Overview of important changes to FRS 102

Although revenue and leases have understandably attracted the most attention in the recent revisions to FRS 102, several other important amendments also deserve consideration. This article provides an overview of these other changes.
 

Additional disclosures for small entities financial statements under Section 1A of FRS 102

Currently, section 1A of FRS 102 sets out very few mandatory disclosures for small entities that choose to apply that section and/ encourages some additional disclosures. The list of mandatory disclosures has now been expanded to reduce the amount of judgement required by preparers.

Subject to materiality consideration, this will increase disclosure by small entities applying section 1A. The additional disclosures include a requirement to provide a statement of compliance with FRS 102, while others relate to going concern, dividends, transition, leases, provisions and contingencies, share-based payments, revenue, related parties and deferred tax.

In addition, small entities are now required to consider if the presentation of statements of comprehensive income, of changes in equity or of income and retained earnings, are necessary to give a true and fair view when small entities recognise gains or losses in other comprehensive income and/or have changes in equity other than profit or loss.

To comply with the new disclosure requirements, small entities will need to review their existing disclosures and systems, identify and source any additional data needed for the new disclosures in advance of the adoption of the amendments.
 

Concepts and pervasive principles (Section 2)

Concepts and pervasive principles (Section 2) has been entirely rewritten to align with the IASB’s Conceptual Framework for Financial Reporting, issued in 2018. The following changes that may affect a limited number of entities:

• Updated definition of an asset, which means that only the potential to produce economic benefits is required, not that future economic benefits are expected. However, this does not apply to intangible assets for which the definition is unchanged, limiting the possible effect of this change
• Updated definition of a liability, which means that an outflow of resources does not need to be expected for a liability to exist, only that an obligation exists that may require a transfer of resources. However, this does not apply to provisions and contingencies for which the definition is unchanged, limiting the possible effect of this change.

Fair value measurement (Section 2A)

The guidance on fair value measurement has been extensively revised to align with IFRS. Section 2A now provides more explanatory material on the fair value concept, such as the different markets in which an item can be sold or transferred. For the most part, we would not expect this to result in different accounting outcomes as many of the changes clarify common understanding.

However, in those cases where liabilities are measured at fair value, the measurement will now reflect the risk of non-performance by the entity itself. In other words, the higher the entity’s own credit risk, the lower the fair value of its liabilities will be. This is because the fair value is measured by considering the transfer of the liability to a third party with the same credit risk, rather than the settlement of the liability with the counterparty.

Financial statement presentation (Section 3)

The amendment to Section 3 (financial statement presentation) now strengthens the requirements for going concern disclosures. Entities are now required to confirm that the financial statements have been prepared on a going concern basis and disclose that they have considered all available future information in making their assessment.

In addition, where significant judgements are involved in assessing the ability to continue as a going concern, these judgements must also be disclosed.

This change will increase transparency for users of financial statements, giving clearer insight into how robustly management has assessed the entity’s ability to continue as a going concern. This may result in more detailed narrative disclosures for entities where significant judgment is applied in reaching a going concern conclusion.

Supplier finance arrangements (Section 7: Cashflow statements)

Section 7 now requires entities to provide disclosures about supplier finance arrangements, as defined in the revised standard. It should be noted that this amendment is applicable before many of the other changes, being effective for accounting periods beginning on or after 1 January 2025.

These disclosures must cover the key terms and conditions, the carrying amounts of liabilities under such arrangements (including the impact of any non-cash changes), and the range of payment dates.

Previously, qualifying entities were exempt from all Section 7 requirements. Under the revised standard, however, they will only be exempt from the new supplier finance disclosures where equivalent information is already presented in the consolidated financial statements.

Entities will be required to identify whether supplier finance arrangements exist and put appropriate systems in place to capture and report the required disclosures.

Notes to financial statements (Section 8)

Section 8 now requires entities to disclose ‘material accounting policy information’ rather than ‘significant accounting policies’. The revised standard clarifies which accounting policies should be disclosed in the financial statements and may lead to the disclosure of fewer accounting policies. This amendment aims to ensure that entities provide more relevant and entity-specific accounting policy disclosures.

Entities will need to make materiality judgements about what accounting policy information to disclose.

Financial instruments (sections 11 and 12- Basic and other financial instruments)

The most significant changes to Sections 11 and 12 relate to the recognition and measurement options in the standard.

The old FRS 102 provides an accounting policy choice for entities to recognise and measure financial instruments under section 11 and 12 of FRS 102, IFRS 9 or IAS 39. Under the new amendments, entities are no longer permitted to select IAS 39 as an accounting policy choice although entities that already apply IAS 39 can continue to do so. Entities that wish to elect IAS 39 to account for their financial instruments will need to change their accounting policy before the amended standards become effective. After the effective date of the amendments, entities can only change their policy to IAS 39 if the change aligns with the policy of a consolidating parent that applies IAS 39.

Business Combinations (Section 19)

Section 19 now provides additional clarification on how to identify an acquirer in a business combination. This guidance may be relevant for business combinations and group reconstructions in situations where a new parent company is added but that entity does not have substance. In such a scenario, the new guidance will be applied to determine who the acquirer is. This guidance may also result in the entity whose equity instruments are acquired (the legal acquiree) being identified as the acquirer for accounting purposes (reverse acquisition).

Section 19 also provides new guidance on distinguishing contingent consideration for the acquisition of a business from remuneration for post-acquisition employee services.

Entities will need to consider the substance of business combination arrangements carefully in order to determine who the acquirer is and what is part of the cost of the business combination.

Income taxes (Section 29)

The old FRS 102 does not provide explicit guidance on uncertain tax positions. The amendment, which draws on IFRIC 23 Uncertainty over Income Tax Treatments, now requires an entity to assume that the relevant tax authority has full knowledge of all relevant information while examining the entity’s tax assessment. Based on that assumption, if the entity concludes that it is not probable that tax authorities will accept the uncertain tax treatment, then the entity reflects the effect of the uncertainty in accounting for current and deferred taxes using an estimation method (most likely amount or expected value method) that better predicts the resolution of the uncertainty.

On transition, entities must reassess uncertain tax positions and consider whether recognition is required under the amended guidance. This could increase the number of uncertain tax positions recognised compared with current practice.

Other changes and clarifications to FRS 102

There are a number of other minor changes to FRS 102. These are listed below.

• Scope (Section 1): The amendment introduces certain disclosure exemptions in respect of leases and revenue for qualifying entities. Lease disclosure exemptions include lessee exemption from disclosing total cash outflows on leases, lessor exemption from disclosing finance income and variable lease payment income, among others. Revenue exemptions include exemption from disclosure on disaggregation of revenue and some disclosures in respect of satisfaction of performance obligations.
• Statement of changes in equity (Section 6): Disclosure of dividend paid separately for each class of share capital.
• Accounting policies, estimates and errors (Section 10) now provides a clearer definition and explanation, including specific examples, of accounting estimates. It also clarifies how entities can distinguish between changes in accounting policies and changes in accounting estimates.
• Intangible assets (Section 18): Section 18 now clarifies that assets that contain both tangible and intangible elements are classified as PPE or an intangible asset depending upon the element that is more significant.
• Provisions and contingencies (section 21): When determining whether a contract is onerous, Section 21 now requires that costs to fulfil the contract include all incremental costs and an allocation of other costs directly attributable to fulfilling contracts.
• Share-based payments (Section 26): Section 26 now includes more prescriptive requirements on certain matters, which includes treatment of settlement of equity-settled share-based payment in cash, and how vesting and non-vesting conditions affect fair value measurement of cash-settled share-based payments. However, in most cases, the impact of this change is expected to be limited as these are already followed by most entities by drawing analogy from IFRS.

Many of these other amendments to FRS 102 will require careful planning and assessment. Early preparation will help you understand the scale of the impact of the changes, minimise implementation costs and mitigate the risks of non-compliance.

For further details on the differences between the old FRS 102 and new FRS 102 please refer to our comprehensive summary of the significant differences between the old and new FRS 102.

If you would like to discuss how the amendments might impact your business and how we can help support your business through the transition to the new standard, please get in touch with Frederic Larquetoux, Financial Reporting Advisory Partner or your usual BDO advisor.