Amendments to FRS 102

The direction of travel with FRS 102 has been expected to follow IFRS 16 Leases and IFRS 15 Revenue from Contracts with Customers for some time. This has now been crystallised with the issuing of the comprehensive improvements to FRS 102 by the FRC on 27 March 2024, with the changes to impact accounting periods commencing on or after 1 January 2026, but early adoption is permitted.

As expected, the headline changes are Section 20 – Leases and Section 23 Revenue from Contracts with Customers. There are also a number of smaller changes but following consultation the FRC have not included the expected credit loss model of financial asset impairment (from IFRS 9) or made adjustments to align with IFRS 17 Insurance Contracts, but these will be part of a future project by the FRC, so these changes may still come in just at a later point.

Back to these changes. Whilst any iFRS preparers will already be familiar with these concepts, for anybody solely within FRS 102 they will be a significant change.

Leases

Under IFRS 16 and under the new FRS 102 amendments, there is no distinction between operating and finance leases.

Where an entity has for example a property lease for 5 years at say £50,000 per annum, the current accounting is to recognise the cost over the period of the lease. So, in this example a £50,000 expense per annum and a lease commitment disclosed in the notes to the financial statements under existing FRS 102 accounting treatments.

Under the new accounting (ignoring any possible impact of discounting), the lease value of £50,000 x 5 = £250,000, would be recognised as both an asset and a liability:

As you can already see, whilst the net balance sheet position is nil, there is an increase in the current liabilities, so those with large leases could result in a significant increase in current liabilities, which could impact net current asset position and potentially financial covenants.

Each year, the asset will depreciate by £50,000 and the liability will be reduced by £50,000 due to the payment of the rent, so there will remain a £50,000 expense in the profit and loss account, but as depreciation and not rent.

This example is very simplistic and ignores present values, it also uses a relatively low annual rental, but does illustrate that for a business with significant leases, the treatment will impact the net current asset position of the business.

Under IFRS 16 there is a shorter-term and low-value asset exemption, which allows preparers to circumvent the above and treat on a similar basis as currently done – expense in profit and loss account. This exemption is not only present in FRS 102 but has a higher threshold which will allow for more assets under FRS 102 to be exempt from this treatment than under IFRS 16.

Revenue recognition

The new amended FRS 102 also have five steps to revenue recognition:

1. Identify the contract.
2. Identify the performance obligations.
3. Determine the transaction price.
4. Allocate the transaction price.
5. Recognise revenue.

These steps are aligned to the IFRS 15 steps and for many businesses this will not impact how you recognise revenue. However, in some cases it will be necessary to review your revenue recognition currently and adopt the above five steps.

So, an example would be the selling of a mobile phone on a contract. The phone itself is worth say £800 if bought outright, but as part of a £50 a month contract over 24 months, the phone is free.

1. The contract is the sale of the mobile phone and contract services.
2. On the sale the phone’s risk and rewards of ownerships are transferred, however, the contract has a monthly service to be provided too, so the income associated with that would be recognised each month.
3. The transaction price is £50 x 24 = £1,200.
4. The £1,200 must be allocated across the contract, so for this example we would allocate £800 to the sale of the phone and then £400 to the monthly line rentals, so £16.67 per month.
5. Recognise the revenue – the £800 is recognised immediately on the sale and then £16.67 a month thereafter.

Again, this is a simplistic example but shows how the overall transaction price must be split and allocated to each performance obligation and recognised accordingly.

Summary

These changes bring the FRS 102 accounting standard closer to its international counterpart with the aim of providing better information to the users of the financial statements and in particular to potential investors or lenders.

Whilst these changes remain some way off, if you are likely to be impacted then please speak with your usual Ensors contact and they will be able to offer advice and support with the adoption of these amendments.