On 15 December 2022 the Financial Reporting Council (“FRC”) released a much-anticipated draft of the periodic review of FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”.

As the original standard was based on the IFRS for SMEs, it was expected that recently-introduced International Financial Reporting Standards (“IFRS”) would be incorporated into this review. This expectation has proved to be true and, as a result, the proposals will significantly impact certain areas of accounting by UK companies. The 352-page consultation paper is likely to affect 3.2 million reporting entities in the UK and has a proposed effective date of accounting periods commencing on 1 January 2025.

Among the most notable changes are the new rules for lease accounting derived from IFRS 16 ‘Leases’. Companies will be required to capitalise most of their operating leases, such as cars and offices, and use the on-balance sheet model by presenting a right-of-use asset and a corresponding lease liability. Certain exemptions are provided for short-term and low-value leases (for example, computers and printers).

The rental expense will be replaced in the profit and loss account by a depreciation charge and interest expense on the liability. This may result in a front-loading of the lease charge but, conversely, an increase in EBITDA.

One of the challenges of adopting IFRS 16 back in 2019 was to establish a company’s incremental borrowing rate for discounting the lease payments when calculating a lease liability. Companies with no borrowings in place had to derive proxy rates from discussions with their banks or by using listed corporate debt. The FRC has recognised this issue by allowing such companies to use the gilt rate which is easily observable.

Another new standard, IFRS 15 ‘Revenue from Contracts with Customers’ that was introduced in 2018, is also represented in the draft update to FRS 102. Revenue recognition will follow a five-step model that will require companies to make a distinction between the different elements in a contract and recognise revenue for each of those elements based on separate pricing. As a result, the timing of revenue recognition might change for businesses across various industries that sign long-term contracts with customers. This amendment is also proposed for FRS 105 (micro-entities regime).

The expected credit loss model from the new IFRS 9 ‘Financial Instruments’ is not proposed to be included in this review. The FRC is gathering views on whether to wait for a future edition of IFRS for SMEs which proposes to introduce this new model for more complex debts and exclude trade debtors. IFRS 9 proved challenging to IFRS reporters, as entities were required to derive a forward-looking model and make provisions against debts that have not yet shown signs of impairment.

What do I need to do?

The implementation of this periodic review will likely require an extensive data collection and analysis exercise as well amendments to existing IT systems and processes. Management will need to prepare for the impact that these changes might have on their KPIs, bonuses and targets, in addition to loan covenants and other external regulatory requirements. 

Other changes to note include the requirement to only disclose ‘material’ accounting policies, rather than ‘significant’ ones, and additional disclosure requirements for small companies applying section 1A of FRS 102.

Get in touch

Our specialists can assist you with the impact assessment of the proposed changes and carry out the transition exercise ahead of the effective date. If you would like to discuss this further, please don't hesitate to get in touch with me at Irina.Cheburdanidze@jcca.co.uk, Gavin Young, or Barry Masson.