FRS 102 amendments: are you ready?

Lease accounting alignment with IFRS 16

Section 20 of FRS 102 no longer distinguishes between operating and finance leases for lessees. This means more leases must be recognised on the balance sheet as both assets and liabilities. Exemptions are permitted for short-term leases and leases of low-value assets.

Revenue accounting alignment with IFRS 15

Section 23 of FRS 102 introduces a comprehensive five-step model for revenue recognition. This model applies to all contracts with customers and focuses on identifying the distinct goods or services promised. It also considers the amount of consideration the entity expects to receive in exchange.

Other key amendments

The amendments to FRS 102 include several incremental improvements and clarifications:

• Clarity for small entities: Section 1A provides clearer guidance on the disclosures needed to present a true and fair view for small entities in the UK.
• Revised concepts and principles: Section 2 (Concepts and Pervasive Principles) has been updated to reflect the International Accounting Standards Board’s (IASB) Conceptual Framework for Financial Reporting, issued in 2018.
• Fair value measurement: A new Section 2A (Fair Value Measurement) replaces the Appendix to Section 2, incorporating the principles of IFRS 13.
• Supplier finance arrangements: New disclosures are required for supplier finance arrangements.
• IAS 39 option removal: The option to newly adopt IAS 39 for financial instruments is removed, except for consistency with group accounting policies. Entities already using this option may continue to do so for now.

Key actions businesses can take today

1. Assess the impact on your accounts

The new lease accounting model will bring leases onto the balance sheet for lessees, splitting lease expense components between operating and financing costs. This change may affect EBITDA, profit, net debt, and other financial metrics. The five-step revenue recognition model could alter the timing of revenue recognition, especially for complex contracts with bundled deliverables and variable considerations. This may impact both reported and forecasted revenue and profits.

2. Identify necessary operational changes

The new lease accounting and revenue recognition models are closely tied to the contractual terms and conditions. They require interconnected financial modelling throughout the contracts. An early assessment of your current accounting processes, systems, and controls is essential to identify the necessary operational changes. This proactive approach will ensure smooth adaptation to the new requirements and compliance with FRS 102 amendments.

3. Determine a game plan for the transition

The FRS 102 amendments take effect for accounting periods beginning on or after 1 January 2026. Early application is allowed if all amendments are adopted simultaneously. Transitional provisions cover fair value measurement, disclosure of supplier finance arrangements, business combinations, leases, revenue from contracts with customers, and uncertain tax treatments.

Many areas include simplified and optional transition requirements. In some cases, early adoption may be advantageous. It’s crucial to determine the timing, scope, and method of adopting these amendments to ensure a smooth transition and compliance with the new standards.

4. Determine the mandated disclosure requirements

The FRS 102 amendments introduce enhanced disclosure requirements, which may include new and previously undisclosed information in financial statements. Entities must provide additional details on revenue disaggregation, contract balances, and the carrying amounts of lease right-of-use assets and liabilities, among other disclosures.

While some disclosure requirements may be optional, understanding these requirements will help guide your accounting processes and the preparation of financial statements. Being well-prepared will ensure compliance and transparency in your financial reporting.

5. Ensure the team is fully equipped for the transition

Engaging your accounting team through training courses, workshops and similar methods before and during the transition phase is crucial. This proactive approach will ensure that your team fully understands the upcoming changes introduced by the FRS 102 amendments. Adequate training will help your team adapt to new lease accounting and revenue recognition models, ensuring compliance and effective implementation.

We are here to help you

Our team is ready to support you through these changes. We offer various services, including impact assessments, training sessions, workshops, assistance with financial statement preparation, and topical and transaction accounting advice. We can also help you calculate the correct journal entries relating to the new lease accounting methodology. With our expertise, you can confidently navigate the FRS 102 amendments and ensure your business remains compliant and well-prepared.