Article

Amendments to FRS 102 – Periodic Review 2024 

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18th January 2025 5 min read

On 27 March 2024 the FRC issued amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, and other FRSs – Periodic Review 2024. In this update, Barbara Sims, Audit Director at PKF Smith Cooper, discusses the potential impact of these changes on leases and revenues.

When will the changes to FRS 102 be applicable from? 

The changes are effective for periods beginning on or after 1st January 2026, with the exception of supplier finance arrangements which apply for accounting periods commencing on or after 1st January 2025. Entities are required to disclose any information about supplier finance arrangements and comparatives are not required in the year of adoption. 

 

What are the significant amendments to FRS 102?

The most significant changes to FRS 102 relate to leases and revenue recognition as set out below:

  Leases  Revenue  
Change   Current distinction between accounting treatment for operating finance leases is being removed. All leases will be recognised on balance sheet.  

Recognise “right of use” asset at the “present value” of future lease payments (including costs of obtaining the lease e.g. legal fees) and a corresponding finance lease liability. 

Five-step revenue recognition model to be applied for all contracts:  

  • Step 1 – Identify customer contract(s) 
  • Step 2 – Identify performance obligations in the contract 
  • Step 3 – Determine transaction price 
  • Step 4 – Allocate above to performance obligations in contract 
  • Step 5 – Recognise revenue when (or as) satisfy a performance obligation 
Impact on micro entities  This change has not been made to FRS 105 applicable for micro entities.   There are simplifications in FRS 105 applicable for micro entities. 
Exemptions available  
  • Short term leases i.e., those less than 12 months  
  • Low value assets – not defined but examples given that are not considered to be low value e.g., motor vehicles, and buildings 
  • May apply the 5-step model to “buckets” of similar contracts (rather than each contract individually) 
  • Simplifications for allocating discounts  

 

Impact on financial statements   
  • Increased gross asset values and reduced net current assets.  
  • Rental payments will reduce the lease liability rather than recognised as an expense.  
  • Interest on lease liability will be charged over lease term.  
  • Depreciation charged as an expense to reduce the asset value.  
  • Changes may impact the timing of revenue recognition and therefore trading position / balance sheet values.  
  • Enhanced disclosure requirements relating to revenue recognition and judgements made.  

 

Transition period   No restatement of comparatives required.  

 

Any cumulative effect on initial application adjusts opening reserves. 

There are two options available: 

  1. Restate comparatives and apply new model to all contracts.  
  1. Apply model to incomplete contracts at the start of the current period and adjust reserves for any cumulative effect (modified retrospective approach).  
Considerations  An entity may use an “obtainable borrowing rate” (i.e., that used by lender) for calculations.  

 

Regular reassessment is required, for example when there is indexation, a rent review, or a change in the existing lease terms.  

 

Permitted to use carrying value amounts used for group reporting purposes under IFRS16 as opening balances. 

If applying modified retrospective approach: 

  • When accounting for contracts with variable consideration completed by the reporting date, may use the transaction price at date the contract was completed, rather than estimating for comparative periods. 
  • No need to retrospectively restate where contract modifications occurred prior to the date of initial application, aggregate effect can be reflected when identifying completed performance obligations.  

 

If applying full retrospective approach: 

  • In addition to the above, do not need to restate contracts that begin and end in the same reporting period or were completed at beginning of the earliest period presented in the accounts. 

What do the FRS 102 changes mean for businesses?

It is essential for businesses to be aware of the potential implications of the FRS 102 amendments; your considerations might include:   

  • Impact on EBITDA due to the removal of operating lease expense.  
  • Impact on covenants, in particular due to additional finance and depreciation costs. 
  • Potential breach of size thresholds requiring increased disclosures (and additionally falling within the audit requirements) as gross asset values will increase. NB. The company size limits are increasing for accounting periods beginning on or after 6th April 2025 (https://www.legislation.gov.uk/uksi/2024/1303/contents/made), therefore may be a short-term impact.)

What can you do to prepare for FRS 102 changes?

These changes are not required until 2026, but it is never too early to plan. Some suggested actions: 

  • Review customer and leasing contracts to identify the potential impact.  
  • From the above, identify any more immediate actions that need to be taken e.g., discussions with lenders.  
  • Identify customer contracts that include bundles of goods/services, variable consideration, warranties, customer options or significant financing components. As these will require a more detailed review.  
  • Consider numerical and additional disclosure requirements. 
  • Consider which implementation approach is most appropriate to apply for revenue recognition i.e., full retrospective approach or the modified retrospective approach.

At PKF Smith Cooper, our team have expert knowledge to assist you and your business on upcoming changes to the FRS 102. For more information on these changes and to find out how our team can help you, get in touch with us today.

About the author

Barbara Sims

Audit Director

I am an Audit Director based in the firm’s Nottingham office with over 15 years practice experience.