What are the proposed amendments to FRS 102?

In December 2022, the Financial Reporting Council (FRC) published ‘FRED 82’ following its second periodic review of UK accounting standards. FRED 82 details how the FRC intends to amend accounting standards for the review’s findings. These financial reporting standards are known as FRS 102. We discuss the proposed main changes to FRS 102, when they’ll apply and why it’s important to be aware of them.

What is FRED 82?

FRED 82 is a public consultation on the proposed amendments, with responses required by 30 April 2023.

What are the proposed main changes to FRS 102?

The changes are extensive, but those to leases and revenue are the most significant, and more closely align FRS 102 with international financial reporting standards (IFRS).

• Leases: The proposals would, like IFRS 16, result in lessees recognising a lease liability and a right-of-use asset on-balance sheet for most leases.
  
  The distinction between a finance lease and an operating lease would be removed. This will mean that, for many operating leases, an asset and liability would be recognised, in a similar way to how finance leases are currently treated. 
  
  This is a significant change from the current treatment, where only an expense is recognised.
  
  The rationale is that moving away from off-balance sheet operating leases should provide more relevant information to users of financial statements and improve comparability between entities.
  
  Many entities will see a change in lease accounting if the proposal is accepted.  

Thankfully, FRC has proposed several simplifications to determining the more complex aspects of the IFRS 16, for example, in relation to the discount rate to use.  

• Revenue: The revenue recognition proposals are comparable to IFRS 15. Each entity will need to determine whether and how it will be affected. This is because the accounting will depend fundamentally on the terms of customer contracts, with revenue largely recognised based on promises included in those contracts, and whether these are satisfied over time, or at a point in time.
  
  In practice, whilst this is a change to the approach to revenue recognition, and will require consideration, for many, it will not result in a change to the point of revenue recognition.

What are the other changes?

There are a significant number of other changes, however, most are minor, and at this stage, we don’t recommend detailed consideration of these. The proposals include:

• Disclosures in Appendix E, for companies applying Section 1A, to be mandatory, rather than encouraged.
• A revision of Section 2 Concepts and Pervasive Principles, based on the IASB’s updated Conceptual Framework.
• A new Section 2A, Fair Value Measurement, to replace the current guidance in the Appendix to Section 2. The new section is based on the requirements of IFRS 13 Fair Value Measurement.
• Removal of the option to newly apply the recognition and measurement requirements of IAS 39, although the option will remain for those already opting to apply IAS 39.

When will this apply?

The proposed effective date for the amendments is accounting periods beginning on or after 1 January 2025, meaning, except for short periods, December 2025 year ends will be the first affected.   

The FRC intends to allow an implementation period of at least 12 months between the publication of the final amendments and their effective date. This means that the FRC hopes to issue the final amendments before the end of 2023.

Why does this matter and what should I do?

The proposed changes are still at consultation and will not apply until 2025. At this stage, awareness is most important.

For those with significant operating leases, for example, on a property, you should be aware that you will likely see significant changes to your accounts, with greater assets and liabilities, and a change to how the costs of the lease are shown in expenditure; depreciation and interest, as opposed to rent.

In due course, there will be additional work calculating the necessary accounting entries, but you should start to consider how this could impact things such as covenants or EBITDA driven calculations, such as bonuses.

In addition, the increase in assets may bring some entities into audit scope, when previously they were exempt.

If you would like to discuss any of this further, please get in touch with your usual contact. You can find contact details on the Our People section of the Larking Gowen website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Chris Yeates