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Development of new functionality to meet the new FRS 102/105 requirements following from the FRC Periodic Review. Key changes are around income recognition to be based on delivery (known as the 5-step model), and an on-balance sheet treatment for operating leases.

These requirements apply to accounting periods beginning on or after 1st January 2026,

For the income recognition, the functionality would ideally be embedded in invoicing (and potentially products and services), and this would lead to the correct bookkeeping including disaggregation and recognition of income on delivery, as well as contract debtors and creditors. This new requirement applies to all limited companies (FRS102 and FRS105). It is a complex area, but without software functionality there will need to be a resort to spreadsheets and manual journals as well as a high potential for poor compliance.

The leasing only applies to FRS102 and requires most operating leases of 12 months or more to be capitalised as an asset on the balance sheet with a corresponding lease liability. A net present value approach is needed as well as depreciation and notional interest. In Xero this could mean adding functionality to the fixed asset register to handle all these calculations and entries and also with relevant disclosures in Xero tax.

It is important to also bear in mind that these changes will impact Corporation Tax calculations so are vital to get right. If Xero does not offer this functionality then accountants and bookkeepers will need to resort to spreadsheets/manual journals or other software. These new requirements should be a high priority for Xero, like MTD.