Rick DunkleyWith less than five months until sweeping changes to United Kingdom Generally Accepted Accounting Practice (‘UK GAAP’) take effect, recruitment firms across the UK must take immediate action to prepare for the revised Financial Reporting Standard (‘FRS 102’), which will significantly affect how businesses report revenue and lease obligations.
Set to apply to accounting periods beginning on or after 1st January 2026, the new standard represents the most significant overhaul in over a decade, and the impact on the recruitment sector could be profound, affecting everything from profit recognition to debt covenants, and even bonus structures.
FRS 102 will now require recruitment firms to adopt a new five-step revenue recognition model, aligning more closely with international standards. This change is particularly relevant for recruitment agencies that operate under milestone-based contracts or stage payments who will need to reassess when revenue is recognised. Under the new model, income may only be recognised once specific performance obligations are satisfied, which could delay recognition and impact reported profitability.
One of the most transformative changes will be the requirement for leaseholders to bring most leases on the balance sheet. For recruitment businesses operating multiple offices or service locations under lease agreements, this means recognising both a right-of-use asset and a lease liability, replacing the previous simple rental expense model and fundamentally changing the look and feel of the balance sheet.
The familiar rent expense will also be replaced by depreciation and finance costs, with knock-on effects to earnings before interest, taxes, depreciation, and amortisation (EBITDA) and other financial metrics. This could trigger unintended consequences to investor reporting and remuneration plans because of clauses in loan agreements. For example, a firm leasing five regional offices may now report a significant lease liability, affecting gearing ratios and potentially breaching loan covenants.
The recruitment industry must not underestimate the scale of these changes. This is not just an accounting exercise, these changes could directly affect how lenders, investors, and regulators perceive a recruitment firm’s financial health. The time to act is now.
Recruitment firms are encouraged to review all client contracts and leasing arrangements immediately. Grouping contracts with similar characteristics may help, but those with complex or vague terms may need to be renegotiated to ensure clarity under the new rules. For businesses with extensive lease portfolios, we recommend that they use specialist lease accounting software or seek professional advisory support.
Whilst the new rules present challenges, they also offer opportunities. There is the chance to strengthen internal controls, streamline contract management, and improve transparency. Recruitment firms that prepare now can avoid compliance issues and turn these changes into a strategic advantage. These changes also bring UK GAAP closer to international standards, allowing for improved benchmarking against listed UK companies and global recruitment firms.
Firms should also be aware of changes to company size thresholds, effective for accounting periods commencing on or after 6th April 2025, which may reclassify some recruiters into different reporting regimes, with FRS 105 not including all the same lease requirements.
Recruitment firms involved in merger and acquisition activities, especially where deals include earn-outs based on profit or revenue, should urgently revisit those agreements. The new standards may shift how performance is measured and trigger unintended payment obligations or disputes. Many recruitment firms rely on debt instruments with covenant requirements tied to EBITDA or net assets. The revised lease accounting rules may impact these metrics, making early impact assessments and lender engagement critical.
Rick Dunkley is partner at Saffery LLP
