FRED 82: FRC delays UK GAAP changes by 12 months

02 October 2023

The Financial Reporting Council (FRC) has announced a delay to the publication and effective date of the future changes to UK GAAP from its periodic review. The revised suite of standards reflecting the second periodic review of UK GAAP is now expected to be issued in the first half of 2024, and implementation not before periods commencing on or after 1 January 2026, instead of 1 January 2025 as originally planned.

The FRC has taken this decision to allow for more time as it considers over 50 responses to FRED 82, including the RSM response issued in April 2023. They still expect the principles of IFRS alignment to apply to the major changes to lease accounting and revenue recognition, however, these may be simplified further. Other proposed changes are likely to differ in a number of respects from the proposals.

Reacting to the announcement, Head of Financial Reporting at RSM UK, Danielle Stewart OBE, said:

‘The postponement of the FRS 102 update may be welcome news for entities who are facing significant challenges in the current environment. However, it is not a reason to relax or delay the preparation process.

‘Entities should use this extra time wisely, 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 contract terms, such as lending and remuneration arrangements, will be affected by changes to 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.

Danielle said: ‘One of the key areas that entities should focus on is how the new standards will affect 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.’

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 updated standards. This will be more extensive and granular than before.

‘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.

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 use this extra time to review these contracts and assess whether they need to renegotiate or amend them to avoid any adverse consequences from the accounting changes.’

How can we help?

We have a dedicated team of accounting and financial reporting experts, experienced in both UK GAAP, IFRS 15 and IFRS 16 on which the major changes for revenue and leases are based.

We can help you understand the impact of the new standards on your management information, financial statements, and business operations, providing practical guidance on how to implement them effectively and efficiently.

We can also help you plan your communications with your stakeholders and ensure that your financial statements are clear, transparent and compliant with the new requirements.

If you would like to discuss these changes further, please get in touch with Danielle Stewart OBE, Andy Ka or your usual RSM contact today.

Danielle Stewart
Danielle Stewart OBE
Partner, Head of financial accounting advisory specialists
Danielle Stewart
Danielle Stewart OBE
Partner, Head of financial accounting advisory specialists