Financial Reporting Exposure Draft (FRED) 82 was released in December 2022, proposing significant amendments to UK Financial Reporting Standards (UKFRS).
The proposed changes have been finalised, with the purpose of this article to provide an update on the most significant changes and to function as a reminder that these changes are significant. It is important that businesses are thinking about these matters now.
One of the most significant changes from FRED 82 is the change in the effective date. This is now for periods beginning on or after 1 February 2026 rather than 2025, other than for disclosures relating to supplier finance arrangements which remains at 1 January 2025. Early adoption is permissible but separate changes cannot be adopted in isolation (other than supplier finance arrangements).
The headline changes relate to lease accounting and revenue recognition but there are other amendments, including changes to supplier finance arrangements.
This area was added to the standard following FRED 82. As noted, the new effective date for supplier finance agreements will be 1 January 2025, a year earlier than the other amendments to UK FRS and can also be adopted independently (unlike the other amendments).
This impacts to align UKFRS more closely with International Financial Reporting Standards (IFRS). Here the intent is to make such arrangements more transparent to the users of the financial statements.
UKFRS does not specifically define what a ‘supplier finance arrangement’ is but in general, they relate to an arrangement whereby a finance provider offers to pay amounts owed by an entity to its suppliers and the entity then agrees to pay the finance provider according to the terms and conditions of the arrangements at the same or later date that the suppliers are paid.
Supplier finance arrangements disclosures
Key terms and conditions of the arrangements must be disclosed. In addition, the carrying amount of financial liabilities associated with these arrangements must be disclosed. There must also be disclosure of the range of payment due dates for the arrangement liabilities and due dates for payments of comparable trade payable, not part of such an arrangement.
The proposed changes to lease accounting are probably the most significant that have been made and will certainly have the greatest impact on our client base. It is important that businesses start thinking about this now.
Overall, the aim is to bring lease accounting in UKFRS more in line with that of IFRS, albeit a simplified version. Fundamentally for lessees, operating leases will now be shown on the balance sheet rather than simply disclosed, with a right-of-use asset and related liability.
What are the exemptions from disclosure in lease accounting?
There are two exemptions from disclosure. Firstly, for leases with a term of less than 12 months and secondly, for low-value leases. Unlike IFRS where there is a clear definition of low value ($5,000) there is no set value presented by UKFRS. Certain items are excluded from this category, such as cars but common sense and professional judgement will be required.
A key point to note is that entities adopting UKFRS for micro entities (FRS 105) will remain on the old model – likely making FRS 105 more attractive to eligible entities.
Recognition of lease liability
The lease liability will be calculated based on the present value of minimum lease payments. Overall, this is similar to the current treatment of finance leases. However, there is a choice regarding the interest rate used to calculate the present value of the lease:
It is expected that many entities will adopt the latter option as this is far easier to determine than the other two. This simplification is not available in international reporting.
Recognition of asset
As there is a credit there must be a debit!
As noted above, there will now be a ‘right of use asset’ recognised. This equates to the lease liability plus any upfront payments, less lease incentives. Subsequent measurement is like other assets, at cost less depreciation or fair value. Costless depreciation would be more straightforward.
Adoption
UKFRS mandates a single approach, unlike international reporting where there is a choice.
Overall, this will be a notable change for many businesses, but not as complex as feared.
Again, this change is to align UKFRS more closely with international reporting. The main change is to introduce the 5-step model, focussing on the contract with the customer. Many businesses will not see any change in recognition as a result of this, but some will see a significant impact.
Five-step process:
Revenue may therefore be recognised at different points compared to the current treatment.
Adoption
Unlike for lease, there is a choice on transition. Either a full retrospective adoption or retrospective with the cumulative impact of transition presented as an adjustment to opening retained earnings at the date of initial application.
Now the changes to UKFRS have been finalised we can start planning.
We are approaching a time of notable change in UK corporate reporting, after a period of relative calm. In addition to changes to UKFRS, we should also be thinking about the changes to company size limits and the impact of the Economic Crime and Corporate Transparency Act 2023.
As always, if you have any questions get in touch.
