Periodic Review of UK and Ireland GAAP: Other notable changes

In March 2024, the Financial Reporting Council (FRC) published its final amendments to UK and Ireland accounting standards following its periodic review. These amendments are effective for accounting periods commencing on or after 1 January 2026. Early adoption is permissible, provided all the periodic review amendments are applied at the same time.

The revised lease accounting and revenue recognition treatments have been discussed in previous articles. However, there are some other notable amendments to UK and Ireland GAAP that preparers need to be aware of which this article will look at.

Section 2 Concepts and Pervasive Principles

FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland has a new Section 2 Concepts and Pervasive Principles. The new Section 2 is aligned more closely to the IASB’s Conceptual Framework.

The fundamental qualitative characteristic of ‘faithful representation’ is now included, rather than it being implied within ‘reliability’,  along with the enhancing qualitative characteristic of ‘verifiability’.

The revised section is more detailed than the Section 2 in FRS 102 (January 2022) as additional guidance is provided on areas such as the unit of account, derecognition, classification and aggregation. Other concepts and principles have been given additional clarity.

Fair value measurement guidance

In addition to a new Section 2 (as discussed above), there is a new Section 2A Fair Value Measurement which replaces the Appendix to Section 2 in FRS 102 (January 2022). The FRC has also amended the definition of ‘fair value’ in the Glossary to FRS 102 so that it is more consistent with IFRS® 13 Fair Value Measurement (see below).

FRS 102, Section 2A will apply where other sections of the standard mandate or permit fair value measurement. It does not apply to FRS 102, Section 20 Leases or Section 26 Share-based Payment and there are additional paragraphs in those sections to clarify that fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

For clarity, the revised definition of ‘fair value’ in the Glossary to FRS 102 (September 2024) is as follows (note terms in bold type mean they are defined terms in the Glossary):

Section 7 Statement of Cash Flows

Certain paragraphs have been amended to include specific examples of cash flows which fall under either operating or financing cash flows. For example, payments for short-term leases, payments for leases of low-value assets and variable lease payments not included in the measurement of the lease liability as required by FRS 102, Section 20 Leases are operating cash flows.

It should also be noted that there are new disclosure requirements in respect of supplier finance arrangements. These disclosures have an earlier effective date of accounting periods commencing on or after 1 January 2025 as the amendments were subject to a separate consultation even though they were finalised at the same time as the periodic review amendments.

Section 11 Basic Financial Instruments

Section 11 has been amended to prohibit switching to IAS® 39 Financial Instruments: Recognition and Measurement, except where doing so enables consistency with the group financial statements in which the entity is consolidated.

Other updates have been made to Section 11 to reflect:

• the new revenue recognition requirements in FRS 102, Section 23 Revenue from Contracts with Customers;
• interest rate benchmarks; and
• the initial measurement of trade receivables (trade debtors) or contract asset.

There is a new paragraph 11.14A which outlines the criteria for recognising dividend income from investments in non-derivative financial instruments that are equity of the issuer. These are only recognised in profit or loss when:

• the entity’s right to receive payment is established;
• it is probable (i.e. more likely than not) that the economic benefits associated with the dividend will flow to the entity; and
• the amount of the dividend can be measured reliably.

Section 12 Other Financial Instruments Issues

Similar amendments have been made to Section 12 as those in Section 11 regarding the prohibition on switching to IAS 39, except for consistency with the group financial statements in which the entity is consolidated.

There is a scope exclusion included in respect of rights and obligations that fall in the scope of FRS 102, Section 23 which are financial instruments (except trade receivables).

An additional para 12.9A has been included relating to dividend income from investments in non-derivative financial instruments that are equity of the issuer (see the criteria in the Section 11 amendments above).

Section 19 Business Combinations and Goodwill

There is new guidance in the form of an Appendix to Section 19 on identifying an acquirer when it is unclear which party is the acquirer. For example, an acquirer is likely to be the entity transferring cash, assets, or incurring liabilities or the one issuing equity instruments.

There is additional guidance concerning contingent consideration which is linked to employment. For example, costs for remunerating employees (or former owners) which are contingent on providing future services are excluded from the cost of the business combination.

There are consequential amendments to FRS 102, Section 19 in light of the new lease accounting treatments where the acquiree is the lessee.

Given the above amendments, it is unsurprising that there are additional disclosure requirements for business combinations and goodwill.

Section 29 Income Tax

There are minor clarifications in respect of deferred tax to be recognised in a business combination.

Additional guidance has been included on uncertain tax treatments. There is a requirement that the entity must assume that the tax authority will examine amounts it has a right to examine and have full knowledge of all related information when making those examinations.

Any change in relevant facts and circumstances where uncertain tax positions are concerned are reflected as a change in an accounting estimate and hence are applied prospectively.

Section 35 Transition to this FRS

Amendments have been made to clarify that this section is applicable to a first-time adopter of FRS 102 regardless of the previous financial reporting framework applied. This includes micro-entities that previously applied FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime or FRS 101 Reduced Disclosure Framework that are transitioning to FRS 102.

There are new requirements on the treatment of:

• borrowing costs previously capitalised;
• development costs; and
• financial instruments,

on first-time adoption of FRS 102.

Certain optional exemptions relating to small companies have been removed which related to accounting periods commencing prior to 1 January 2017as they are no longer relevant.

Conversely, there are new exemptions included in respect of:

• decommissioning liabilities included in the cost of right-of-use assets;
• development costs;
• leases; and
• revenue from contracts with customers.

There are also specific disclosure requirements for an entity to disclose which, if any, of the transitional exemptions it has adopted on first-time adoption of FRS 102. In addition, the entity must also disclose any material changes that are not covered in the reconciliations required by paragraph 35.13. This explanation should state whether the identified change(s) arose as a result of error or because of a change in accounting policy.

Conclusion

The periodic review amendments are mandatorily effective for accounting periods commencing on or after 1 January 2026. Some entities are going to be more affected than others, hence a sound understanding of all the periodic review amendments will be needed.

Over the course of the year, various technical articles outlining the technical accounting requirements will be published to help preparers understand the new treatments under the 2024 editions of the standards.

Category: Accounting and standards