On 27th March 2024, the FRC has issued amendments to UK GAAP. This follows extensive feedback from its published exposure draft FRED 82, issued in December 2022.
The changes impact all companies reporting under FRS 102 and small companies reporting under FRS 102 section 1A. In addition, there are some changes impacting micro companies reporting under FRS 105.
When will the changes become effective?
The effective date for most amendments is periods beginning on or after 1 January 2026 with early adoption permitted, provided all amendments are applied at the same time.
What are the key changes?:
The most significant changes to UK GAAP are changes in the recognition of revenue and leases to align more closely with IFRS 15 and 16.
Revenue Recognition:
There is a new model of revenue recognition, based upon the five-step model for revenue recognition under IFRS 15. This change will also impact micro entities reporting under FRS 105 with additional simplifications.
The five-step model involves:
- Identifying the contract (or contracts) with a customer;
- Identifying the promises in the contract;
- Determining the transaction price;
- Allocating the transaction price to the promises in the contract; and
- Recognising revenue when (or as) the entity satisfies a promise.
The individual terms of an entity’s contracts with its customers will determine the impact this proposed change will have on revenue recognition.
Lease Accounting:
There is a new model of lease accounting, based upon IFRS 16’s on balance sheet model. This removes the differentiation between finance and operating leases and create a ‘right-of-use asset’ on the balance sheet with a corresponding liability, meaning most lessees with operating leases will be impacted. The right-of-use fixed asset will be subject to depreciation and interest based on the liability will be charged to profit and loss, affecting the presentation of financial information.
This proposed change would apply only to entities reporting under FRS 102 and small company reporting under FRS 102 1A. Micro-entities reporting under FRS 105 are not required to adopt this model.
Exemptions are included for short term leases and leases of low value items.
How do I prepare for these proposed changes?
Companies should begin to consider the impact of the new standard on their current business models and communicate with relevant stakeholders.
Gathering the appropriate information now will help to make the transition as smooth as possible. This may include summarising and analysing all leases on a lease register including the lease term and future payments.
In addition, companies should consider the impact these changes will have on contracts with customers and identify specific contract terms and performance obligations.