FRC proposes changes to UK and Ireland accounting standards

On 15 December 2022, the Financial Reporting Council (FRC) issued FRED 82 Draft amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs – Periodic Review. This 346-page document contains some significant proposals for change following the Requests for Views phase which ended on 31 October 2021. Comments on FRED 82 are open until 30 April 2023. All interested parties are encouraged to submit their comments on the proposals by email to ukfrsperiodicreview@frc.org.uk.

It is impossible to summarise all the proposed changes in one article and so there will be a couple of articles around this subject published before the comment close date so interested parties are familiar with the more notable proposals for change.

It was pleasing to see the FRC confirm that no amendments to FRS 102 are proposed to reflect the expected credit loss model from IFRS® 9 Financial Instruments in this periodic review. Although, they have stated that they will reconsider this issue in due course.

A couple of the principal amendments are summarised as follows (note references to ‘draft para X’ refer to the proposed paragraph in FRED 82):

On-balance sheet lease accounting

As expected, the FRC propose to change the lease accounting requirements in FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. There are no equivalent changes proposed in this area for FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime. The proposed changes are intended to align FRS 102 to IFRS 16 Leases (albeit with necessary simplifications).

Interestingly, the International Accounting Standards Board® (IASB®) have decided not to change the equivalent Section 20 Leases in the IFRS for SMEs Accounting Standard in their current comprehensive review of that Accounting Standard. However, the IASB may well decide to align IFRS for SMEs with IFRS 16 during a future review.

Essentially, the vast majority of leases for a lessee (with some limited exceptions related to ‘short-term leases’ and low-value leases) will be reported on-balance sheet. A short-term lease is a lease which, at the commencement date, has a lease term of 12 months or less. Draft para 20.9 confirms that the value of an underlying asset is based on the value of the asset at the start of the lease. Draft para 20.11 cites the following examples of underlying assets that would typically be considered to be of low value:

• tablet computers;
• personal computers;
• home printers and photocopiers;
• mobile phones;
• desk phones;
• televisions;
• small items of furniture; and
• portable power tools.

The FRC have cited ‘efficiency within groups’ as one of the reasons for aligning lease accounting within FRS 102 to that of IFRS 16. Some entities applying FRS 102 could well be members of a group which prepares consolidated financial statements in accordance with IFRS Accounting Standards. Hence, the proposed change to lease accounting in FRS 102 would minimise accounting differences, thus enabling comparability. To that end, the proposed simplifications in FRS 102 are optional rather than mandatory.

The simplifications within FRS 102, Section 20 are as follows:

Revenue

The title of FRS 102, Section 23 is proposed for change from Revenue to Revenue from Contracts with Customers. Section 23 has been completely re-written in FRED 82 and reflects a simplified version of IFRS 15 Revenue from Contracts with Customers. Notably, the ‘five-step model’ approach to recognising revenue as follows:

• Step 1 – Identify the contract(s) with a customer (draft paras 23.6 to 23.15)
• Step 2 – Identify the promises in the contract (draft paras 23.16 to 23.40)
• Step 3 – Determine the transaction price (draft paras 23.41 to 23.60C)
• Step 4 – Allocate the transaction price to the promises in the contract (draft paras 23.61 to 23.74)
• Step 5 – Recognise revenue when (or as) the entity satisfies a promise (draft paras 23.75 to 23.101)

The term ‘promise (in a contract with a customer)’ is defined as:

While many of the requirements in proposed Section 23 are consistent with the IASB’s Exposure Draft of the third edition of IFRS for SMEs, there are some FRED 82-specific amendments to permit entities to use an accounting policy for revenue which meets the requirements of both FRS 102 and IFRS 15 as follows:

• The proposals require an entity to account for a warranty as a separate promise when the warranty provides the customer with a service in addition to the assurance that the product complies with agreed-upon specifications. This applies even if the warranty is insignificant to the contract.
• FRED 82 proposes to allow an entity to account for an option to provide a customer with a material right as a separate promise when the effect of doing so is insignificant to the accounting of the individual contract.
• There is a proposal to require refund liabilities to be measured based on amounts of consideration received which are not included in the transaction price, where such amounts are determined by considering the requirement to constrain estimates of variable consideration.

For smaller entities applying FRS 102, Section 1A

Following the UK’s departure from the EU, the FRC are now able to require more disclosure from small companies in the UK. Previously, the FRC were constrained by the requirements of the EU Accounting Directive, but this is no longer the case. However, this does remain the case for entities in the Republic of Ireland so FRS 102, Section 1A, Appendix D Disclosure requirements for small entities in the Republic of Ireland remains unchanged.

Some of the notable changes proposed in FRED 82 to FRS 102, Section 1A, Appendix C Disclosure requirements for small entities in the UK include:

• A requirement to make an explicit and unreserved statement of compliance with FRS 102, including Section 1A. Currently this is an encouraged disclosure per FRS 102, para 1AE.1(a).
• Mandatory going concern disclosures to comply with draft para 3.8A, which states:

In addition, the small entity will be required to provide disclosures relating to material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern as set out in para 3.9. Currently, this requirement is an encouraged disclosure per FRS 102, para 1AE.1(c).

• There are additional disclosures proposed in respect of leasing arrangements (draft para 1AC.31A) including short-term leases, leases of low-value assets and variable lease payments (draft para 1AC.32A); provisions and contingencies (draft para 1AC.31B); share-based payment transactions (draft para 1AC.31C); and promises in contracts with customers (draft para 1AC.32B).
• Disclosures in respect of deferred tax (draft para 1AC.36A).
• Dividends declared and paid or payable during the period (draft para 1AC.40). Currently this is an encouraged disclosure per FRS 102, para 1AE.1(d).
• Transition information on first-time adoption of FRS 102 (draft para 1AC.41). Currently this is an encouraged disclosure per FRS 102, para 1AE.1(e).

Conclusion

The comment period on FRED 82 is open until the end of April 2023, and all interested parties are encouraged to send in constructive feedback to the FRC using the email address at the start of this article for them to consider prior to finalising FRED 82. The proposed effective date for the amendments is for accounting periods commencing on or after 1 January 2025. Early application will be permitted, provided all the amendments are applied at the same time. Transitional provisions (for example where on-balance sheet lease accounting is concerned) are also contained in FRED 82.

Category: Accounting and standards, Audit