FRED 82 Draft amendments to FRS 102 the Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs – Periodic Review was first issued in December 2022 by the Financial Reporting Council (FRC). The consultation period on FRED 82 closed on 30 April 2023.
Originally, it was expected that the final amendments to FRS 102 would be published in 2023 and be effective for accounting periods commencing on or after 1 January 2025, typically for 31 December 2025 year ends.
The FRC have however announced that they are still 'fine-tuning' the amendments and now expect to issue the final amendments in the first half of 2024, with an effective date of no earlier than 1 January 2026. Therefore, this would push back the application by entities with a 31 December year end, from the year ending 31 December 2025 to 31 December 2026.
As a brief recap, the major changes to FRS 102 proposed by FRED 82 surround lease accounting and revenue recognition.
FRED 82 is proposing to follow the broad principles set out in the relevant International Financial Reporting Standard (IFRS 16 Leases), whilst providing a number of optional simplifications. FRED 82 proposes that lease obligations of lessees should 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. There would be, in essence, no distinction between operating and finance leases that we have in the current version of FRS 102. The disclosure of these additional liabilities will increase the apparent financial gearing on an entity.
Under the proposals, depreciation would be charged as an expense on the 'right-of-use fixed assets', typically over the lease term, and a finance cost charged as an expense of servicing the lease liability. With all things equal, reported profits are likely to see little change compared to those currently reported with operating lease rentals recorded as an expense under FRS 102.
Whilst moving to ‘on balance sheet’ lease accounting for all leases might present challenges for reporters in obtaining all the inputs for the lease model, the proposals 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.
FRED 82 proposes adopting the five-step model for revenue recognition from IFRS 15 Revenue from Contracts with Customers but 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.
Experience says the final standard will broadly mirror the proposal, although as noted above a little bit of 'fine-tuning' is taking place.
With the delay, those lease calculators can be put away, for a little bit at least!