions that can be picked individually. Those most relevant to private companies are:

• Business combinations (35.10(a)). Past acquisitions and group reconstructions need not be restated under Section 19. Goodwill is not adjusted, although goodwill previously treated as having an indefinite life must be given a remaining useful life. If any combination is restated, all later ones must be too.
• Share based payment (35.10(b)). Section 26 need not be applied to equity instruments granted before the date of transition, with an exception for those previously applying IFRS 2 or FRS 101.
• Fair value as deemed cost (35.10(c)). An item of property, plant and equipment, or a qualifying intangible asset, can be measured at fair value at the date of transition and that value used as deemed cost.
• Revaluation as deemed cost (35.10(d)). A previous GAAP revaluation at or before the date of transition can be used as deemed cost.
• Investments in subsidiaries, associates and joint ventures (35.10(f)). In individual accounts, cost can be the old carrying amount at the date of transition.
• Dormant entities (35.10(m)). A dormant company can keep its existing policies until balances change or it undertakes new transactions.
• Leases (35.10(x)). Lessees can measure the lease liability at the present value of remaining payments at the date of transition, set the right of use asset equal to it (adjusted for prepaid or accrued payments), use one discount rate for similar leases, use hindsight on the lease term, and leave out leases ending within 12 months or of low value.
• Revenue (35.10(y)). The transitional provisions in paragraph 1.65 can be used, with the required disclosure.

Paragraph 35.11 covers impracticability: where an adjustment cannot practicably be made at the date of transition, it is made in the earliest practicable period and the amounts not restated are identified. Exemptions taken can continue until the related items are derecognised (paragraph 35.11A), but must be reassessed if circumstances change significantly (paragraph 35.11B).

What has to be disclosed?

Paragraphs 35.12 to 35.15 require the entity to explain how the transition affected its financial position and performance and to state which exemptions it used. The first FRS 102 accounts must include:

• a description of each change in accounting policy;
• reconciliations of equity from the old framework to FRS 102 at the date of transition and at the end of the latest period in the most recent previous accounts; and
• a reconciliation of profit or loss for that latest period.

Errors found in the old figures must be distinguished from policy changes where practicable (paragraph 35.14; see prior period adjustments), and an entity that did not previously present accounts must say so (paragraph 35.15).

What does a worked example look like?

Illustration only. A company leaves FRS 105 and prepares its first FRS 102 accounts for the year to 31 March 2027, so the date of transition is 1 April 2025. Its freehold workshop is carried at depreciated cost of £300,000, and a valuer puts its fair value at £450,000 at 1 April 2025. The company elects fair value as deemed cost under paragraph 35.10(c). At 1 April 2025 the workshop is restated to £450,000 and the £150,000 increase is taken to retained earnings under paragraph 35.8, together with any related deferred tax (see deferred tax under FRS 102). Depreciation from then on is based on £450,000. The equity reconciliations at 1 April 2025 and 31 March 2026, and the profit reconciliation for the year to 31 March 2026, show the effect.

What about tax?

HMRC’s Business Income Manual at BIM34065 notes that Section 10 of FRS 102 requires changes in policy caused by a new standard to follow that standard’s transitional provisions. Where a change of basis alters taxable trading profits, BIM34095 explains that for corporation tax a positive adjustment is treated as a receipt of the trade arising on the first day of the first period of account on the new basis, and a negative adjustment as an expense on that day, under the change of basis rules (section 181 Corporation Tax Act 2009 for companies). Each transition adjustment should be reviewed for its tax effect rather than assuming that a movement in retained earnings is outside the tax computation.

What mistakes come up most often?

• Using the wrong transition date. It is the start of the comparative period, not the first FRS 102 year.
• Taking adjustments through profit or loss. Opening adjustments go to retained earnings.
• Revising old estimates with hindsight. Paragraph 35.9 prohibits it.
• Not stating the exemptions used. Paragraph 35.12A requires it.
• Restating one acquisition only. Restating any business combination forces restatement of all later ones.

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Related Accountapedia entries

• Adopting IFRS for the first time: IFRS 1
• Moving from FRS 105 to FRS 102
• Can a company move from IFRS back to FRS 102
• When can a company change its accounting policy
• Can micro entities revalue property
• FRS 102 Section 10: policies, estimates and errors

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• legislation.gov.uk: Act 2006 c. 46, section 384A
• legislation.gov.uk: Act 2006 c. 46, section 395
• GOV.UK: Manual page BIM34065
• GOV.UK: Manual page BIM34095

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.