The upcoming amendments to FRS 102, effective for periods beginning on or after 1 January 2026, include significant changes to revenue recognition and lease accounting, broadly aligning FRS 102 with international accounting standards. Understanding these amendments and their transitional requirements is crucial for businesses to ensure a smooth transition. Here’s what you need to know.
Key amendments to FRS 102
1. Revenue recognition
- Five-step process: The amendments introduce a five-step process for revenue recognition, closely aligned with IFRS 15. This model requires businesses to:
- Identify contracts
- Identify performance obligations
- Determine transaction prices
- Allocate prices to performance obligations
- Recognise revenue as obligations are satisfied.
- Impact: This change affects the timing and pattern of revenue recognition, especially for complex contracts involving bundled goods/services, variable consideration, warranties, customer options, or significant financing components.
2. Lease accounting
- Balance sheet recognition: Reflecting IFRS 16 principles, the amendments require lessees to recognise leases on the balance sheet, with few exceptions. This involves recording a right-of-use (RoU) asset and a lease liability, transforming lease rental expenses into depreciation and interest.
- Impact on financial metrics: This shift impacts key financial metrics such as EBITDA and working capital ratio which might impact covenants.
3. Fair value measurement
- Alignment with IFRS 13: A new Section 2A replaces the Appendix to Section 2, aligning fair value measurement principles with IFRS 13. This ensures consistency and comparability in financial reporting with IFRS reporters.
4. Other amendments
- Conceptual framework: Updates to Section 2 reflect the IASB’s Conceptual Framework for Financial Reporting.
- Financial instruments: Removal of the option to adopt IAS 39 for financial instruments, except where necessary for consistency with group accounting policies.
- Supplier financing: Additional disclosure requirements for supplier financing arrangements.
Transition provisions
Navigating the transition to these new standards requires careful planning and execution. Here are the key transitional provisions:
Leases
The transitional requirements for leases primarily relate to lessees. An entity makes no adjustment on initial application for leases in which it is a lessor, except that an intermediate lessor reassesses subleases that were previously classified as operating leases.
- Modified retrospective approach: The new leases requirements must be applied retrospectively with the cumulative effect of initially applying the new requirements recognised as an adjustment to the opening balance of retained earnings (or other component of equity) at the date of initial application.
- Practical expedients:
- No need to reassess whether a contract is, or contains, a lease at the date of initial application.
- Can use IFRS 16 calculations where the calculation is prepared for group reporting purposes.
- Application of a single discount rate to a portfolio of similar leases.
- Use of hindsight in assessing lease terms.
- Reliance on previous assessments of onerous leases.
- Exceptions:
- Low value leases may be exempt from balance sheet recognition.
- Leases ending within 12 months of the date of initial application may be treated like low value leases.
Revenue from contracts with customers
An entity can choose between a full retrospective approach or a modified retrospective approach on initial application of the revised Section 23 of FRS 102.
- Modified retrospective approach: Recognise the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings at the date of initial application, without restating comparative information.
- Practical expedients in relation to:
- Variable consideration
- Contract modifications
- Full retrospective approach: Recalculate comparative information for prior periods to the earliest date practicable, applying the amendments as if they had always applied.
Other amendments to be aware of
- Fair value measurement: Applied prospectively from the date of initial application.
- Business combinations: No reassessment of accounting for business combinations prior to the date of initial application unless initial accounting was incomplete.
- Uncertain tax treatments: Can be applied retrospectively or with the cumulative effect recognised as an adjustment to the opening balance of retained earnings.
Whilst most of the amendments are effective for accounting periods beginning on or after 1 January 2026, disclosure requirements for Supplier Finance Arrangements are effective for accounting periods beginning on or after 1 January 2025. The amendments require additional disclosures around supplier finance arrangements. But an entity is not required to disclose comparative information.
Disclosures
The amendments introduce additional disclosure requirements for leases. On transition there are some exceptions from the disclosure requirements required by a change in accounting policy. In addition, there are exemptions when applying the modified retrospective approach in relation to revenue.
Tax implications
Transition adjustments for the FRS 102 amendments can have significant tax implications. When transitioning, entities must recognise all assets and liabilities required by the new amendments, which can lead to adjustments to the opening retained earnings.
For leases the Finance Act 2019 introduced rules to spread the tax impact of transitional adjustments for lessees over the average remaining lease term, providing stability and fairness for businesses. The introduction of the five-step model for revenue recognition may affect the timing of taxable income, which could lead to either accelerated or deferred tax liabilities depending on the nature of the contracts.
Careful planning and consultation with tax professionals are essential to navigate these changes effectively and optimise tax outcomes.
Pros and cons of early adoption
Early application is allowed, so long as all amendments are applied at the same time. Early adoption of the FRS 102 amendments offers both opportunities and challenges for businesses. Here’s why you should consider making the leap:
- Global alignment: By aligning UK GAAP with IFRS and US GAAP, your business can seamlessly integrate into international markets. This alignment not only simplifies reporting but also boosts your credibility on the global stage.
- Future-proof your business: New entities can start off on the right foot, avoiding the hassle of future adjustments. Early adoption means you’re ahead of the curve, ready to tackle any financial reporting challenges that come your way.
- Boost your financing prospects: A stable and transparent financial reporting framework can be a powerful tool when negotiating financing terms. It’s an opportunity to show potential investors and lenders that your business is built on solid financial ground.
- Simplify ownership transitions: If you’re anticipating changes in ownership, early adoption can streamline earn-out arrangements, saving you from the complexities of dual accounting records.
Considerations to keep in mind:
- Comparability challenges: While early adoption offers numerous benefits, it’s important to consider the potential difficulties in comparing your financial statements with those of competitors who haven’t adopted the amendments.
- Resources: Implementing the amendments requires a significant investment of time and resources. Ensure your team is prepared for the transition to maximise the benefits.
- Impact on financial metrics: Changes in lease accounting and revenue recognition can affect key financial metrics. Be proactive in understanding how these changes might impact your loan covenants and agreements.
How we can help
The amendments to FRS 102 represent a significant shift in financial reporting standards. There are pros and cons to the transition options available under both Leases and Revenue. We can help you to understanding these changes and effectively prepare for them. Our Financial Accounting Advisory Services team is here to support you every step of the way, ensuring a seamless transition and continued compliance with the latest standards.
For more information or to schedule a consultation, please contact FAAS today.
