Changes to UK and Ireland accounting standards
On 27 March 2024, the Financial Reporting Council (FRC) issued the final amendments to UK and Ireland GAAP. The amendments primarily affect FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, but there are consequential amendments to other standards arising from this periodic review such as FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime.
The FRC estimates that some 3.4 million businesses will be affected by the changes which are designed to enhance the quality of financial reporting in the UK. This article summarises some of the more notable changes arising from this periodic review. Further articles will be published in due course which will explore some of the accounting treatments that have changed as a result of the periodic review.
Headline changes
The two headline changes relate to lease accounting and revenue recognition. In terms of lease accounting, the changes only affect FRS 102 (not FRS 105). Amendments to revenue recognition affect both FRS 102 and FRS 105.
Leasing
The lease accounting amendments ensure that the most significant leases are recognised on the balance sheet. Essentially, the changes mean there will no longer be a distinction between a finance lease and an operating lease so most leases for lessees will be on-balance sheet. There are two exemptions to on-balance sheet recognition:
- If the lease is a short-term lease; and
- If the lease is for a low-value asset(s).
Short-term leases
A new definition of ‘short-term lease’ is included in the Glossary to FRS 102 which confirms that a short-term lease is:
‘A lease that, at the commencement date, has a lease term of 12 months or less. A lease that contains a purchase option is not a short-term lease.’
Low-value assets
In the Exposure Draft, the FRC included examples of assets that would be considered to be of low value (such as tablets and personal computers). Following stakeholder feedback, the FRC have removed such examples and have only retained examples of underlying assets that would not be of low value in paragraph 20.11 which are:
- Cars, vans, buses, coaches, trams, trucks and lorries;
- Cranes, excavators, loaders and bulldozers;
- Telehandlers and forklifts;
- Tractors, harvesters and related attachments;
- Boats and ships;
- Railway rolling stock;
- Aircraft and aero engines;
- Land and buildings; and
- Production line equipment.
The principles in FRS 102, Section 20 Leases are broadly aligned to those of IFRS® 16 Leases. IFRS 16 includes examples of assets that would be considered low value (e.g. tablet and personal computers, small items of office furniture and telephones). It would be acceptable to apply the recognition exemption to, at least, leases of such assets under FRS 102.
The FRC’s conclusion where low-value assets are concerned was to take a more permissive approach to defining low-value assets. To that end, Section 20 defines low-value assets in absolute terms as opposed to what is material to the lessee (FRS 102, para 20.9). An entity that wishes to set a threshold at a lower level (for example to be consistent with a group accounting policy) is able to.
Future articles will examine the revised accounting treatments for assets under leasing agreements.
Revenue recognition
As discussed above, the changes to revenue recognition affect both FRS 102 and FRS 105.
Both FRS 102, Section 23 Revenue and FRS 105, Section 18 Revenue have been renamed Revenue from Contracts with Customers. Both sections have been completely re-written and include a single comprehensive five-step model for recognising revenue for all contracts with customers. This model is based on identifying the distinct goods or services promised to the customer and the amount of consideration to which the entity will be entitled to receive in exchange for those goods and/or services. A summary of the new requirements in FRS 102 are as follows:
| Step 1 | Identify the contract(s) with a customer | Paras 23.7 to 23.16 |
| Step 2 | Identify the performance obligations in the contract | Paras 23.17 to 23.40 |
| Step 3 | Determine the transaction price | Paras 23.41 to 23.64 |
| Step 4 | Allocate the transaction price to the performance obligations in the contract | Paras 23.65 to 23.77 |
| Step 5 | Recognise revenue when (or as) the entity satisfies a performance obligation | Paras 23.78 to 23.112 |
It should be noted that additional simplifications have been made in FRS 105.
Other notable changes
Some other notable changes include the following:
| Section 1A Small Entities | Additional disclosure requirements for small entities in the UK including:
· Statement of compliance with FRS 102 · Going concern · Significant leasing arrangements (including, where necessary, additional qualitative and quantitative information; short-term leases; leases of assets of low-value; and variable lease payments) · Provisions and contingencies · Share-based payment transactions · Performance obligations in contracts with customers · Current tax and deferred tax · Dividends declared and paid or payable during the period · Transitional disclosures on first-time adoption of FRS 102 The related party disclosure requirements have been extended for small entities in the UK by requiring the full disclosures required by paras 33.9 and 33.14 (subject to the provisions of para 33.1A relating to wholly owned subsidiaries and para 33.11 in respect of states). |
| Section 2 Concepts and Pervasive Principles | A new Section 2 has been included which is aligned to the Conceptual Framework for Financial Reporting as issued by the IASB. There is also an additional Section 2A Fair Value Measurement which has been updated to align definitions with latest international standards and provide additional guidance. |
| Section 7 Statement of Cash Flows | New disclosure requirements have been included in respect of supplier finance arrangements. These new requirements have an earlier effective date than the rest of the amendments (being effective for accounting periods commencing on or after 1 January 2025 with earlier adoption permissible). |
| Section 26 Share-based Payment | Additional guidance has been included that aids application of the principles in specific situations which promote consistency with IFRS reporting. |
| Section 29 Income Tax | Additional guidance has been included in respect of accounting for uncertain tax positions. |
| Section 34 Specialised Activities | Improvements have been made to this section including clarifications to existing requirements. In addition, consequential changes have also been made to reflect other amendments. |
Expected credit loss model and insurance contracts
This article has considered some of the headline amendments that have arisen as a result of the FRC’s periodic review. The FRC have not introduced any amendments in respect of the expected credit loss model (found in IFRS 9 Financial Instruments); nor has it made any amendments in respect of IFRS 17 Insurance Contracts. The FRC has confirmed that it will consider further alignments with these standards in consultations in due course.
Effective date
The effective date of the periodic review amendments is for accounting periods commencing on or after 1 January 2026. Earlier adoption is permissible, provided all the amendments are applied at the same time. The exception is in respect of the additional disclosures required in FRS 102, Section 7 Statement of Cash Flows in respect of supplier finance arrangements which have an earlier effective date of accounting periods commencing on or after 1 January 2025, with earlier application permitted.
Category: Accounting and standards, Audit
