How changes to revenue and lease accounting under FRS 102 affect MIPs
As mid-market deal activity continues to evolve, management incentive plans (“MIPs”) remain a critical tool for aligning the interests of asset managers and management teams. From 1 January 2026, amendments to FRS 102 relating to revenue recognition and lease accounting will apply for accounting periods beginning on or after that date. Even where underlying business activity remains unchanged, reported performance may move, with major knock-on effects on MIPs. For boards and sponsors, the key risk is that incentive outcomes shift because accounting presentation has shifted, not because performance has changed.
The revised revenue recognition model introduces more detailed rules around identifying performance obligations and the timing of revenue recognition, which may alter how and when revenue is reported. The lease accounting changes will now bring most leases onto the balance sheet, replacing operating lease expenses by separating depreciation and interest. The practical implication is that revenue trends, EBITDA and balance sheet ratios may move, particularly during transition periods where year on year comparability becomes harder.
These changes will directly impact key financial metrics commonly used in MIPs. As a result, asset managers may need to consider whether existing incentive structures remain appropriate under the revised accounting framework. This is not only about accounting compliance, but also about preserving fairness, intent and defensibility of incentive outcomes.
Revenue recognition
FRS 102 now applies a more structured approach to revenue, similar to IFRS 15, whereby revenue is recognised based on when performance obligations are satisfied, not simply when invoices are raised.
Why this matters for MIPs
• Revenue may be recognised earlier or later than before
• Multi-year contracts may be split across periods
• YOY revenue growth can change purely due to timing changes
A key change concerning management is that revenue-based bonuses may be impacted by these accounting changes, potentially penalising performance that may otherwise be strong. Equally, the opposite can occur: timing effects can flatter a period without a corresponding change in underlying activity, creating outcomes that are hard to explain or defend.
Lease accounting
Most leases now appear on the balance sheet as:
• A right-of-use asset
• A lease liability
Instead of a single rental expense, companies record:
• Depreciation
• Interest expense
This is important for MIPs because moving lease costs below the line for EBITDA can boost reported EBITDA, alter the timing of operating and net profits and make the early years of leases appear less profitable.
A key change for asset managers is that EBITDA linked bonuses could seem easier to earn, despite no real operational improvements. Where plans reference below-EBITDA measures, reported profitability may move differently again due to the shift in depreciation and interest.
Why this matters for MIPs
Bringing leases onto the balance sheet increases:
• Total assets
• Total liabilities
In turn, this can have an effect on company MIPs by impacting return on assets, gearing ratios and capital efficiency measures. It can also change leverage and gearing ratios on paper, which may matter where MIPs include balance sheet-linked hurdles.
What asset managers may need to consider
To keep MIPs fair and effective, asset managers should:
• Update targets using post change numbers
• Consider adjusted metrics that strip out accounting driven volatility
• Clearly define how accounting changes are treated in incentive plans
• Use parallel reporting during transition periods where possible
Fund managers should also consider the investor narrative. If EBITDA appears to improve due to lease accounting, or revenue trends shift due to revised recognition, stakeholders may read that as underlying change when it is accounting presentation. Consistency and clear explanation matter, particularly when performance is being assessed over time.
What this means in practice
The priority is to protect the integrity of incentive outcomes. A small amount of work now, modelling what moves and documenting how the MIP should treat the transition, can prevent avoidable debate later.
This is particularly relevant where revenue timing is complex or lease profiles are material, which is often the case in infrastructure and real assets. Given these changes may materially impact reported performance and risk management, careful implementation is essential to avoid unintended consequences, including significant misalignment or demotivation. Langham Hall can help managers and sponsors quantify the impact, support transition reporting and ensure incentive frameworks remain aligned to the underlying commercial story.
