FRC amends FRS 102 and FRS 105
The Financial Reporting Council (FRC) has issued a couple of updates which will affect some preparers and auditors.
While the periodic review amendments, which were finalised in March 2024, are only coming into effect this year, any emerging issues beyond the periodic review cycle (currently around every five years) may be dealt with as an ad-hoc project. This means that there is likely to be further amendments to UK and Ireland GAAP before the next periodic review to deal with issues such as legislative changes, changes in IFRS® Accounting Standards and other issues that could cause divergent treatments.
Amendments to UK and Ireland accounting standards
In February 2026, the FRC issued Amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime – Adapted formats.
In April 2024, the International Accounting Standards Board (IASB®) issued IFRS 18 Presentation and Disclosure in Financial Statements. This new IFRS becomes effective for annual accounting periods commencing on or after 1 January 2027 and replaces IAS® 1 Presentation of Financial Statements. Of course, neither IFRS 18 nor IAS 1 applies to UK and Ireland GAAP, but the issue does affect those entities that are permitted in UK law to adapt the financial statement formats. These adapted formats are based on the requirements in IFRS Accounting Standards.
This means that where an entity does choose to adapt one of the profit and loss account and/or balance sheet formats, it will effectively be complying with IFRS 18 for accounting periods commencing on or after 1 January 2027.
In practice, very few entities adapt the formats of the financial statements and so these amendments will not affect many preparers. Typically, they will affect entities that seek closer alignment to IFRS Accounting Standards and so adapt the financial statement formats to enable a smoother consolidation for groups that prepare consolidated financial statements in accordance with IFRS principles.
In making the amendments, the FRC has not reproduced the requirements of IFRS 18 into FRS 102; nor do the amendments introduce the five category-based classifications of operating, investing, financing, income taxes and discontinued operations on the face of the statement of profit or loss. The FRC is mindful to keep FRS 102 proportionate to entities that are using the adapted formats within the standard.
A summary of the amendments is shown below:
| Section of FRS 102 | Amendment |
| Section 1A Small Entities | Minimum line-items for the adapted balance sheet and adapted profit and loss account to ensure consistency with Section 4 Statement of Financial Position and Section 5 Statement of Comprehensive Income and Income Statement
Intangible assets and goodwill are presented separately New guidance on classification of ‘current assets’, ‘current liabilities’ and ‘non-current assets’ (see below) New line-items for ‘operating expenses’, ‘operating profit or loss’, ‘profit or loss before financing and taxation’ and ‘finance costs’ |
| Section 4 Statement of Financial Position | Intangible assets and goodwill are to be presented separately
Updated guidance on categorising balance sheet items as current and non-current A new Appendix to Section 4 relating to adapted balance sheets which is an integral part of Section 4 |
| Section 5 Statement of Comprehensive Income and Income Statement | Inclusion of line-items for ‘operating expenses’, ‘operating profit or loss’ and ‘profit or loss before financing and taxation’
Additional presentation requirements in respect of other comprehensive income A new Appendix to Section 5 relating to adapted profit and loss accounts which is an integral part of Section 5 |
| Appendix to Section 5 | Renamed to Appendix B which shows an example of the presentation of discontinued operations |
| Section 29 Income Tax | A single amendment in paragraph 29.23 to change the cross-reference to paragraph 4.2A to paragraph 4A.4 |
| Glossary | The definition of ‘current assets’, ‘current liabilities’ and ‘non-current assets’ have been amended for those entities that choose to adapt the financial statement formats to ensure consistency with the presentation requirements (this issue is discussed further below) |
Current and non-current definitions
As part of the amendments, the FRC has made amendments to the definition of ‘current assets’, ‘current liabilities’ and ‘non-current assets’. These amendments will affect those entities that choose to adapt the statutory formats.
Prior to the February 2026 amendments, a liability would be classified as current only when the entity did not have an unconditional right to defer settlement for at least 12 months from the balance sheet date. The amended definition now requires the entity to treat the liability as current where it does not have the right at the balance sheet date to defer settlement for at least 12 months after the balance sheet date (ie, a substantive right rather than an unconditional right). Careful thought will need to be given to certain liabilities where, for example, there are loan covenants or other conditions in place which could mean payment of the liability may be within 12 months from the balance sheet date rather than beyond 12 months from the balance sheet date.
The definitions of ‘current assets’ and ‘non-current assets’ have been amended for entities choosing to adapt the statutory formats so they are aligned with the presentation requirements of IFRS 18.
Other amendments
At the same time as issuing the amendments to FRS 102 and FRS 105 in respect of the adapted formats, the FRC took the opportunity to issue further amendments to FRS 102, Section 9 Consolidated and Separate Financial Statements, Section 13 Inventories and FRS 105, Section 10 Inventories. These amendments were made to reflect feedback from stakeholders following the periodic review as follows:
| Section of FRS 102 (and FRS 105) | Amendment |
| Section 9 Consolidated and Separate Financial Statements | Clarification as to the circumstances under which a parent is exempt from the requirement to prepare consolidated financial statements |
| Section 13 Inventories (and Section 10 of FRS 105) | Paragraphs 13.14 of FRS 102 and 10.13 of FRS 105, which related to the cost of inventories of a service provider has been deleted. This amendment is to ensure consistency with the IFRS for SMEs Accounting Standard which no longer contains this paragraph |
Effective date
The amendments relating to the adapted formats are effective for accounting periods commencing on or after 1 January 2027. An entity can early adopt the amendments, if it wishes to do so. Where early adoption is taken up, the entity must disclose that fact. If the entity is a small entity in the Republic of Ireland, it is encouraged (rather than mandated) to disclose that fact.
FRC issues Practice Note 28
On 24 March 2026, the FRC issued Practice Note 28 Guidance for audits of small and medium-sized entities. This Practice Note (PN) provides guidance to auditors of small and medium-sized entities in auditing the financial statements in a scalable, proportionate and effective way.
The PN follows a detailed consultation by the FRC on the way in which audits of SMEs are carried out. Many auditors have criticised the International Standards on Auditing (UK) (ISAs (UK)) for being disproportionate, costly and disruptive in their application. Calls were made for a ‘scaled-down’ version of the ISAs (UK) that would be proportionate for SME audits and one of the options available was adoption of the IAASB’s The International Standard on Auditing for Audits of Less Complex Entities (ISA for LCE). However, the FRC decided the UK would not adopt the ISA for LCE and that it would issue guidance in the form of a PN that addressed issues concerning audits of SMEs.
At the outset it is worth noting that the PN does not act as a ‘standalone’ auditing standard and the FRC has been clear in that reading the PN is not a substitute for reading the detailed ISAs (UK).
The mainstream ISAs (UK) are still the authority that must be used when auditing clients. However, there are proportionality considerations that can be used where there is less complexity. The PN clarifies that there are several qualitative indicators of complexity that indicate whether an SME client is less complex:
- Ownership and/or control of the entity is concentrated in a small number of individuals (sometimes a single individual) who are actively involved in managing the business.
- The operations are uncomplicated with few activities and sources of income.
- Business processes and accounting systems are simple.
- Internal controls are relatively few and may be informal. This suggests that there is going to be less reliance on internal controls and more substantive audit procedures (tests of detail and substantive analytical procedures) where SME audits are concerned.
Paragraph 10 of the PN states that entities most likely to exhibit the qualitative indicators described above include:
- Small companies (as defined in Companies Act 2006, sections 381-4).
- Medium-sized companies (as defined in Companies Act 2006, sections 465-7).
- Entities that are eligible to claim audit exemption but choose to have a voluntary audit.
- Smaller charities (see also Practice Note 11 (Revised November 2017) The audit of charities in the United Kingdom).
- Subsidiaries within a group that engage in a limited range of activities (eg, a property holding subsidiary).
- Group undertakings with simple structures and limited complexity within individual components.
Of course, professional judgement on the part of the auditor will be needed to determine the extent of complexity within the SME and the PN can be applied to any SME regardless of its size. The proviso is that the entity exhibits no or limited indicators of complexity but it cannot be applied to audits of Public Interest Entities.
The intention of the PN is to enable auditors of SMEs to apply the ISAs (UK) in a way that is proportionate to the complexity and size of the business. This, in turn, (it is hoped) should result in audit efficiencies and maximise the benefits of the audit process.
Further articles on the PN will be published in due course.
A copy of the PN can be downloaded from this link.
Category: Accounting and standards
