How an accounting standard change can affect your lending or valuation

You may have heard about the FRS 102 changes which may affect your company accounts. We did a breakfast seminar on it not long ago. But did you know that these changes can also impact EBITDA and so affect your ability to borrow, or your company valuation?

Andrew Moss explains how you can minimise any disruption to lending relationships or exit plans, in spite of these new requirements.

How is my company valued by purchasers or funders?

EBITDA means ‘Earnings before interest, tax, depreciation and amortisation’ and is typically the number which a multiple is applied to when calculating a company valuation. Lenders see this as an approximation of the cash generated by your business.

It starts with Profit before Taxation, then adds back interest costs, depreciation and amortisation. Adjustments are also included to ensure that it reflects market rates and maintainable earnings, removing any exceptional costs in a year, e.g. property move costs or a significant bad debt.

What is FRS 102?

FRS 102 is the principal accounting framework for UK SMEs.

The latest version came into effect for accounting periods beginning on or after 1 January 2026.

The changes affect 3 major areas:

1. The timing of income and costs
2. The classification of where costs appear in the profit and loss account and whether they are above or below EBITDA
3. The measurement of assets – historic cost vs fair value

FRS 102 can both increase and decrease EBITDA, depending on what changes will be made to your financial statements.

Examples when EBITDA may increase

1. Lease accounting changes – operating lease costs (rent/hire) may be replaced with depreciation and interest. This sits below the EBITDA line, so EBITDA will increase. The relevant assets and the ongoing lease rentals will be included on the balance sheet so the debt of the business will increase.
2. Capitalisation of development costs – certain costs can be moved from an immediate expense to a balance sheet asset. And costs shift from operating expenses to amortisation. So EBITDA increases in the short term.
3. Reclassification of costs – financing or non-operating costs could be removed from EBITDA, increasing it.

Examples when EBITDA may decrease

1. Stricter revenue recognition may mean income is deferred, resulting in a lower EBITDA in earlier periods
2. Increased provisions/impairments such as recognising bad debts sooner, means EBITDA will decrease sooner

Implications for M&A and valuation

If you are considering a transaction, buyers will focus on adjusted EBITDA and may make further adjustments due to normalising revenue or costs, or recasting for consistency. There may be more challenges around what is to be included in EBITDA.

Business owners need to be ready to explain how FRS 102 affects your figures and should prepare a clear bridge from statutory accounts to adjusted EBITDA.

Implications for lending agreements

Banks often include covenants in their terms and conditions, requesting that certain financial ratios are met, in order to maintain the facility.

For example, Interest Cover might require EBITDA to be at least 2x your interest payments. Or Leverage Ratio which measures your total debt against your EBITDA and might require Debt to be less than 3xEBITDA.

Once EBITDA changes, those ratios will also change.

So be ready to discuss these with lenders and renegotiate covenants if necessary, so that you don’t breach the terms of your loans.

It is rare for a change in accounting standard to have such a domino effect across other commercial areas of a company, but FRS102 has created such potential consequences.

If you would like to discuss what impact FRS102 may have on your transaction or your funding, please email Andrew Moss at [email protected] or speak to your usual contact at our office.