Moving between IFRS and FRS 102 is not a fresh start, it is a retrospective restatement governed by Section 35 Transition to this FRS of FRS 102. An entity selects a date of transition, builds an opening statement of financial position on the new basis, applies a defined set of mandatory exceptions and optional exemptions, and then presents reconciliations showing how equity and profit changed. This guide walks through the Section 35 mechanics, the exemptions that matter most in practice, the reconciliations users depend on, the specific policy differences that drive the adjustments, and the auditor red flags that follow, with references to ISA (UK) 510, 540 and 500.
How does Section 35 govern first-time adoption of FRS 102?
Section 35 requires a first-time adopter to prepare an opening statement of financial position at the date of transition and to apply FRS 102's recognition and measurement requirements retrospectively, subject to the mandatory exceptions and optional exemptions in paragraphs 35.9 and 35.10. The date of transition is the beginning of the earliest period for which full comparative information is presented, normally one year before the first FRS 102 reporting date.
A first-time adopter is any entity presenting its first financial statements that conform to FRS 102, whether it previously reported under EU-adopted IFRS, old UK GAAP, or another framework. Because a UK company usually presents one comparative year, the date of transition sits at the start of that comparative year. For a first FRS 102 year ending 31 December 2026, the date of transition is 1 January 2025 and the reporting entity carries three columns of equity: the transition date, the comparative year-end, and the current year-end.
At the transition date (FRS 102.35.7) the entity must: (a) recognise all assets and liabilities whose recognition FRS 102 requires; (b) derecognise items FRS 102 does not permit; (c) reclassify items into the FRS 102 category; and (d) remeasure all recognised items to FRS 102 bases. Every resulting adjustment is taken directly to retained earnings (or another appropriate equity category) at the date of transition, not through profit or loss, because these differences relate to transactions before the changeover. This is the single most misunderstood mechanic: transition adjustments never touch the current-year income statement.
Key point: The date of transition is one year before the first FRS 102 balance sheet date where a single comparative is presented. Get this wrong and every reconciliation, exemption election and comparative restatement anchors to the wrong point.
What are the mandatory exceptions and optional exemptions on transition?
FRS 102.35.9 lists mandatory exceptions where retrospective application is prohibited, and FRS 102.35.10 offers optional exemptions an entity may elect to ease the burden of full retrospection. The exceptions protect against hindsight; the exemptions cut cost where full retrospection would be impractical or of little value to users.
The mandatory exceptions in 35.9 prohibit retrospective application to: derecognition of financial assets and liabilities; hedge accounting; accounting estimates (estimates at the transition date must be consistent with those made under the previous framework, corrected only for accounting-policy differences); discontinued operations; and measuring non-controlling interests. You cannot rebuild these with the benefit of hindsight.
The optional exemptions in 35.10 are the levers that shape the transition. The most frequently used are set out below.
| Optional exemption (FRS 102.35.10) | What it lets you do | Typical use |
|---|---|---|
| Fair value as deemed cost (35.10(c)) | Use a prior IFRS revaluation or fair value at transition as the deemed cost of PP&E, investment property or an intangible | Avoids reconstructing historical cost for long-held property |
| Revaluation as deemed cost (35.10(d)) | Use a previous-GAAP revaluation before the transition date as deemed cost | Freezes an old valuation without a fresh exercise |
| Business combinations (35.10(a)) | Not restate combinations before the transition date; goodwill is frozen at its previous carrying amount | Avoids re-opening historical acquisition accounting |
| Cumulative translation differences (35.10(f)) | Reset the foreign-currency translation reserve to nil at transition | Removes legacy FX reserve tracking |
| Compound financial instruments (35.10(g)) | Not split a compound instrument if the liability component is no longer outstanding | Simplifies settled convertibles |
| Lease incentives (35.10(p)) | Continue to recognise pre-transition operating lease incentives on the old basis | Avoids re-spreading historical incentives |
| Borrowing costs (35.10(o)) | Elect the transition date as the date from which capitalisation begins | Avoids retrospective interest capitalisation |
Each election is a policy decision that must be documented and disclosed, and several are one-way: choosing fair value as deemed cost, for example, fixes a new depreciable base that cannot later be unwound. Auditors expect a schedule listing every exemption taken, the paragraph relied upon, and the quantified effect.
Which reconciliations of equity and profit must you present?
FRS 102.35.13 requires a first-time adopter to explain how the transition affected its reported financial position and performance through reconciliations of equity and profit or loss. Specifically, the entity must present a reconciliation of equity at the date of transition and at the end of the latest period in the most recent previous-framework financial statements, plus a reconciliation of profit or loss for that latest period.
In practice that means two equity reconciliations (opening date and comparative year-end) and one profit reconciliation for the comparative year, each moving from the previous-GAAP figure to the FRS 102 figure line by line. The reconciliations must give enough detail to let users understand each material adjustment, and they must distinguish corrections of errors from changes in accounting policy on transition. Where the entity presents a cash flow statement under the previous framework, material adjustments to it are also explained.
These reconciliations are the primary audit evidence that the changeover was complete and arithmetically sound. A reconciliation that fails to tie the previous-GAAP equity to the FRS 102 opening equity, or that lumps unexplained differences into a single balancing line, is a direct audit exception.
How do the 2024 Periodic Review amendments trigger a transition?
The FRC's Periodic Review 2024 amendments to FRS 102 are effective for accounting periods beginning on or after 1 January 2026, with early application permitted if all amendments are adopted together. They introduce an IFRS 16-style on-balance-sheet lease model for lessees and an IFRS 15-style five-step revenue model, the two largest UK GAAP changes in a decade.
Although these amendments are a change within FRS 102 rather than a first-time adoption under Section 35, they behave like a transition for the entities affected and carry their own dedicated transition provisions. For leases, lessees apply a modified retrospective approach: comparatives are not restated, and the cumulative effect of first applying the new model is recognised as an adjustment to the opening balance of retained earnings at the date of initial application. The new five-step revenue model similarly replaces the previous Section 23 guidance.
This matters for anyone planning an IFRS-to-FRS 102 move around 2026. The historic simplification, that FRS 102 kept most leases off balance sheet, is disappearing. From 1 January 2026 a lessee moving from IFRS to amended FRS 102 will find the lease models substantially aligned, so the transition adjustment for leases shrinks dramatically compared with the pre-amendment position described in the sections below.
Why Transition from IFRS to FRS 102?
- De-listing: Company delisted from stock exchange; no longer required to report under IFRS
- Voluntary change: Reduce reporting complexity and audit costs
- Regulatory change: FCA/regulatory shift requiring FRS 102 for certain entities
Key point: Transition requires restatement of comparative financial statements to FRS 102 basis. This is material accounting policy change; full year-on-year comparison required.
Major IFRS to FRS 102 Changes
1. Property, Plant & Equipment (Most Material)
IFRS Approach:
- Revaluation model (PP&E held at fair value; gains through OCI)
- Componentization (major components depreciated separately)
- Reviews for impairment; asset retirement obligations
FRS 102 Approach:
- Cost model (historical cost, net of accumulated depreciation) — standard
- Revaluation optional (but if chosen, applies to entire class; reversals through P&L)
- Simpler componentization rules
Transition Mechanics:
Use deemed cost election: treat revalued IFRS amount as deemed cost at transition date (no reversal of prior revaluation gains). Going forward, depreciate the deemed cost balance.
Example: Building originally cost £5m (IFRS), revalued to £8m (IFRS). At FRS 102 transition (1 Jan 2026):
— Deemed cost = £8m (the revalued IFRS amount)
— Accumulated depreciation reset to £0
— Going forward, depreciate £8m over remaining useful life
— Revaluation gain of £3m retained in equity (not reversed)
2. Investment Property
IFRS Approach:
- Fair value model (remeasure each period; gains/losses in P&L)
FRS 102 Approach:
- Fair value model (same as IFRS) — if active market
OR
- Cost model (if no active market) — significantly simpler
Transition Decision:
If no active market, FRS 102 allows cost model. Write-down IFRS fair value to cost (often a significant loss).
3. Leases (Major Change)
IFRS 16:
- All leases > 12 months capitalized as ROU assets (with lease liability)
FRS 102:
- Periods beginning on or after 1 January 2026 (amended Section 20): the operating versus finance split is gone for lessees. Most leases sit on the balance sheet as a right-of-use asset and lease liability, with optional exemptions for short-term leases of 12 months or less and leases of low-value underlying assets.
- Periods beginning before that date (original Section 20): operating versus finance classification, with most leases held off balance sheet and charged to profit or loss.
Transition Impact:
Which answer applies turns entirely on the date of transition, not the date of the decision.
Transition dated on or after 1 January 2026. Amended Section 20 keeps the leases on balance sheet. There is no wholesale derecognition. The work is remeasurement, not reversal: FRS 102 requires the rate implicit in the lease if readily determinable and otherwise the obtaining rate, so the discount rate may move; the low-value exemption is applied qualitatively rather than against the IFRS 16 Basis for Conclusions indicator; and the lease term and any previous IFRS 16 reassessments have to be reconsidered under Section 20 as written. In most cases the balance sheet effect is a modest adjustment rather than the removal of a line.
Transition dated before 1 January 2026. Original Section 20 applies, so leases classified as operating do come off the balance sheet and the payments return to profit or loss. If the entity has any 2026 or later comparative period in its first FRS 102 accounts, it is stepping straight back into an on-balance-sheet model, which is rarely worth doing. Consider early application of the amendments instead, remembering that early adoption is only permitted if all of them are taken together.
Worked comparison. A company carries a £20m right-of-use asset and an £18m lease liability under IFRS 16.
Transition at 1 January 2026 or later: both stay recognised. The adjustment is limited to the effect of any change in discount rate, lease term or exemption scope. A movement of a few hundred thousand pounds is typical; a £20m write-off is not.
Transition before 1 January 2026: for leases that classify as operating, both balances are derecognised, the £2m net asset goes to opening retained earnings, and the payments revert to an operating expense. Finance leases stay on balance sheet under the original Section 20 in any event.
4. Deferred Tax
IFRS:
- IAS 12 works from temporary differences, the gap between an asset or liability's carrying amount and its tax base, whether or not any income or expense has yet passed through profit or loss.
- Deferred tax assets are recognised only to the extent it is probable that future taxable profit will be available (IAS 12.24 and 12.34), and that assessment is revisited at each reporting date under IAS 12.56.
- There is no valuation allowance under IFRS. That is a US GAAP mechanism from ASC 740, which recognises the asset gross and then offsets it. IAS 12 restricts recognition at source, so the two frameworks can reach the same net number while presenting it differently.
FRS 102:
- Section 29 uses a timing difference plus approach. The starting point is timing differences, meaning differences between accounting and taxable profit that originate in one period and reverse in another, with specified additions, chiefly deferred tax on revalued assets and on fair values recognised in a business combination.
- The practical consequence is that FRS 102 recognises deferred tax in fewer situations than IAS 12. The classic case is an asset acquired outside a business combination whose tax base differs from cost: a temporary difference under IAS 12, no timing difference under Section 29.
- Deferred tax assets are recognised to the extent recovery is probable (FRS 102.29.7), the same threshold as IAS 12 even though the differences being measured are not the same.
- Small entities do recognise deferred tax. Section 1A relaxes disclosure, not recognition and measurement, so Section 29 applies in full. It is FRS 105 micro-entities that recognise none, and that is a different regime with its own eligibility test. Conflating the two is a common and material error.
Transition:
If transitioning to SE status, de-recognize all deferred tax (material P&L benefit in transition year).
5. Financial Instruments
IFRS 9:
- SPPI + business model test (complex)
- FVOCI (fair value gains through OCI)
- ECL impairment model (3-stage)
FRS 102:
- Simpler: Available-for-Sale (AFS), Loans & Receivables, FVPL
- Incurred loss impairment model (simpler)
Transition Reclassification:
- IFRS FVOCI investments →’ FRS 102 AFS (similar treatment; OCI flow continues)
- IFRS amortized cost debt →’ FRS 102 Loans & Receivables (cost model)
Transition Year Adjustments (Summary)
Typical P&L Impact (First FRS 102 Year)
| Item | Impact |
|---|---|
| Lease de-recognition (operating lease) | Increases profit (ROU asset/liability reversed; lease now expense) |
| Deferred tax de-recognition (if SE) | Increases profit (DTA loss reverses) |
| Investment property fair value →’ cost | Decreases profit (write-down loss) |
| Revaluation asset use of deemed cost | Neutral (no immediate impact; affects depreciation going forward) |
Audit Red Flags: IFRS to FRS 102 Transition
Red Flag 1: Opening balances not verified to the transition reconciliation (ISA (UK) 510)
Finding: The FRS 102 opening statement of financial position does not tie to the reconciliation of equity, or exemption elections (e.g. fair value as deemed cost) are asserted without supporting valuations.
Auditor action: Under ISA (UK) 510 Initial Audit Engagements — Opening Balances, obtain sufficient evidence that opening balances are correctly brought forward and that the transition adjustments in the 35.13 reconciliations are complete and supportable. Where 35.10(c)/(d) deemed cost is used, inspect the valuation report and the depreciation restart.
Red Flag 2: Deemed-cost and fair-value estimates unchallenged (ISA (UK) 540)
Finding: Investment property, PP&E deemed cost, or impairment estimates on transition are accepted without testing the method, assumptions and data.
Auditor action: Apply ISA (UK) 540 Auditing Accounting Estimates — assess estimation uncertainty, evaluate valuation assumptions against market evidence, and consider management bias in the direction of the transition adjustments (e.g. whether a "no active market" assertion conveniently drops investment property to cost).
Red Flag 3: Comparatives not restated to the FRS 102 basis
Finding: The first FRS 102 year is presented on the new basis while prior-year comparatives remain on the previous framework, breaching Section 35's retrospective requirement.
Auditor action: Require full restatement of comparatives to the FRS 102 basis and reconciliation of every transition difference per FRS 102.35.13; unexplained balancing figures are unacceptable.
Red Flag 4: Transition adjustments taken through profit, not equity (ISA (UK) 500)
Finding: Adjustments that relate to pre-transition transactions are routed through the current-year income statement instead of opening retained earnings, distorting reported performance.
Auditor action: Under ISA (UK) 500 Audit Evidence, trace each material adjustment to its source and confirm it was recognised in equity at the date of transition (FRS 102.35.7/35.8), not in profit or loss. Evaluate the relevance and reliability of the evidence supporting each reconciling item.
Illustrative Case Study: Equity Reconciliation IFRS → FRS 102
A subsidiary previously consolidated under group EU-adopted IFRS switches to standalone FRS 102 to cut reporting cost, with a date of transition of 1 January 2025. It elects fair value as deemed cost for its property (FRS 102.35.10(c)) and does not restate pre-transition business combinations (35.10(a)). The reconciliation of equity required by FRS 102.35.13 at the transition date is set out below.
| Line item | IFRS (£'000) | Transition adjustment (£'000) | FRS 102 (£'000) | Basis |
|---|---|---|---|---|
| Property (deemed cost elected) | 8,000 | — | 8,000 | 35.10(c) fair value as deemed cost |
| Right-of-use lease assets | 2,000 | (2,000) | — | Pre-2026 FRS 102 operating leases off balance sheet |
| Lease liabilities | (1,850) | 1,850 | — | Derecognised with ROU asset |
| Development costs (intangible) | 600 | (600) | — | Expensed where FRS 102 criteria not met |
| Goodwill | 1,200 | (120) | 1,080 | Amortisation reinstated (10-yr life) |
| Deferred tax | (300) | 90 | (210) | Remeasured on FRS 102 timing-difference-plus basis |
| Net equity effect | (780) | To opening retained earnings |
The £780k net reduction is taken directly to opening retained earnings at 1 January 2025, not through the 2025 or 2026 income statement.
Where the timetable allows it, the sensible answer is to move the transition date so that the first FRS 102 year begins on or after 1 January 2026, or to early-apply the amendments from the transition date, which is permitted provided every amendment is adopted together. Either route avoids reversing the same balance twice and gives users a comparative that is prepared on the basis the entity will actually keep using.
Illustrative composite scenario for educational purposes. Figures are indicative and do not represent any specific company.
Frequently Asked Questions
What is the date of transition to FRS 102?
It is the beginning of the earliest period for which an entity presents full comparative information under FRS 102. Where one comparative year is shown, it is one year before the first FRS 102 reporting date, so a 31 December 2026 first FRS 102 year has a transition date of 1 January 2025.
Where do transition adjustments go?
Into opening retained earnings (or another appropriate equity category) at the date of transition, per FRS 102.35.7–35.8. They never pass through the current-year profit or loss because they relate to pre-transition transactions.
Are the optional exemptions mandatory to use?
No. FRS 102.35.10 exemptions are elective and chosen line by line; the 35.9 exceptions, by contrast, are mandatory prohibitions on retrospective application. Every election must be documented and disclosed.
What reconciliations must a first-time adopter present?
FRS 102.35.13 requires reconciliations of equity at the transition date and at the previous framework's latest year-end, plus a reconciliation of profit or loss for that latest period, each moving from the previous-GAAP figure to the FRS 102 figure.
Do the 2024 Periodic Review changes affect a transition?
Yes. Effective for periods beginning on or after 1 January 2026, the amendments bring an IFRS 16-style lease model and IFRS 15-style five-step revenue model into FRS 102, narrowing the gap with IFRS and shrinking the lease-related transition adjustment.
Can you move from FRS 102 back to full IFRS?
Yes. The reverse move is a first-time adoption of IFRS under IFRS 1, which has its own opening balance sheet, mandatory exceptions and optional exemptions that mirror the Section 35 architecture in spirit, and its own equity and profit reconciliations.
Is goodwill amortised under FRS 102?
Yes. Unlike IFRS, FRS 102 requires goodwill and intangibles with finite lives to be amortised, so an IFRS-to-FRS 102 transition reinstates amortisation from the transition date on the frozen carrying amount where the business-combination exemption is taken.
• FRS 102 Small Entities Exemption: Disclosure & Measurement Relief
• FRS 102 Financial Instruments: Classification, Measurement & Impairment
• FRS 102 Periodic Review 2024: Leases & Revenue Changes (effective 2026)
About the author
Usman Qureshi is a Chartered Certified Accountant (ACCA) working in audit and advisory. He writes the IFRS, FRS 102 and US GAAP guides published on this site. Membership is listed on the ACCA public register.