Financial Reporting Standard 102 (FRS 102), which serves as the ‘all in one’ standard for most UK GAAP reporters, underwent its most recent periodic review during 2024 by the Financial Reporting Council (FRC). These assess whether updates are needed to the existing requirements or if new developments, such as changes in International Financial Reporting Standards (IFRS), should be incorporated into FRS 102.
The consequential revisions to FRS 102 take effect for accounting periods beginning on or after 1 January 2026, the only exception being the amendment for supplier finance arrangements which applies for accounting periods beginning on or after 1 January 2025.
One of the significant changes involves lease accounting. The revision to FRS 102 aligns with the principles of IFRS 16 Leases, requiring operating leases to be recognised as ‘right-of-use fixed assets’ on the balance sheet, with corresponding lease liabilities, except for short-term and low-value leases. Depreciation will be charged on these “right-of-use fixed assets”, typically over the lease term, with a finance cost recognised for servicing of the lease liability. If all things are equal, this will have little impact on reported profits compared to the current treatment.
Importantly though, entities using the key financial metric of earnings before interest, tax, depreciation and amortisation (EBITDA) could benefit as the operating lease expense is currently deducted from profit in arriving at EBITDA, whilst the revisions will see the depreciation on the “right-of-use fixed assets” and interest cost on the lease liability excluded from EBITDA.
Another major update is revenue recognition, where the revised FRS 102 adopts the five-step model from IFRS 15 Revenue from Contracts with Customers. This model involves identifying the contract with a customer, identifying the promises in the contract, determining the transaction price, allocating the transaction price to the promises, and recognizing revenue when the entity satisfies a promise. The form of an entity’s contracts with its customers will determine whether there is a change to revenue recognition.
In relation to supplier finance arrangements, the amendment increases awareness of an entity’s use of supplier finance arrangements and their effect on the entity’s financial position and cash flows.
For small entities, changes to FRS 102 Section 1A are intended to give clarity on disclosures for the purposes of giving a true and fair view. This includes additional disclosures related to going concern, provisions and contingencies, share-based payment transactions, current and deferred tax, dividends, leasing arrangements, and performance obligations in contracts with customers. Significantly, small entities will need to disclose related party transactions, even if these are concluded under normal market conditions, compared to the current treatment of not requiring disclosure in such circumstances.
Be prepared!
