UK GAAP: preparing for change

The FRC has issued substantial amendments to FRS 102, that aim to ‘enhance the quality of UK financial reporting’ by more closely aligning UK GAAP with IFRS in key areas, including new revenue recognition and lease accounting models. 

This follows the extensive outreach carried out by the FRC as part of FRED 82, the second periodic review of UK GAAP. 

Consequential amendments have also been made to the suite of other UK FRSs, including FRS 100, 101, 103, 104 and 105, which move UK GAAP closer than ever to IFRS.

What are the major changes to UK GAAP FRS 102?

The two headline changes are to:

• revenue recognition – there is a new model based on IFRS 15’s five-step model, with appropriate simplifications. How entities will be impacted will depend on the form of their contracts with customers; and
• lease accounting requirements – there is a new model for lease accounting, based on IFRS 16’s on-balance sheet model, with some simplifications. Many businesses that use operating leases will be impacted.

Other improvements and clarifications in the periodic review to FRS 102 include (but are not limited to):

• greater clarity for UK small entities applying Section 1A, regarding which disclosures need to be provided in order to give a true and fair view; 
• revised Section 2 Concepts and Pervasive Principles to align with the IASB’s Conceptual Framework for Financial Reporting;
• new Section 2A Fair Value Measurement, replacing the Appendix to Section 2 and updated to reflect the principles of international standards;
• revisions to Section 7 Statement of Cash Flows, to include new disclosures for supplier finance arrangements that promote consistency with IFRS;
• additional guidance in Section 26 Share-Based Payments for specific situations, such as equity instruments issued as part of a business combination;
• additional guidance in Section 29 Income Tax on uncertain tax positions;
• various amendments to Section 34 Specialised Activities, such as agricultural activities, service concession arrangements, heritage assets and public benefit entity accounting; and
• additions and amendments to the defined terms in the glossary.

What hasn’t changed?

The FRC have listened to feedback, and in a welcome move for many preparers, have chosen not to align FRS 102 with the expected credit loss model of financial asset impairment in IFRS 9, nor introduce any alignment with IFRS 17 Insurance contracts. Any such changes will be part of a future consultation.

When will the changes to UK GAAP FRS 102 become effective?

While the bulk of the standard has retained the expected effective date of accounting periods commencing on or after 1 January 2026, with early application permitted, there is one exception.

New disclosure requirements about supplier finance arrangements must be provided for periods commencing on or after 1 January 2025 – again these promote consistency with IFRS in what is a rare area.

What do UK GAAP FRS 102 changes mean for your business?

Reacting to the announcement, head of financial reporting at RSM UK, Danielle Stewart OBE, said:

‘The issue of the amendments to FRS 102 is welcome news, as it provides middle market businesses the clarity they need to move forward with really understanding how the changes will impact their financial statements and stakeholders.

‘Entities should now start to assess the impact of the new standards on their financial statements, systems and processes and to plan their communications with stakeholders, such as investors, lenders and employees.’

Preparing for this communication may include collecting, summarising and analysing all leases and revenue contracts, as well as understanding what contracts, such as lending and remuneration arrangements, are reliant on figures reported in the financial statements.

Changes to the timing of revenue recognition, as well as bringing leases on balance sheet, may affect leverage ratios, debt covenants, EBITDA, and the tax position. 

For some, it may also affect the ability to take small company exemptions, albeit we expect the government to issue legislation to increase company size thresholds for revenue and gross assets by around 50% in the summer of 2024.

Danielle said: ‘One of the key areas that entities should focus on is how the new standards will affect the accounting for their contracts with customers and suppliers. For example, entities will need to identify the performance obligations in their contracts and follow the new five-step model for revenue recognition. This may require more judgement and estimation than under the current UK GAAP.

‘Similarly, entities will need to identify and summarise all their leases, identifying which are in scope and which are not.’

To prepare for the new standards, entities should start by reviewing their existing accounting policies and systems and identifying any gaps or weaknesses that need to be addressed to implement the new standards.

Andy Ka, partner at RSM UK, advised: ‘It is important that businesses consider how they will collect and analyse the data required for the revised standards. This will be more extensive and granular than before, and may require new systems, especially for revenue and leases.

‘Finally, they should plan how and when they will transition to the new standards in both their management information and the annual financial statements, and how they will explain the impact of the changes to their stakeholders.’

The new standards may also have commercial implications that entities should be aware of, including to both new and existing contracts.

Andy warned: ‘Some contracts may contain clauses that are linked to the financial statements, such as lending covenants, earn-out agreements, or bonus schemes. Entities should review these contracts and assess whether they need to renegotiate or amend them to avoid any adverse consequences from the accounting changes.’

If you would like further information about how the amendments to UK GAAP might impact your business, please do not hesitate to contact Danielle Stewart OBE, Andy Ka, or your usual RSM contact.