Amendments to FRS 102 - it's not just revenue and leases

In March 2024, the Financial Reporting Council (‘FRC’) published amendments to FRS 102 resulting from its latest Periodic Review.

While the focus of the amendments is the alignment of the lessee accounting provisions of Section 20 Leases with IFRS 16 and the alignment of Section 23 Revenue from Contracts with Customers with IFRS 15 which we have covered within blogs FRED 82: don't forget revenue and FRED 82: changes to lease accounting, there are a host of other changes which shouldn’t be overlooked, including but not limited to fair value measurement, business combinations, supplier financing disclosures, uncertain tax treatments, and share-based payments.

KPMG’s Accounting Advisory team are currently delivering workshops and impact assessments which will consider the impact of these changes to your business in detail, and set out a route forward for implementation. We summarise some of these other amendments below:

Small entities currently benefit from reduced disclosure requirements under Section 1A of FRS 102 but will see an increase in effort as the revised standard specifies additional disclosures relating to going concern, provisions, contingent liabilities/assets, financial guarantees, share-based payments, deferred taxes, dividends, and the transition to new standards which are expected to be required in order to give a true and fair view. These are designed to reduce the amount of judgement required of preparers.

Small entities might need to obtain data that is not currently readily available to meet these disclosure requirements and therefore source this information in advance of their transition year.

The Concepts and Pervasive Principles section of FRS 102 is more than doubling in paragraph size, updating various definitions and concepts to align with the IASB’s Conceptual Framework for Financial Reporting issued in 2018. However, some sections of FRS 102 will retain their current definitions (such as provisions and share-based payments) to avoid unintended consequences of the amendments.

FRS 102 preparers will need to consider whether changing definitions impact existing accounting policies and any judgements made under those policies as part of their transition exercise.

FRS 102’s fair value measurement guidance will align more closely to IFRS 13 after the amendments on areas such as the definition of a market, treatment of transaction costs, and valuation techniques.

A lack of guidance on such areas previously may have resulted in an alternative practice being adopted which may require re-evaluation when preparers implement the amendments.

The amendments will increase the extent of going concern disclosures, including any significant judgements made in assessing the entity’s ability to continue as a going concern. Preparers will need to ensure these newly disclosed judgements do not result in inconsistencies with other judgements, such as impairment or deferred tax asset recoverability forecasts.

The amendments will require disclosure of 'material accounting policy information’ in place of ‘significant accounting policies’. Preparers will need to consider their disclosed policies against the updated requirements and potentially add or remove policies as a result of the change.

Guidance on accounting estimates will allow preparers to better distinguish between a change in accounting estimate, a change in accounting policy and the correction of a prior period error. Although this is unlikely to impact transition for many, preparers will have to consider this distinction going forward.

The amendments introduce disclosure requirements for supplier finance arrangements, where a third-party finance provider pays an entity's supplier, and the entity repays the finance provider. These are based on the IASB’s May 2023 Supplier Finance Arrangements (Amendments to IAS7 and IFRS 7).

Preparers will now need to disclose information, in aggregate, about supplier finance arrangements which will include key terms and conditions, carrying amounts of liabilities subject to the arrangements (and any effects of non-cash changes), and ranges of payment dates.

Qualifying entities were previously exempt from all of the requirements of Section 7, but will only be exempt from the supplier finance disclosure requirements if equivalent disclosures are included in the consolidated financial statements.

FRS 102 currently allows preparers to recognise and measure their financial instruments using any of the following policies: (1) Sections 11 and 12 of FRS 102; (2) IAS 39; or (3) IFRS 9.

The amendments prohibit option 2 (IAS 39), either on transition to FRS 102 or through a voluntary change in accounting policy, unless it makes the preparer’s policy consistent with those of its consolidating parent.

However, preparers already applying IAS 39 prior to the amendment can continue to do so. Those who currently don’t but wish to apply IAS 39 to account for their financial instruments would need to change their policy before the amended standards become effective, unless they are able to change the policy after transition to align with their consolidating parent’s policy.

The amendments include guidance on how an asset with both intangible and tangible elements should be accounted for depending on which element is more significant. For example, software for a machine that cannot operate without that specific software is an integral part of the related hardware and is treated as a tangible asset.

Preparers will need to review their fixed assets to identify assets with both tangible and intangible elements and decide whether any reclassifications are needed on transition.

Certain IFRS 3 concepts such as identifying the accounting acquirer (including when a Newco is formed) and distinguishing contingent consideration from remuneration for ongoing services have been incorporated through the amendments.

This may change how FRS 102 preparers identify the accounting acquirer in complex business combinations (such as in mergers or reverse acquisitions) and post-acquisition remuneration mechanisms such as earn-out clauses.

A number of specific amendments have been made which include scope exclusions in business combinations, accounting for equity-settled share-based payments within equity or as an expense, incorporating vesting conditions in determining fair value of cash-settled liabilities, and accounting for awards where the counterparty has a choice of settlement that includes a net settlement feature.

Given the specificity of the changes and the lack of previous guidance, FRS 102 preparers may have applied alternative accounting approaches to the areas of amendment which could require adjustment on implementation.

Preparers with share-based payments should start reviewing current and future anticipated share-based payment arrangements to assess whether they fall in scope of the amendments.

Although FRS 102 is currently silent on uncertain tax treatments, the amendments introduce guidance based on IFRC23 Uncertainty over Income Tax Treatments that uncertain tax treatments are recognised only if it’s probable that the tax authority has full knowledge of relevant information and would accept the position if examined.

FRS 102 preparers should assess whether any unresolved uncertain tax positions at the transition date and consider whether they need to be recognised to align with the amended guidance which may increase the likelihood of preparers recognising certain tax uncertainties on the balance sheet.

Other amendments also impact the following areas:

• Related party disclosures (Section 33) – disclosure of amount of related party commitments.
• Employee benefits (Section 28) – estimates and assumption used to remeasure defined benefit plans
• Borrowing costs (Section 25) – exclusion of specific borrowings from the capitalisation rate for general borrowings.
• Equity (Section 6) – disclosure of dividends paid separately for each class of shares.
• Specialised activities (Section 34) – various alignment amendments, as well as guidance on heritage assets, and non-exchange transactions for public benefit entities.

Amendments relating to supplier finance arrangements are effective from accounting periods beginning on or after 1 January 2025 with early application being permitted. Comparative information is not required in the year of adoption.

All other amendments are applicable from accounting periods beginning on or after 1 January 2026 and early application is permitted provided all amendments are applied at the same time.

The amendments are applied retrospectively other than fair value measurement and business combinations which are applied prospectively. There is also an option for retrospective amendments to uncertain tax treatments to be cumulatively reflected in equity rather than restating comparatives.

KPMG’s Accounting Advisory Services team are on hand to help and support preparers with implementation of the FRS 102 amendments.

Typically implementation starts with a workshop to kick off the project and upskill your team, followed by an impact assessment, preparation of accounting papers, quantification and disclosure. Do please reach out if you would like to talk to our specialists.