Significant changes proposed by Financial Reporting Council

Published by Sam Rouse on 3 May 2023

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The Financial Reporting Council (FRC) has recently published its long-awaited exposure draft, FRED 82, proposing significant changes to FRS 102, and other financial reporting standards. This results from its second periodic review of the standard, with said changes proposed to apply to accounting periods beginning on or after 1 January 2025.

The changes are quite extensive and come as the FRC seeks closer alignment with International Financial Reporting Standards (IFRS), albeit with a number of simplifications.

In brief the proposals include: a new model of revenue recognition in FRS 102 and FRS 105; a new model of accounting for leases in FRS 102; and numerous other incremental clarifications and improvements.

The changes proposed are to affect all businesses reporting under FRS 102 (including small companies reporting under FRS 102 section 1A), with some of the proposals also impacting the smallest (micro) entities reporting under FRS 105.

Revenue Recognition

A new model for revenue recognition is put forward. This model is based on the five-step model for revenue recognition, originating from IFRS 15, with a few simplifications applied, where possible. Recognition will largely be based upon promises included in contracts with customers, and whether these are satisfied over time or at a point in time.

A ‘promise’ is defined as an obligation to transfer a goods or services, from which the customer can benefit seemingly on its own, with the obligation to transfer these goods or services separate from any other obligations set out in the contract.

Lease Accounting

Perhaps more controversially, based on the IFRS 16 leasing requirements (with some simplifications), a new on-Balance Sheet leasing model is being proposed. All leases will be recognised as assets and liabilities, with exemptions available for leases of low value assets and for short-term leases (i.e., those with a lease term of 12 months or less at the commencement date).

Other More Minor Changes to FRS 102

  • A proposal to revise Section 2 Concepts and Pervasive Principles, based on the IASB’s updated Conceptual Framework. The framework was updated in 2018 and the FRC considers that similar updates are necessary to FRS 102.
  • A new Section 2A, Fair Value Measurement, is proposed to replace the current guidance in the Appendix to Section 2. The new section is based on the requirements of IFRS 13 Fair Value Measurement.
  • The option to newly apply the recognition and measurement requirements of IAS 39 is proposed to be removed, although the option will remain for those already opting to apply IAS 39. It is anticipated that the option will be removed entirely in later amendments, though these may yet be some way off.
  • There are also various other minor changes to other sections of the standard.

What happens next?

The consultation on the proposed changes closed on 30 April 2023. The FRC will now consider the feedback it receives with a view to publishing final amendments towards the end of 2023.

These changes will need be taken into consideration and discussed by the Charities SORP Committee, but at this stage it’s far from clear what impacts they will have on the SORP, i.e. whether they will override the existing SORP, whether the existing SORP will override them, or whether some kind of amendment will be required to incorporate them fully.

If you would like further information or guidance on the proposed changes to FRS 102 and other financial reporting standards, contact us today.

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