FRED 82 – Periodic Updates to FRS 100 – 105

Setting the scene for financial reporting updates

The concept of a new suite of standards for the UK and Ireland, aligning with international financial reporting standards, was first conceived in 2002. The vision was to update UK and Irish Generally Accepted Accounting Practice (GAAP), to more closely align it with the standards used internationally, but without the disclosure burden that many of those international standards bring. The standards issued in 2013 were largely based on the IFRS for SMEs (International Financial Reporting Standards for Small & Medium Entities) framework in place at the time.

After a decade of consultations, exposure drafts and impact assessments, standards FRS 100 – 105, were published by the Financial Reporting Council (FRC) in 2013 and applied for accounting periods beginning on or after 1 January 2015.

The FRC committed to a periodic review of the standards. Although no exact timelines were given, it was generally anticipated that these reviews would take place every 3-5 years. The first of these revisions, known as the Triennial Review, took place in 2017, effective for periods beginning 1 January 2018. However, there have been a number of new, substantial IFRSs issued since that date – IFRS 9: Financial Instruments, IFRS 15: Revenue from Contracts with Customers, and IFRS 16: Leases. With effective dates after the 2017 publication of the Triennial Review, provisions equivalent to these IFRSs were not incorporated into UK and Irish GAAP, meaning the standards now diverge in some aspects from their international counterparts.

The FRC began the process of reviewing the current version of the standards in 2021, and carried out a public consultation on Financial Reporting Exposure Draft (FRED) number 82 at the start of 2023, to obtain stakeholder feedback on the proposed changes.

Proposed changes to FRS 102 – revenue accounting

IFRS 15: Revenue from Contracts with Customers was a joint project between the IASB, who publish IFRSs, and the FASB, who publish US accounting standards. The standard applies to almost all revenue contracts, including construction contracts, and includes revised criteria around whether revenue is recognised at a point in time or over a period of time. It also includes extensive guidance and is generally more prescriptive than its predecessors, IAS 11 and IAS 18.

Generally speaking, FRS 102’s model for recognising revenue is principles-based, and although containing lots of examples in the Appendix to section 23, it is relatively non-prescriptive. IFRS 15 introduced a five-step model for recognising revenue from contracts with customers:

1. Identify a contract;
2. Identify distinct performance obligations;
3. Determine the transaction price;
4. Allocate the transaction price to each performance obligation; and
5. Recognise revenue for each performance obligation, either at a point in time or over a period of time.

The new IFRS 15 model would not likely impact “basic” revenue transactions such as cash retail sales or goods sold on short-term credit arrangements. However, it could significantly impact more complex revenue arrangements, such as telecoms contracts and licensing revenues.

The changes to revenue standards are also proposed to be applied to FRS 105, the standard for micro companies.

Proposed changes to FRS 102 – lease accounting

IFRS 16: Leases saw the most significant changes to lease accounting internationally in over 30 years. The overall premise of the standard is to bring all leases “on balance sheet”, subject to a small number of exemptions.

IFRS 16 removes the split between financing and operating leases, and instead requires that all leases, including those formally classed as operating leases, be included on the balance sheet with a “right-of-use asset” (ROU asset) and a corresponding lease liability recognised. Over the lease term, the ROU asset is depreciated, and the discount on the lease liability is unwound. There are two exemptions available, when leases can be accounted for under the old operating lease model – where a lease is of low value (no threshold is mandated in the standard, but a suggestion of $5,000 is given in the guidance), or where the lease is short-term, with a total life of less than 12 months.

The changes to leasing standards are not proposed to be applied to FRS 105.

Proposed changes to FRS 102 – small companies

A small number of changes are proposed to Section 1A of FRS 102, which applies to small companies. These include making some disclosures mandatory that are currently “encouraged”, such as the disclosure of dividends paid during the year.

However, implementing the amendments to lease accounting proposed above may have an adverse effect for small companies. Small companies that hold operating leases will be required to recognise the assets on their balance sheets as ROU assets (unless one of the exemptions is available); this will subsequently increase their total assets figure, which is one of the three criteria for qualifying as a small company (total assets not more than £5.1m). Should a small company meet one of the other criteria (total revenue < £10.2m, or employees < 50), it will cease to qualify as small and will no longer be able to avail of the small companies’ regime, Section 1A of FRS 102 and any applicable small company audit exemptions. This may lead to increased regulatory and administrative burdens on smaller entities.

Conclusion

Grant Thornton will issue final guidance once the Financial Reporting Council publish the updated standards, which is anticipated to be before the end of 2023. The effective date of the revised standards is not yet known and will depend on the number of responses to the FRED received by the FRC and the extent of any further revisions required. However, it will not be earlier than for periods beginning on or after 1 January 2025. Comparatives will need to be restated for periods beginning 1 January 2024, and early adoption is anticipated to be made available.