More changes for accounting standards: who will they affect?

Following a periodic review of Financial Reporting Council’s (FRC) standards, some updates to current accounting requirements have been proposed and are currently subject to consultation, with comments invited by 30 April 2023. The changes are not due to come into effect until 1 January 2025, but what are they and what effect will they have?

Due to affect UK Accounting Standards, the proposed updates to FRS 102 relate to the treatment of revenue and leases, as well as other improvements and clarifications. These changes would be introduced in an attempt to reflect the changes in the IFRS, making reports easier to compare and ensuring greater consistency for companies reporting under UK GAAP and IFRS.

The main two changes that are being introduced affect FRS 102. One of the proposals states that all leases should be brought onto balance sheets. This would remove the differentiation between finance and operating leases and create a ‘right of use’ asset on the balance sheet with a related liability, similar to IFRS 16. The ‘right of use’ asset would then be treated as fixed, and so is subject to depreciation and interest based on the liability will be charged to profit and loss. Exemptions are proposed for short term leases with a life of less than 12 months and leases of low value items.

This change would affect the presentation of financial information. For example, the value of fixed assets may increase. This could disproportionately affect businesses that hold a number of property or equipment leases, such as those in the retail and construction sectors.

The other main change is that a five-step model similar to IFRS 15 is being proposed for revenue recognition. This may impact many businesses but particularly, those with bundled contracts – for example, those with a single contract for software, maintenance and training may have to be separated out for accounting purposes, reporting on each element individually. Businesses with long-term contracts, should be aware that the point at which revenue is recognised may alter when the changes take effect for periods commencing on or after 1 January 2025. It is also important to consider how these changes will affect future contracts. Contracts will need to be assessed to ensure revenue is recognised at the appropriate point.

Businesses should begin considering the impacts of these FRS changes on their current business models and communicate with relevant stakeholders. Contracts, software, governance and borrowing arrangements should be reviewed in light of the changes. Gathering the appropriate information now will help to make the transition as smooth as possible. Extra resources may also be needed to help manage the transition effectively.

While to some it may seem that these changes are still some way off and are not yet set in stone, assuming they go ahead businesses with an accounting period starting 1^st January 2025 will be affected. These businesses should start preparing now to avoid any unnecessary complications and additional costs when the time comes.  While the changes will bring some benefits and make reports and accounts easier to compare, they could have major implications for some businesses.

By Andrew Collier, technical director at accounting firm, Menzies LLP