The FRC’s periodic review of FRS 102: explained

The FRC issued a laundry list of comprehensive improvements to FRS 102 on 27 March, which is used by an estimated 3.4 million businesses. 

The changes to these financial reporting standards aim to enhance the quality of financial reporting in the UK, helping support the access to capital and the growth of the businesses applying them.   

They also follow extensive stakeholder engagement and consultation on the proposals, with the FRC being required to undertake a periodic review of FRS 102 every five years.

During the stakeholder engagement period, many stakeholders – including those representing preparers – are said to have “generally” supported the updates to the accounting model for revenue recognition.

The amendments to the standards will, in most cases, be effective for accounting periods beginning on or after 1 January 2026. 

That said, the FRC intends to publish new editions of the standards and updated staff factsheets throughout 2024 that will include guidance on key aspects of the new requirements. 

So far, this is what we know: 

The most significant changes will apply to leases and revenue recognition to align with recent changes to international financial reporting standards. The changes aim to provide better information to users of financial statements, including current and potential investors and lenders. 

In response to stakeholder feedback, the FRC has made improvements to the proposals for lease accounting and revised the recognition exemption for leases of low-value assets to clarify that the focus is “to ensure that the most significant leases are recognised on balance sheets”.

As such, a new model for revenue recognition will be launched that aligns to IFRS 15. Some simplifications will be made to Revenue from Contracts with Customers (when the goods or services are transferred to the customer, at the transaction price).

Based on IFRS 15 Revenue from Contracts with Customers, the FRC will implement a five-step revenue recognition model that uses “promises” rather than “performance obligations”. As a result, entities will need to review revenue contracts and apply the five-step model. This may potentially impact timing of revenue recognition.

In particular, will need to consider the treatment for contracts that have bundles of goods/services, variable consideration, warranties, customer options, or significant financing components.

Key simplifications from IFRS 15 include: accounting policy choice in respect of the capitalisation of costs to obtain a contract; a simplified decision tree for licence revenue; businesses may apply the five-step model to a portfolio of similar contracts; businesses can apply simplifications for allocating discounts and contract modifications; and the new IFRS 15 will offer a simplified agent vs principal decisions.

These changes aim to transition IFRS 15 to require no restatement of comparatives, and will also only need to apply the guidance to contracts open at transition date and thereafter.

At the same time, the authority will also align balance sheet lease accounting for lessees to IFRS 16 as a right of use (RoU) asset and lease liability. Lease expenses will also be presented as depreciation and interest, impacting EBITDA and key metrics.

While the current system will broadly stay the same, there will be certain practical exemptions that apply to short-term leases and leases of low-value assets. 

The key simplifications made to IFRS 16 affect contracts with multiple components as a single lease. The FRC will also make changes in index/rates, and use an unchanged discount rate when remeasuring a lease liability in certain scenarios. 

These changes aim to transition IFRS 16 to also require no restatement of comparatives, and instead permit businesses to use carrying amounts for group reporting under IFRS 16 as opening balances. If not applying the group exemption, assets recognised will be equal to the liabilities on transition. Any cumulative effect of initially applying the standard is recorded as an adjustment to opening retained earnings.

The FRC has proposed other modifications to fair value measurement, uncertain tax positions; business combinations; as well as a revised Section 2 aligned with IASB’s Conceptual Framework.

The improvements made to these standards are expected to result in a net benefit to UK businesses and contribute to “high-quality, easier to understand financial reports”.