Proposed amendments to UK GAAP

In 2022 the Financial Reporting Council published the Financial Reporting Exposure Draft ‘FRED’ 82 - Draft amendments to FRS 102.

This draft set out a number of changes to FRS 102 and UK GAAP in order to keep the standards aligned with IFRS. In an increasingly global marketplace, the FRC are aiming to provide greater consistency for users of financial statements. 

Effective date 

The proposed effective date for these amendments is accounting periods beginning on or after 1 January 2025. Early application will be permitted providing all amendments are applied at the same time. 

Key changes 

The key proposed changes are as follows: 

Revenue recognition 

Section 23 of FRS 102 will become aligned with IFRS 15 ‘Revenue from contracts with customers' and its five-step revenue recognition model: 

1. Identify the contract(s) with a customer. 
2. Identify the performance obligations in the contract. 
3. Determine the transaction price. 
4. Allocate the transaction price to the performance obligations. 
5. Recognise the revenue when (or as) the entity satisfies the performance obligations. 

The vast majority of our clients will see no changes to their revenue recognition policy however the proposed changes are most likely to impact those providing a combination of goods and services.  

For example, consider the sale of a phone on a two-year contract for £40 per month without any upfront fee for the handset. Under the current FRS 102 framework, revenue would simply be recognised at £40 per month over the duration of the contract. 

However, under the proposed changes the revenue recognition will look slightly different. Following the five-step model as above: 

1. Identify the contract: 
   The signed phone contract. 
2. Identify the performance obligations: 
   Provision of a phone. 
   Provision of minutes, texts, and data. 
3. Determine the transaction price: 
   £40 x 24 months = £960 
4. Allocate the transaction price to the performance obligations: 
   Phone fair value = £600 
   Minutes, texts and data = balance of the contract = £360 
5. Recognise the revenue when (or as) the entity satisfies the performance obligations: 
   Day one – recognise the provision of a phone for £600 
   Over the remaining two years – recognise £360/24 = £15 per month 

Operating leases 

Perhaps the biggest change is the proposed removal of the distinctions between finance leases and operating leases. All leases (except for a small number of limited circumstances) will be brought onto the Statement of Financial Position in line with IFRS 16. 

Where operating leases were previously charged through the Income Statement over the term of the lease, companies will now recognise a ‘right of use asset’ with a corresponding lease liability. It is proposed that the lease liability will be discounted by the lessee’s obtainable borrowing rate. 

The rental charge will be replaced by depreciation/amortisation of the right-to-use asset and an interest expense on the lease liability. This means that although the total effect on profit and loss will be the same over the life of the lease, the charge will be weighted towards the beginning of the lease and decrease over its life. 

It should also be noted that as the expense is now accounted for as amortisation and interest rather than rentals, many common KPIs and metrics such as EBITDA will be impacted. 

Changes for Smaller Entities – FRS 102 Section 1A 

Following the UK leaving the European Union, the FRC is no longer bound by the constraints of the EU Accounting Directive and is able to demand further disclosures for small companies. They consider that the current disclosures are not necessarily adequate to provide a true and fair view.  

These additional disclosures are likely to include: 

1. A requirement to make an explicit and unreserved statement of compliance with FRS 102. 
2. Mandatory going concern disclosures i.e. where an entity prepares its financial statements on a going concern basis it will required to disclose this fact, along with confirmation it has considered future events and disclosure of any significant judgements. 
3. Disclosures in respect of deferred tax. 
4. Disclosures in respect of dividends declared or paid. 

Conclusion 

There are numerous other smaller incremental changes to FRS 102 however the principal proposed amendments have been covered above. The FRC’s invitation to comment window closed on 
30 April 2023 and the ICAEW have published their full response broadly supporting the reforms. The final revised publication will be issued in due course and further training and guidance will be provided to support its implementation.