Since Financial Reporting Exposure Draft 82 ‘FRED’ 82 was released in December 2022 most conversations have quickly focussed on the impact on leases. However, although the leasing changes are most obvious, the changes to revenue are also complex and may require significant effort to implement.
What are the proposed changes to revenue accounting?
‘FRED’ 82 proposes to align FRS 102 with IFRS 15: Revenue from Contracts with Customers, albeit a simplified version with reference to ‘promises’ rather than ‘performance obligations’ as under IFRS 15.
The proposed changes to revenue accounting is expected to follow the five-step model approach:
Have you thought about how the 5-step model will impact your contracts?
- How similar are your customer contracts? – you will need to put contracts into ‘buckets’, make judgements and prepare accounting papers on each of these
- Identifying whether the ‘promises’ in each contract need unbundling is likely the most difficult judgement, impacting the timing of revenue recognition
- Do your contracts contain variable consideration? – determining an appropriate estimation approach, and how if it will impact the future timing of revenue recognition can be challenging
- Will any KPI’s be impacted? – who are the stakeholders to manage and what is the plan
- Do I need to update systems, chart of accounts, or implement a model/system solution?
- How am I going to train my commercial, sales and finance teams on the impacts to their roles?
- Can I make contracts clearer now, to manage future accounting impacts?
Applying the changes to revenue to contracts can be complex, especially for businesses with long-term contracts, technology businesses, and those in the construction sector. Investing the time early is key to a successful, low-stress adoption of the new standard and establishing efficient processes – and KPMG is here to support.
What is ‘FRED’ 82 and when will it take effect?
Following the conclusion of the consultation period on 30 April 2023, the FRC are now in the process of finalising these amendments and it is expected that the revised standard will be released in the first half of 2024.
FRED 82 has an anticipated effective date of accounting periods beginning on or after 1 January 2026. At face value, this seems quite far away, but you will need to collect data, make accounting judgements and implement systems/tools ahead of this date.
Where do I start?
If you haven’t already, we recommend that you perform an initial impact assessment to better understand how the proposed changes will affect your business. To do this, you should ask yourself the following questions:
- Do I understand the five-step model and which revenue streams might be impacted?
- How confidently can I apply the proposed five-step model to each type of revenue contract?
- Do I have contracts containing multiple goods/services that might need unbundling?
- Do I have variable consideration, contract modifications, discounts/rebates, and other complexities which may need detailed accounting judgements?
- Do I need to update processes, systems, and controls?