Whilst the proposals put forward as part of the FRC’s (Financial Reporting Exposure Draft) FRED 82 excluded the alignment of FRS 102 to IFRS 9 in the short term, the amendments see a removal of the option of applying IAS 39 to financial instruments alongside the introduction of the main reporting requirements of IFRS 15 (revenue recognition) and IFRS 16 (lease accounting). The effective date of the changes is 1 January 2026.
For lenders currently applying FRS 102 the amendments may have an impact in the following areas:
- The removal of the ability to apply IAS 39 to financial instruments requiring a decision and impact assessment of applying the requirements of section 11 and 12 of FRS 102 or IFRS 9. The expectation is that most lenders would look to apply section 11 and 12 of FRS 102 which is very similar to IAS 39.
- Revenue recognition (Section 23 of FRS 102). The new five step model for revenue recognition will be broadly aligned to IFRS 15 but with some simplifications and therefore if there were any fees, charges or other revenue streams which did not form part of the effective interest rate this revenue would need to be recognised based on the five steps of IFRS 15.
- Lease accounting (Section 20 of FRS 102): The new lease accounting model will be broadly aligned with IFRS 16, but with some simplifications. It will require almost all leases to be brought onto the balance sheet from the lessee’s perspective. It requires the recognition of a right-of-use asset and a lease liability for all leases with a term of more than 12 months, unless the underlying asset is of low value.
The new lease accounting model will require most leases to be brought onto the balance sheet. This could have a significant impact on financial statements and key ratios, as it will increase lease liabilities and right of use assets on the balance sheet while also increasing finance expenses and depreciation of the right of use assets and decreasing the operating lease rentals in the income statement.
The IFRS 16 definition of what constitutes a lease might also mean that new contracts are identified as leases that were not previously accounted for as such. For example, in group scenarios, consideration on which entity has the right of use of an asset could result in new leases and sub-leases being identified resulting in more complexity.
- Other changes: FRED 82 also sees a number of other changes, mostly seeking alignment with IFRS, including the adoption of the IFRS 13 definition of fair value, guidance on factors to consider when accounting for uncertain income tax positions, share-based payments and business combinations.
Our experienced Financial Accounting Advisory team can help you with impact assessment, implementation and transition to the amended FRS 102 standards. We have a team of enthusiastic and experienced individuals who have previously worked on IFRS 15, IFRS 16 and IFRS 9 transitions and understand the challenges these accounting changes pose to preparers. Please do not hesitate to contact us to discuss further.
