Artemis Marketing: In March 2024, The Financial Reporting Council published a list of amendments to Financial Reporting Standard (FRS) 102, a financial reporting standard which sets out the measurement and recognition rules for entities.
It’s one of the most significant changes to lease accounting in many years, and is intended to align UK Generally Accepted Accounting Practice (GAAP) with international standards.
At Artemis Marketing, we believe in not only staying informed but getting a head start where possible to ensure our business, and those of our clients’, remains compliant. Here’s what you should know about the upcoming FRS 102 changes, why it’s worth making the updates early, and how to do so.
What are the changes to FRS 102?
There are several changes to FRS 102, but the main updates are as follows:
Lease accounting
A new single lease accounting model for leases has been introduced. Under the new rules, operating leases will now appear on the balance sheet, and lease costs will be replaced with depreciation and interest, though exemptions remain for short-term leases. This could significantly impact the financial statements of companies reporting under UK GAAP. You’ll need to review your lease contracts to determine which leases fall under the new standard and establish a method for calculating lease liabilities and corresponding assets.
Fortunately, the standard includes some practical simplifications compared to international standards, particularly regarding the transition process, discount rate calculations, and low-value assets. Additionally, companies that already prepare IFRS 16 figures for consolidation can use those same numbers when adopting the new rules, making the transition easier.
Revenue recognition
The changes to revenue recognition introduce a new five-step model, closely aligned with IFRS 15. However, to simplify the process, the concept of “performance obligations” in a contract—which was challenging under IFRS 15—has been simplified by referring to them as “promises.”
As seen with IFRS 15, the impact of these changes will vary by sector, potentially affecting the timing of revenue recognition under FRS 102. To ease the transition, some simplifications have been introduced, including policy choices on how to handle costs related to obtaining a contract and how to allocate discounts over time.
Fair value measurement
The changes here align FRS 102 with IFRS 13, both in terms of the definition of fair value and the guidance on how to measure it. For liabilities, the valuation now needs to consider its own credit risk as part of non-performance risk, which refers to the risk that an entity might not meet its obligations.
Another key change is that using bid prices for assets and ask prices for liabilities is now optional rather than mandatory. This means that if management believes a mid-price better reflects fair value, they can now apply that approach in their financial statements.
Share-based payments
Key changes to share-based payment accounting under FRS 102 include updates to how business combinations are handled, how share-based transactions with settlement choices are accounted for, and how vesting conditions affect cash-settled share-based payments.
Why preparing early for FRS 102 changes is beneficial
While these changes aren’t set to take effect until 1st January 2026, getting a head start offers several benefits for your business. Adapting to these amendments requires businesses to invest in updated data collection, assess system capabilities, and refine processes to meet the revised standards.
What’s more, management reporting and forecasting formats may need to be revisited to align with these changes. This represents a significant operational and financial commitment, so companies should make sure their accounting and finance teams are adequately trained to handle the transition smoothly.
Understand the impact
Early planning will also provide a clearer understanding of the changes’ impact, allowing for a smoother transition and reducing the risk of last-minute disruptions. Taking the time to assess the potential effects on financial statements, systems, and processes in advance will help you ensure effective communication with key stakeholders, including investors, lenders, and employees, to maintain transparency around financial metrics and tax positions.
A strategic advantage
Opting for early adoption of the amendments can offer your business a strategic advantage. Companies that already prepare financial information under UK-adopted international accounting standards (IFRS) for group reporting may find it beneficial to align sooner. Similarly, businesses operating within corporate groups that report under IFRS might achieve greater consistency by transitioning early.
If potential acquirers or acquisition targets follow IFRS, aligning reporting structures in advance could streamline due diligence and integration processes. Companies in sectors where IFRS is the prevailing standard can enhance their financial statement comparability within the market, making them more attractive to investors and stakeholders. Just remember, if you’re considering early adoption of these updates you should apply all the amendments in full at the same time though—selective implementation isn’t permitted by the FRC.
Making the updates
To effectively prepare for the amendments to FRS 102, businesses should begin by assessing the impact of the new standards on their financial statements, systems, and processes. This includes planning communication with key stakeholders such as investors, lenders, and employees. A crucial first step is to collect, summarise, and analyse all leases and revenue contracts, ensuring a clear understanding of which agreements, including lending and remuneration arrangements, rely on financial statement figures.
One key area to focus on is the impact on accounting for contracts with customers and suppliers. Identifying performance obligations in contracts and applying the new five-step model for revenue recognition will require increased judgement and estimation compared to the current UK GAAP. Likewise, entities will need to review and summarise all leases, determining which fall within the scope of the revised standard.
Businesses should also review their existing accounting policies and systems, identifying any gaps or weaknesses that could hinder the implementation of the new standards. Given that the revised reporting requirements are more extensive and granular, entities may need to upgrade their data collection and analysis systems, particularly for revenue and leases. While this all requires additional planning, it can provide a valuable head start in adapting to the new regulatory landscape, minimising disruption, and ensuring long-term compliance.
For more news, click here.
