Audit and Assurance update: Changes for UK GAAP

Financial Reporting Standard 102 (‘FRS 102’), the ‘all in one’ standard for most UK GAAP reporters, is subject to periodic reviews by the Financial Reporting Council (‘FRC’). These consider, amongst other things, whether changes are required to existing requirements or other developments need to be brought within FRS 102. The latter includes International Financial Reporting Standards (“IFRS”) which tends to filter their way into UK GAAP at some point. The initial periodic review of FRS 102 was finalised in December 2017 with revised FRS 102 applicable to December 2019 year ends.

Five years further down the line, the second periodic review of FRS 102 by the FRC has taken place with a resultant exposure draft FRED 82 Draft amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs – Periodic Review. Whilst FRED 82 contained proposed amendments to FRS 103, FRS 104 and FRS 105, as well as FRS 102, it is the latter which tends to have more relevance for UK GAAP reporters.

The FRC’s consultation on FRED 82 closed on 30 April 2023. It was envisaged the final amendments to FRS 102 would be published in 2023, before being pushed back into the first half of 2024.

At the end of March 2024, the FRC published the final amendments which in most cases are effective for accounting periods beginning on or after 1 January 2026, typically for 31 December 2026 year ends. The major changes to FRS 102 are outlined below.

Lease accounting

Over the years, there has been much debate whether to bring operating leases onto the balance sheet. The revision to FRS 102 follows the broad principles set out in the relevant International Financial Reporting Standard (IFRS 16 Leases), whilst providing a number of optional simplifications. Lease obligations of lessees are to be recognised as assets on the balance sheet as “right-of-use fixed assets” (with the exception of short-term and low-value leases) together with a corresponding amount disclosed as a liability. This means, in essence, there is no distinction between operating and finance leases.

Depreciation will be charged as an expense on the “right-of-use fixed assets”, typically over the lease term, with a finance cost recognised for the servicing the lease liability. If all things are equal, reported profits are likely to change little compared to those reporting operating lease rentals as an expense under the current version of FRS 102.

Whilst moving to ‘on balance sheet’ lease accounting for all leases might present a challenge to obtain all the inputs for the lease model, they might enhance key profitability metrics for some. Those entities for which earnings before interest, tax, depreciation and amortisation (EBITDA) is a key financial metric will note that an operating lease expense is deducted from profit in the calculation of EBITDA, whilst depreciation of the “right-of-use fixed assets” and interest cost on the lease liability is not deducted.

Revenue recognition

Revenue recognition has also been an area of focus for some time and the revised FRS 102 adopts the five-step model for revenue recognition from IFRS 15 Revenue from Contracts with Customers with some simplifications.

The five step model involves:

  • Identifying the contract (or contracts) with a customer;
  • Identifying the promises in the contract;
  • Determining the transaction price;
  • Allocating the transaction price to the promises in the contract; and
  • Recognising revenue when (or as) the entity satisfies a promise.

The form of an entity’s contracts with its customers will determine whether there is a change to revenue recognition.

In applying the changes for leasing and revenue recognition, the cumulative retrospective effect can be dealt with as an adjustment to opening equity or reserves at the date of the initial application, rather than a full restatement for prior years.

Changes for small entities

The changes to FRS 102 Section 1A, Small Entities, are aimed at giving clarity on disclosures required for their financial statements to give a true and fair view, including additional disclosures relating to:

  • Going concern;
  • Provisions and contingencies;
  • Share-based payment transactions;
  • Current and deferred tax;
  • Dividends declared and paid or payable;
  • Leasing arrangements (qualitative and quantitative), short-term leases and low value leases; and
  • Performance obligations in contracts with customers.

The latter two items are derived from the changes made to FRS 102, highlighted above.

In addition, a small entity was not required under Section 1A to disclose related party transactions where these had been concluded under normal market conditions. This has been removed in the revised Section 1A and small entities will need to make the disclosures required by FRS 102, increasing the availability of more sensitive information.

Effective date

The above, together with other incremental improvements to FRS 102, are effective for accounting periods commencing on or after 1 January 2026. Early application is permitted as long as all those amendments are adopted at the same time.

Supplier finance arrangements and effective date

One amendment to FRS 102 concerning Supplier finance arrangements is however effective for accounting periods commencing on or after 1 January 2025. This was issued at the end of September 2023 as an exposure draft, FRED 84 Draft amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland – Supplier finance arrangements. Early application is allowed.

Supplier finance arrangements are those made with finance providers for them to pay the amounts an entity owes its suppliers. An entity correspondingly agrees to pay its finance providers at the same date as, or a date later than, suppliers are paid. These arrangements provide an entity with extended payment terms, or an entity’s suppliers with early payment terms, compared to the related invoice payment due date.

The aim is to increase the awareness of a user of financial statements about an entity’s use of supplier finance arrangements and the effect of these arrangements on the entity’s financial position and cash flows and amends the disclosure requirements of Section 7 of FRS 102, Statement of Cash Flows, to require the following:

  • The key terms and conditions of arrangements, with separate disclosure of terms and conditions that are not similar;
  • At the end of the reporting period:
    • The carrying amount of supplier finance liabilities and the associated line items in which they are included in the balance sheet;
    • The range of payment due dates for both the liabilities disclosed above and trade creditors that are not part of such arrangements. If the range of payment due dates is wide then additional disclosure is required about the range; and
  • The type and effect of non-cash changes in the carrying amounts of supplier finance liabilities.

There are exemptions from providing certain comparative information in the first year of application. Small entities preparing their financial statements under Section 1A of FRS 102, Small Entities, are not required to comply with the amendment.

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