What date does FRED 82 come into effect?
The FRC published its exposure draft FRED 82 in December 2022, proposing several changes to UK GAAP. The consultation feedback on the exposure draft has since led to a delay in the expected implementation date, with the revised version expected to come into effect for periods commencing on or after 1 January 2026.
The changes proposed impact all companies reporting under FRS 102 and small companies reporting under FRS 102 section 1A. In addition, there are some proposed changes impacting micro companies reporting under FRS 105.
Key changes proposed by Fred 82:
The most significant changes proposed by Fred 82 are changes in the recognition of revenue and leases based on IFRS 15 and 16.
A new model of revenue recognition is proposed, based upon the five-step model for revenue recognition under IFRS 15. This change will also impact micro entities reporting under FRS 105
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.
A new model of lease accounting is proposed, based upon IFRS 16’s on balance sheet model. This would remove 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. Under the proposals, the right of use fixed asset would 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 proposed for short term leases with a life of less than 12 months and leases of low value items.
How to prepare for these proposed changes:
Companies should begin considering the impact 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.