Changes to FRS102: What will this mean for professional services firms?

On 27 March 2024, the FRC issued amendments to FRS 102 with an effective date of 1 January 2026 (earlier effective dates apply for some amendments and early adoption is permitted if all amendments are applied at the same time).

The amendments expected to have the most significant impact on the financial statements of both LLPs and Companies are;

• revisions to revenue recognition accounting (based on IFRS 15) and;
• revisions to lease accounting (based on IFRS 16)

Simplifications are available for updates to both standards.

There are also amendments around clarifications of the standard relating to;

• Business combinations and goodwill (FRS102, Section 19)

So, what will the change in the standards entail?

Revenue Recognition

LLPs and Companies will need to consider and review revenue contracts in a more prescriptive manner as FRS 102 changes largely align with IFRS 15. Revenue will now be recognised when, or as, control over goods or services is transferred to the customer, whereas previously Section 23 stipulated that revenue was based on the timing of the transfer of risks and rewards.

You will need to review all contracts and consider, among other things, the nature of the contractual promises or “performance obligations”, any variable consideration and the treatment of contracts with bundles of services.

Some practical expedients are available provided entities apply them consistently and disclose which they have applied. The revised standard also allows the option to either (1) restate comparatives or (2) not restate comparatives and any cumulative effect of initial application is recorded as an adjustment to opening reserves.

Lease accounting

Lessees are now required to recognise a right-of-use (ROU) asset and a corresponding lease liability ‘on balance sheet’ for all leases as there is no longer a distinction between operating and finance leases. Exemptions are available for short-term leases and low value assets.

Operating lease rental expenses (as recognised under old FRS 102) are replaced by depreciation and a finance charge on the lease liability.

Initial and subsequent measurement - The lease liability is initially measured as the present value of the future lease payments, discounted using an interest rate. The right of use asset is initially measured as the sum of the lease liability and specified adjustments for other costs as well as provisions for impairment (under Section 27). The right of use asset is subsequently measured by applying the cost model or revaluation model. Transitional adjustments are not required for leases previously accounted for as investment property, which are held at fair value.

Disclosures - The level of disclosures required in financial statements will also significantly increase in the new standard although practical expedients are available.

No restatement of comparatives is required, however the cumulative effect of initially applying the new FRS 102 is recognised as an adjustment to opening retained earnings.

Business combinations and goodwill

FRS 102, Section 19 now provides additional clarification on how to identify an acquirer in a business combination.

It also provides new guidance on distinguishing contingent consideration for the acquisition of a business from remuneration for post-acquisition employee services. Entities should consider these amendments when determining the cost of a business combination depending on the nature of any such transactions as well as the substance of arrangements involved.

What will this mean for professional service firms?

• Prepare finance teams – the impact of these changes needs to be planned, for which finance teams need to dedicate time, resource and knowledge in order to ensure the accounting entries are accurate. Partnerships and groups with overseas operations that may be applying different accounting requirements may take time to locate and understand their group-wide revenue and leasing contracts and associated conditions. Early preparation is key to minimise any non-compliance risks.
• Communicate early with stakeholders – depending on the financial impact to your organisation, the look and feel of financial statements could be hugely different. It is worth communicating and explaining these changes to partners, directors and boards early on to ensure all stakeholders are aware and have an opportunity to raise any questions ahead of adoption and before forecasts and budgets are set.
• Gap assessment and cost impact – Do you have the resource and expertise to navigate through the changes to the standards internally or will you outsource this? We can work with your finance team to analyse a gap impact assessment of how both the changes to revenue and leases will impact your key performance indicators, systems and processes.
• Reported profits and profits available for distribution – For leases, as depreciation is charged on the right of use asset along with an associated interest cost based on the unwinding of the lease liability, the calculation of EBITDA and other key performance indicators will be impacted and will need explaining to stakeholders as it is likely to impact your profits available for distribution / distributable reserves.
• Balance sheet liabilities and the impact on debt covenants – For leases, as no restatement of comparatives is necessary, the balance sheet liabilities may show a sudden increase which will need understanding and explaining to stakeholders. This could also impact meeting covenant conditions or facility renewals.
• Accounting policies and judgements – LLPs and Companies will need to update their accounting policies documentation and international groups will need to ensure the revised policies are updated and applied consistently across different territories. For less mature organisations, this may involve writing accounting papers from scratch – let our team of experts support you in this process, get in touch now.
• Automation – for organisations with either a large pool of high value leases or where leases are complex, have you thought about implementing a leasing tool to automate and assist with the calculations feeding into the trial balance and financial statements? Finance teams and boards should consider whether this type of investment would be beneficial, the cost impact as well as the timing and testing of its implementation before mandatory adoption.

Whilst there are more changes to FRS102 other than revenue, leases, and business combinations and goodwill mentioned above, these are the changes most likely to impact on professional service firms. Now is the time to start planning and preparing ahead of full implementation from 1 January 2026. 

To discuss how we can help your partnership, please contact Sarah Harries, Andrew Radford, Jamie Carter or our team.

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