We’re in a period of change for UK accounting standards. Here’s our summary of the main changes, what kind of businesses are likely to be affected, and how our technical accounting specialists can help you take the next steps.
Background
In March 2024, the FRC issued amendments to FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs – Periodic Review 2024’. The effective date for most amendments is periods beginning on or after 1 January 2026.
These changes are similar to major changes introduced to IFRS several years ago, and are introduced to UK GAAP to improve comparability and alignment with international accounting standards.
Affected businesses
It’s important for businesses to plan for these changes if:
- The accounts are prepared under FRS 102, either in-house or by your accountants
- Your business has complex revenue arrangements
- Your business has a larger lease portfolio
Broadly speaking, for affected businesses, the changes will have an impact on:
- How you capture and record changes – on adoption and ongoing
- EBITDA and other measurements, potentially affecting valuation of your business
We have more detail on this below.
Our summary of the main changes
Revenue recognition
Complexity/potential impact: High
FRS 102 reference: Section 23 – Revenue
Key impact summary:
- IFRS 15 five step model replaces old UK GAAP revenue recognition concepts with some key simplifications compared to IFRS Recognition at a “point in time” vs “over time”
- Contract costs taken into account
- Disclosures aligned to “IFRS for SMEs”
- Optional restatement of comparative information
Lease accounting
Complexity/potential impact: High
Key impact summary:
- Lessee accounting
- Based on the IFRS 16 on-balance sheet model
- Recognition of right-of-use asset and lease liability
- Operating lease expense replaced with depreciation on right-of-use asset and interest charge on lease liability
- Cashflows discounted using an ‘obtainable borrowing rate’
- Increased disclosures
- Restatement of comparatives not required
- Lessor accounting largely unchanged
Fair value measurement
Key impact summary: Updating FRS 102 to reflect the principles of IFRS 13 and align the definitions of fair value, and provide more guidance on fair value measurement
Conceptual framework
FRS 102 reference: Section 2 – Concepts and pervasive principles
Key impact summary: Updated to reflect the IASB’s Conceptual Framework for Financial Reporting
Going concern disclosures
FRS 102 reference: Section 3.8A – Going concern
Key impact summary: Positive statement required confirming going concern basis application and consideration of future and any significant judgements made in assessment
Other changes
In addition to the above, there are other incremental improvements and clarifications which will be of lower impact but will still require consideration. Significantly the alignment of the expected credit loss model for the impairment of financial assets within IFRS 9 has been deferred, with FRS 102’s incurred loss model being retained for now.
Next steps
The changes introduced by the latest amendments to FRS 102 will require changes to systems and processes which will make the short implementation timeframe complex and expensive. It is highly recommended that companies act early and perform a detailed impact assessment.
Where multiple or complex revenue or leasing arrangements exist, the impact assessment should initially focus on the primary financial statement impact.
However, it is important to understand that implementation will go beyond a desktop exercise. A project-based approach should be applied, with a full implementation timetable and plan assessing the impact across:
- Teams, systems and processes requirements in order to capture relevant data appropriately to ensure complete and accurate accounting. As it relates to revenue, collating and analysing customer contracts, and for leases, ensuring data complete and accurate with any lease modifications post-transition, communicated in a timely manner.
- Financial performance and KPIs, including monthly and annual financial results and annual reporting disclosures.
- Internal and external reporting timetables and month end procedures.
- Key stakeholders and communication strategy.
- Any debt covenants included in lending arrangements.
Any strategic opportunities should also be considered for businesses considering a conversion to full IFRS for external reporting purposes. For example, companies or groups who may be anticipating listing their business publicly or engaging in other M&A activity in the medium to long term. Often in this instance, compliance with IFRS reporting convention (and metrics) is a pre-requisite.
Our specialists in commercial finance and technical accounting are here to help your business to start planning today for these changes, and are already giving expert guidance to a number of affected clients. To find out more, please get in touch via our enquiry form.
