Get Ready for Changes to GAAP in 2024: FRS102 Update

In this post, we want to give you an overview of the changes and signpost you to other blog entries that go into more detail.

In this post, we cover the following:

• Why is FRS102 changing?
• Changes to IFRS15
• IFRS16 - what will be different?
• Changes to FRS102 section 1A
• Next steps for businesses adapting to FRS102 changes

Why is FRS102 changing?

As the accounting and taxation landscape continues to evolve, the Financial Reporting Council (FRC) recognises the importance of keeping accounting standards relevant and effective. To achieve this, the FRC utilises the Financial Reporting Exposure Draft (FRED) system.

The FRC introduces proposed changes through the FRED system by issuing a draft of the updated standards. This draft serves as an invitation for stakeholders and interested parties to provide their comments and feedback.

Two key drafts currently in the process are FRED 82 and FRED 83.

FRED 82 received comments until April 2023, while the comment period for FRED 83 concluded in May 2023. During these comment periods, accounting bodies and firms have been actively engaged, sharing their perspectives and insights on the proposed changes.

The FRC acknowledges the significance of transparency and inclusivity, thus publishing the responses received from accountancy bodies and firms. This publication fosters open dialogue and provides stakeholders with visibility into the opinions and recommendations of industry professionals.

By actively seeking feedback and considering diverse viewpoints, the FRC aims to enhance the quality and effectiveness of accounting standards, ensuring they meet the needs of businesses, practitioners, and other stakeholders in the evolving accounting and taxation landscape.

Changes to IFRS15

IFRS 15 Revenue from Contracts with Customers is a significant change in the FRC's latest round of proposals for UK GAAP. Published in December 2022 through FRED82, the revisions aim to keep UK GAAP relevant in today's environment.

FRED 82 brings important changes to FRS 102, aligning it with current IFRS SME practices. One of the main changes is in revenue recognition and reporting, specifically contracts with customers.

The new standard introduces a five-step model for revenue recognition, addressing contract modifications, performance obligations, and enhanced disclosure requirements.

The five steps in the IFRS model are:

Step 1 - Identify the contracts with a customer
Step 2 - Identify the promises in the contract
Step 3 - Determine the transaction price
Step 4 - Allocate the transaction price to the promises in the contract
Step 5 - Recognise revenue when (or as) the entity satisfies a promise

To prepare for the new standard, companies using UK GAAP, especially SMEs relying on FRS 102, should assess the impact, provide education and training, review contracts, update systems and processes, and ensure proper disclosure practices.

In our post here, you can find more information about the changes to IFRS15.

IFRS16 - what will be different?

UK GAAP, particularly FRS 102, differs from IFRS in various ways, and one significant area of difference is the treatment of leases. While the aim of FRS 102 is to enhance transparency in financial reporting, it presents challenges for companies, primarily smaller entities with limited resources.

For UK GAAP, the FRC proposes changes in line with IFRS 16, where operating leases will be recognised as balance sheet items, with lease payments as a liability and the underlying right-to-use asset as an asset. This change aligns with the treatment of finance leases but adds a burden to SME accounting departments.

The complexity of collecting and managing lease data poses the primary challenge. Under IFRS 16, lessees must review all lease contracts, including those previously classified as operating leases, requiring comprehensive lease data collection and review.

Determining the appropriate discount rate is another significant hurdle, as the rate implicit in the lease is often not readily available. Estimating the discount rate based on the incremental borrowing rate becomes necessary, requiring careful judgement and potentially impacting the measurement of lease liabilities and assets.

IFRS 16 also introduces complexity in financial statement presentation, as all leases are recognised on the balance sheet. This affects financial ratios and metrics, necessitating an understanding of the impact on financial performance and profitability.

Furthermore, IFRS 16 demands enhanced disclosure requirements, including detailed information on lease commitments, terms, judgments, and cash flow implications, necessitating a comprehensive understanding of the standard and meticulous documentation.

However, there is some relief for UK GAAP in IFRS 16. Companies have the option to treat certain leases as expenses on a straight-line basis throughout the lease term or adopt other systematic approaches for leases with a term of 12 months or less or involving low-value assets. The use of the gilt rate for discounting purposes is also allowed, providing an accessible and publicly available rate.

We've produced a more detailed explanation of the changes to the IFRS16 here.

Changes to FRS102 section 1A

FRED 82 introduces several changes to FRS 102, which are expected to be effective from January 1, 2025. These changes aim to bring FRS 102 closer to IFRS standards. They include the following:

• New Section 23: This section incorporates the IFRS 15 five-step model for revenue recognition, tailored with simplifications for smaller entities.
• New Section 20: It focuses on lease accounting based on the IFRS 16 on-balance sheet model, also with simplifications for smaller entities.
• Greater clarity for small entities: Specific guidance is provided in FRS 102-1A, outlining reporting requirements and custom instructions for SMEs in Ireland.
• New Section 2A: The appendix on fair value measurement, previously in Section 2, is now given a more prominent place as Section 2A in the proposed standard.

Similarly, FRED 83 proposes changes to FRS 101 and FRS 102 to align reporting with OECD Pillar 2 rules for international tax. It also introduces temporary exceptions for deferred tax and reporting for smaller entities.

If you'd like to know more about the FRS102 section 1A changes, then take a look at our more detailed post here.

Your next steps

The first thing to do is contact your auditor and discuss the implications of the new reporting changes.

The Pillar 2 recommendations will be immediately effective when agreed upon and apply to companies producing statements from January 1, 2023. This means that you are already working under these standards.

You'll also need to understand the effects of FRED 82 on your business, particularly in terms of data collection.

For smaller companies with few leases and customer contracts, this may not be a problem, but for companies that make use of off-balance sheet financing or have complex contracts in place, there will be some work to do.

The FRED 82 recommendations have an effective date of January 1 2025. Still, it will be essential to make adjustments as soon as possible, especially when the company needs to put in new accounting and reporting systems to analyse their transactions accurately.

Once you have a clear sight of how the changes will affect your statements, you can put a plan in place to collect, analyse and report the information correctly.

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