DON’T LEASE IT TOO LATE TO START THINKING ABOUT THE CHANGES TO UK GAAP
We’ve known about the amendments to UK GAAP for some time now, but have you really digested what this means for your business?
Do you know which of your KPIs, covenants and remuneration schemes will be impacted and by how much? Have you identified all your lease arrangements and understood the terms?
We know the prospect is time-consuming, and complex, but setting up a clear project plan and team is key to a successful, low-stress adoption of the new standards and establishing efficient BAU processes – and KPMG is here to support you through the process.
What are the changes and when will they take effect?
On 27 March 2024, the FRC issued amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs – Periodic Review 2024. The key changes are alignment with IFRS 15: Revenue from Contracts with Customers and IFRS 16: Leases.
The effective date for most amendments is periods beginning on or after 1 January 2026, with early adoption permitted. 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.
A key aspect of getting ahead is to be able to manage the impacts on KPIs with external stakeholders like investors and lenders.
What are the changes to lease accounting?
The changes to UK GAAP will mirror the approach under IFRS 16: Leases. Existing operating leases under FRS 102 will be brought on-balance sheet.
Liability: A lease liability will be recognised, reflecting the obligation to make lease payments over the lease term. The liability is the present value of future lease payments and will unwind as an interest expense. Lease payments will reduce the liability.
Asset: A right-of-use asset will also be recognised and depreciated over the lease term. This will typically be measured equal to the initial lease liability, with some potential adjustments.
P&L: Depreciation on each leased asset will be recognised as an expense. The lease liability will unwind as an interest expense over the lease term.
These balances aren’t set and forget however, regular reassessment is required, for example when there is indexation, a rent review, or a change in the expected lease term. Changes which are made outside of the existing lease terms (such as an increase or decrease in the scope of the lease) may have to be accounted for a lease modification and these can be complex.
But what’s the good news?
Aside from KPMG’s support, it is also important to note that the FRC has included some optional simplifications within revised FRS 102 to ease the transition process. The key simplifications being:
- Use of an ‘obtainable borrowing rate’ instead of ‘incremental borrowing rate’.
- Guidance on application of the low value definition.
- Reduced modification triggers requiring a revised discount rate.
- Simpler approach to recognising gains/losses for sale and leaseback transactions.
Where do I start?
If you haven’t already, we recommend that you perform an initial impact assessment to better understand how the changes will affect your business. To do this, you should ask yourself the following questions:
- What is my lease portfolio? – do I have any embedded leases in non-lease contracts.
- Do I have copies of all the lease arrangements? Can I obtain these? – as data will need to be extracted and maintained.
How can KPMG’s Accounting Advisory Services team help?
Our team can help support your business through the transition, including through:
- Training/workshops – in-person or virtual classroom training/workshops tailored for finance teams to bring you up to speed on the new requirements and how they apply to your business.
- Impact assessment – We can support with evaluating the potential impacts of the proposed lease requirements on your business and financial statements.
- Financial modelling – We can provide a lease model to calculate the impact of the changes to UK GAAP and prepare the required journal entries on an ongoing basis.
- Accounting policies – We can prepare/review your lease accounting papers/policies and support with the key accounting judgements. Contract reviews may be required.
- Disclosure requirements – We can identify the disclosure impacts for your business and assist with updating the existing disclosures to comply with the proposed changes.
