With long-term contracts, complex lease arrangements, and milestone-based billing, the construction industry faces unique challenges under FRED 82. Here’s what you need to know to stay ahead.
What’s Changing from 1 January 2026?
The UK construction industry is set to experience a significant transformation in financial reporting, as the Financial Reporting Council’s FRED 82 proposes major updates to FRS 102, bringing it into closer alignment with international standards like IFRS 15 (Revenue) and IFRS 16 (Leases).
Understanding the new five-step revenue recognition framework
Given the long-term nature of construction contracts—often extending over several months or even years, the introduction of the five-step revenue recognition model under FRED 82 represents a significant shift in financial reporting.
The model consists of the following steps:
- Identifying the contract with the customer
- Identifying distinct performance obligations (goods or services)
- Determining the total transaction price
- Allocating that price to the individual performance obligations
- Recognising revenue as each obligation is fulfilled
This model demands clearer documentation and more granular tracking of contract modifications, retention payments, and bundled services.
Lease Accounting: On-Balance Sheet Impact
Under FRED 82, most leases will now appear on the balance sheet as a right-of-use asset and a lease liability, removing the previous distinction between operating and finance leases.
Key Impacts for the Construction Firms
The updated lease accounting standards will significantly affect financial statements. Companies will see an increase in reported assets and liabilities, reflecting the shift to on-balance sheet recognition of leases. This change will also lead to a boost in EBITDA, as lease expenses are reclassified from operating to financing costs. However, the higher gearing ratios may trigger potential covenant breaches, requiring careful review of loan agreements. To comply effectively, businesses will also need to implement new systems capable of accurately tracking lease terms and applicable discount rates.
What Should construction firms do?
- Review contracts for revenue and lease implications
- Ensure milestones and performance obligations are clearly defined and aligned with payment plans
- Update systems to capture new data requirements
- Confirm accounting systems can input lease terms and discount rates for monthly adjustments
- Engage auditors early to assess impacts and plan transitions
- Consider early adoption to gain strategic advantage
- Particularly relevant for firms bridging financial statements from IFRS to FRS 102 under UK regulations
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