The Financial Reporting Council (FRC) has made changes to accounting standard, FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland. The amendments will impact the amounts recognised within the financial statements, and additional disclosures will be required. The headline differences and the headline impact on the financial statements are included below.
- Revenue recognition – the amount(s) and timing of revenue included within the financial statements may change as a consequence of the new five-step recognition criteria.
- Leases – almost all operating leases will be recognised ‘on balance sheet’ by lessees within the financial statements, bringing an asset and liability into their accounts.
- Disclosures for small entities, taking advantage of Section 1A of FRS 102, are being expanded.
- Other nuanced changes including business combinations, fair values and share-based payments which may require some alternative or previous practices to be reconsidered, impacting the amounts recognised within the financial statements.
The amendments to FRS 102 are effective for accounting periods commencing on or after 1 January 2026. This is with the exception of disclosing supplier finance arrangements, which is effective for accounting periods commencing on or after 1 January 2025. Early application of the amendments is permitted.
Implications for your financial statements
It is crucial that you understand the impact on recognition and measurement on your financial statements if you adopt the revisions early. For example, most operating leases coming onto the balance sheet will, all other things being equal, increase assets and liabilities on your balance sheet. Your profit or loss will have an increased depreciation charge, increased interest/finance expense and decreased rental charge.
There are wider implications on items such as the following and early consideration of the implications of the revisions will allow any necessary discussions to be held to amend agreements in good time:
- Finance covenants – are leases part of borrowings? Does your interest cover test include all interest/finance costs in profit or loss?
- Bonus schemes or arrangements and share-based payment arrangements – will the amendments change the base number from which bonuses are calculated, such as EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation)? Will your staff be adversely affected?
- Revenue recognition – if affected, can your terms and conditions be altered for the majority of your clients to achieve the recognition and measurement which supports your financing needs? Can contracts be “unbundled”, if appropriate?
- Commission – will changes to revenue affect the timing and amount of commission payable to staff?
- Contingent consideration payable to former owners of the business – will they be entitled to additional consideration as a result?
Consistency across the group
Some of the adjustments, such as bringing leases onto the balance sheet, may result in fewer consolidation adjustments when the company reports to a parent and the consolidated financial statements of the parent are prepared using International Financial Reporting Standards.
Establishing a new entity
You may be considering incorporating a new company or limited liability partnership. Early adoption would mean that your contract terms and conditions are written with the amendments in mind, the chart of accounts used to prepare your financial statements will not require to be changed in eighteen months’ time and you won’t need to calculate any transitional adjustments.
Proximity of end of reporting period to determining the impact on your financial statements
A medium-sized business commencing a project to understand the impact of the amendments on its accounts two weeks before the start of its next accounting period is unlikely to be completed. Identifying any changes to the charts of accounts and other reporting streams will be challenging. Having sufficient time is important to ensure that your financial statements are complete and accurate.
For more information on FRS 102 and the changes to recognition, measurement and disclosure, please contact us.