Financial Reporting Council periodic review of UK GAAP – an overview of the proposed changes to FRS 102 and other standards

UK accounting standards are subjected to periodic reviews that take place at least every five years. The second periodic review is now in progress. In December 2022, the FRC published its proposed amendments to UK GAAP for public consultation in FRED 82. The aim of the periodic review is to ensure that financial reporting standards are up to date, reflect the latest developments in corporate reporting and continue to require high-quality reporting from entities within their scope.

The major amendments proposed in FRED 82 impact revenue recognition and lease accounting.

Revenue recognition

Fred 82 proposes the introduction of a five-step model for revenue recognition in both FRS 102 and FRS 105. The model is based on the requirements of IFRS Revenue from Contracts with Customers, but with simplifications aimed at ensuring the requirements remain cost-effective to apply. The proposed amendments require revenue to be recognised when the entity satisfies a promise to transfer goods or services to a customer. The goods or services are transferred when the customer has control of them, and the term ‘promise’ is defined as ‘an obligation to transfer a good or service (or bundle of goods or services) that is distinct’.

Lease accounting

The lease accounting requirements in FRS 102 are also set to change significantly. FRED 82 proposes an IFRS 16 Leases-based model that requires lessees to recognise all leases on the balance sheet (subject to limited exemptions relating to short-term and low-value leases). Similar to the revenue recognition proposal, the leasing section offers a number of largely optional simplifications to the IFRS requirements. Under the proposals, lessees are required to recognise an asset reflecting their right to use the leased asset for the lease term and a lease liability reflecting their obligation to make the lease payments. The FRC does not propose bringing this change into FRS 105 and micro-entities will continue to apply the existing model of classifying all leases as either finance or operating leases.

No restatement of comparatives is required. For revenue recognition, the guidance is applied to contracts open at transition date and thereafter. For leases, there is no requirement to go back and reconsider whether an arrangement constituted a lease prior to the transition date. Furthermore, no prior year restatement will be required, as any difference between the asset value and lease liability will be shown as an adjustment to opening reserves on the transition date. Leases with less than 12 months remaining at the transition date or leases for assets of low value can continue to be accounted for as operating leases, taking the rent expense to profit or loss over the course of the lease term.

The FRC currently expects the effective date to not be before 1 January 2026. The FRC has not confirmed when the amendments will be finalised but has said it will aim to give preparers at least 12 months to implement the proposals following publication of the final amendments. The FRC currently expects to issue the final amendments in the first half of 2024.

Points to consider

The changes to lease accounting may increase the amount of reported assets and liabilities.  This may affect compliance with bank covenants.  In addition, changes in reported revenue and assets may affect a company’s size, as defined by the Companies Act (see further news on this topic below).  This may have a consequential effect on the level of disclosures required in the financial statements and on whether an audit is required.

Changes to company size thresholds

The thresholds used to determine a company’s size are being raised by 50% as part of a drive to simplify reporting requirements.  The government intends that companies will be able to benefit from the changes for financial years starting on or after 1 October 2024. If the new measures are adopted, micro entity thresholds will move from not more than £632,000 turnover to not more than £1m. The small company threshold will increase to not more than £15m turnover, up from £10.2m, and the medium threshold will move to not more than £54m. The balance sheet total thresholds will increase to not more than £500,000 (micro entities), £7.5m (small companies), and £27m (medium-sized companies).  No changes are proposed to the employee number thresholds.  A company is generally required to meet two of the three criteria to qualify as that size

If you would like further guidance on leasing, please contact 023 8046 1246, or email Alan Davies