UK GAAP changes - amendments to Financial Reporting Standards (FRS) 102

Overview of FRS 102

Financial Reporting Standards (FRS) 102  is a single financial reporting standard that applies to the financial statements of UK entities that are not applying  IFRS as adopted by the UK, FRS 101 Reduced Disclosure Framework or FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime.

FRS 102 aims to provide entities with succinct financial reporting requirements. FRS 102 is designed to apply to the general-purpose financial statements and financial reporting of entities including those that are not constituted as companies and those that are not profit-oriented. General purpose financial statements are intended to focus on the common information needs of a wide range of users like shareholders, lenders, other creditors, employees and members of the public, etc.

Navigating the new FRS 102 standards

On 27 March 2024, the FRC issued amendments to FRS 102 and other FRSs following the conclusion of its second periodic review of the FRSs. The amendments follow on from proposals published in Financial Reporting Exposure Draft (FRED) 82 and FRED 84 which proposed greater alignment with International Financial Reporting Standards (IFRS), especially those that had been issued in recent years. 

What are the key changes?

The amendments expected to have significant impact on the financial statements are: 

• Revised revenue accounting requirements in FRS 102 and FRS 105, based on the IFRS 15 five-step model for revenue rrecognition, with appropriate simplifications; 
• Revised lease accounting requirements in FRS 102 based on the IFRS 16 'on-balance sheet' model, again with appropriate simplifications. 

Other incremental improvements and clarifications to FRS 102 (and FRS 105 where applicable) include:

• greater clarity for small entities in the UK applying Section 1A Small Entities regarding which disclosures need to be provided in order to give a true and fair view.
• a revised Section 2 Concepts and Pervasive Principles, updated to reflect the IASB's Conceptual Framework for Financial Reporting, issued in 2018.
• a new Section 2A Fair Value Measurement, replacing the Appendix Fair Value Measurement to Section 2 and updated to reflect the principles of IFRS 13 Fair Value Measurement.
• removal of the option to newly adopt the recognition and measurement requirements of IAS 39 Financial Instruments: Recognition and Measurement under paragraphs 11.2(b) and 12.2(b) (unless needed to achieve consistency with group accounting policies), in preparation for the eventual removal of this option, but permitting entities already applying the option to continue to do so in the meantime
• Additional guidance on identifying the acquirer and clarifying the distinction between contingent consideration and remuneration for ongoing services in a business combination. 
• New disclosures requirement for supplier finance arrangements.

When are the amendments effective?

The principal effective date for these amendments is accounting periods beginning on or after 1 January 2026, with early application permitted provided all amendments are applied at the same time. Transitional provisions are also included. 

Earlier effective dates apply to new disclosures about supplier finance arrangements in Section 7 Statement of Cash Flows of FRS 102 (periods beginning on or after 1 January 2025, with early application permitted). 

Overview of changes to lease accounting

Lessees are now required to recognise a right-of-use (ROU) asset and a corresponding lease liability on their balance sheet for all leases except for short term leases and those relating to low value assets. 

For lessees there is no longer a distinction made between operating and finance leases. Therefore, operating lease rental expenses as recognised under old FRS 102 are replaced by depreciation on the ROU asset and a finance charge on the lease liability. 

The lease liability is initially measured as the present value of the future lease payments, discounted using one of three specified interest rates. The ROU asset is initially measured as the sum of the lease liability and specified adjustments for other costs. 

Accounting by lessors has not been significantly changed.

Lease transition requirement:

• Restatement of comparatives not permitted. However, any cumulative effect of initially applying the standard is recorded as an adjustment to opening retained earnings (if any).
• Permitted to use carrying amounts for group reporting under IFRS 16 as opening balances.
• If not applying the group exemption, asset recognised is equal to the liability on transition, adjusted by the amount of any prepaid or accrued lease payments on the balance sheet before application of the amendments. Any cumulative effect of initially applying the standard is recorded as an adjustment to opening retained earnings.
• No requirement to disclose the impact on prior periods

Overview of changes to revenue accounting

The revisions to Section 23 bring a more detailed approach to accounting for revenue, using a ‘5-step-model’. It is largely converged with IFRS 15 and contains significantly more prescriptive and precise requirements in comparison with the previous Section 23. This may mean changes in the timing and profile of revenue recognition for many entities.

In some areas the changes are very significant so all entities will need to consider the requirements in detail to facilitate careful planning, both for reporting and wider commercial responses.

Revenue will now be recognised by a vendor when, or as, control over the goods or services is transferred to the customer. In contrast, the previous Section 23 was based on an analysis of the transfer of risks and rewards (which is only one of the criteria for determining whether control has been transferred).

Section 23 now sets out prescriptive requirements on a number of areas, including:

• Whether revenue is recognised over time or at a point in time
• How to account for contract modifications
• Bundling’ or ‘de-bundling’ services
• Treatment of variable consideration, including payments to customers.

Revenue transition requirement

• Entities have a choice to either:
  • Restate comparatives with only the effects of the adjustments for the immediate prior period is disclosed, or
  • Not restate comparatives and any cumulative effect of initially applying the standard recorded as an adjustment to opening balance. If entities choose this option, rather than the usual disclosures required when an accounting policy is changed (focused on the effect on prior periods), the requirement is to disclose the effect of the revisions on profit or loss for the current period.
• The standard also provides practical expedients which allow for the use of hindsight for variable consideration and contract modifications.

How could the amendments impact your business

Entities are advised to conduct a thorough assessment to understand the full implications of this changes. This includes assessing potential impacts on the entity’s  financial ratios, performance metrics, debt covenants, business operations, systems, data, and internal controls. This comprehensive assessment will help identify implementation challenges associated with complying with the new revenue and lease standards even beyond accounting. 

How can BDO support your team through the transition process

Navigating these changes can be complex, our team can help support your business through the transition, including through:

• Impact assessment – We can support with evaluating the potential impacts of the changes to revenue and leases  on your business, impacted metrics and also design appropriate transition plans for your businesses. 
• Training/workshops - Tailored trainings/workshops for finance and operations teams on the new requirements and how they apply to your business
• Accounting policies and papers – We can prepare/review your revenue accounting papers/policies and support with the key accounting judgements.
• Preparation and review of models to apply the new accounting requirements to your revenue and lease contracts
• Assessing the impact on your systems, processes and controls
• Disclosure requirements – We can identify the disclosure impacts for your business and assist with updating the existing disclosures to comply with the proposed changes

If you would like to discuss how the amendments might impact your business and how BDO can help support your business through the transition to the new standard, please don’t hesitate to reach out to a member of our team.