Upcoming changes to FRS 102

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 effective date for most amendments is periods beginning on or after 1 January 2026^*, with early adoption permitted. These amendments seek to provide greater consistency and alignment to international accounting standards including:

A new model for revenue recognition, aligned to IFRS 15: Revenue from Contracts with Customers, but with some simplifications;
On balance sheet lease accounting for lessees, aligned to IFRS 16: Leases, but with certain practical exemptions; and
Other modifications to fair value measurement, uncertain tax positions, business combinations, and a revised Section 2 aligned with IASB’s Conceptual Framework.

* The amendments for supplier finance arrangements will be effective from 1 January 2025.

Simon Cooper

Partner, Accounting Advisory Services

KPMG in the UK

mail
call

The FRS 102 changes will be effective on or after 1 January 2026

The FRC’s latest financial reporting infographic

December 2022 - FRC published FRED 82. April 2023 - Public comment deadline was 30 April 2023. March 2024 - FRC issued amendments to FRS 102. January 2026 - Standards will be effective from 1 January 2026

What are they key FRS 102 changes?

Based on IFRS 16 Leases: on-balance sheet lease accounting for lessees, as a right of use (RoU) asset and lease liability.
Lease expenses now presented as depreciation and interest. Impacting EBITDA and key metrics.
Exemptions available for short-term leases and leases of low-value assets.
Some key simplifications vs IFRS 16 include:
- 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 recognizing gains/losses for sale and leaseback transactions

Transition

No restatement of comparatives required.
Permitted to use carrying amounts for group reporting under IFRS 16 as opening balances.
If not applying the group exemption, asset recognised is equal to the liability on transition. Any cumulative effect of initially applying the standard is recorded as an adjustment to opening retained earnings.

Based on IFRS 15 Revenue from Contracts with Customers: Five-step revenue recognition model.
Entities will need to review revenue contracts and apply the five-step model potentially impacting timing of revenue recognition.
In particular, will need to consider the treatment for contracts that have bundles of goods/services, variable consideration, warranties, customer options, or significant financing components.
Key simplifications from IFRS 15:
- Accounting policy choice in respect of the capitalisation of costs to obtain a contract.
- May apply the five-step model to a portfolio of similar contracts.
- Simplifications for allocating discounts.
- Disclosures are aligned to IFRS for SMEs.

Transition

Option to either: (1) restate comparatives, or; (2) not restate comparatives and any cumulative effect of initially applying the standard is recorded as an adjustment to opening retained earnings.
Greater hindsight allowed for variable consideration and modifications.

How could the FRS 102 changes impact my business?

The commercial impacts of the new requirements may be wide reaching, and include considering:

How will the amendments affect key metrics, such as EBITDA, profit and net debt?
Will any debt/pension covenants need to be reset if EBITDA/net debt is impacted?
How will you amend current remuneration, bonus and share option schemes where reward is directly linked to financial performance?
Will dividend payments be restricted if distributable reserves are impacted?

What should I do next?

The standards will be effective for accounting periods beginning on or after 1 January 2026, and we would encourage companies to plan today for adopting these changes.

Performing an initial impact assessment is advised to understand the likely areas of impact for your financial statements, whether that be profit or loss or balance sheet. From that, calculations can be performed over the key areas impacted to understand the likely quantitative impact of transition ahead of a 1 January 2026 adoption date.

These amendments may require changes to systems and processes to be in place for 1 January 2026. This may involve updating charts of accounts, assessing system capabilities, and designing revised processes to ensure compliance.

Also, don’t forget the disclosure impact: the revenue recognition and lease changes will require increased disclosures in your financial statements from previous years; this will provide more information to the readers of your accounts, some of which may be sensitive around future revenue.

The amendments also 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. 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. 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.

How can we help?

KPMG’s Accounting Advisory Services team are on hand to support you with the transition. Our team of technical accountants has significant experience in accounting standard changes including the adoption of IFRS 15 and IFRS 16 for international standard adopters. Do please reach out if you require support or require further information.

Workshops

In-person or virtual workshops tailored for finance teams to explain the new requirements and start assessing the impact.
Identify the next steps for implementation of the new accounting requirements.

Impact assessment

Review your existing accounting policies and proposed changes under the amendments.
Identify customer contracts and lease portfolios.
Identify impacted metrics (e.g. KPIs, covenants).
Determine a transition approach appropriate for your business.

Accounting policies

Prepare accounting policy papers setting out application of the standards to your arrangements.
Set out key judgements under the new standards.

Quantification

Review revenue and lease contracts and extract data.
Make contract level judgements, such as:

Leases – discount rate, lease term, lease payments, practical expedients.
Revenue – unbundle promises, measure variable consideration, standalone selling price.
Model lease and revenue contracts.