Amendments to FRS 102: are you ready for change?

Amendments to FRS 102: are you ready for change?

Aimed at improving financial reporting practices, the latest FRS 102 amendments introduce important changes finance teams must begin preparing for today. Emer Fitzpatrick and Cayetano Bautista III delve into the details.

FRS 102 is the predominant accounting standard used by small and medium businesses (SMEs) and private family businesses across the island of Ireland.

It was introduced in 2013, applying to accounting periods commencing on or after 1 January 2015, with early adoption permitted.

The UK Financial Reporting Council (FRC) is the standard setter for FRS 102 and performs periodic reviews of the accounting standard, at least every five years.

The aim of these reviews is to take account of changes in global accounting standards – such as changes to the International Accounting Standards Board (IASB) accounting standards, and to respond to specific issues as they arise, such as regulatory decisions and stakeholder feedback.

Amendments are then developed and proposed after feedback has been sought from the relevant stakeholders.

The first periodic review of FRS 102 was completed in December 2017, coming into effect on 1 January 2019, and the FRC recently completed another periodic review in March 2024.

This most recent review has taken several years to complete due to the need for extensive consultations with stakeholders.

The effective date of the amendments arising from this review will be applicable for accounting periods on or after 1 January 2026. (Earlier effective dates apply to new disclosures about supplier finance arrangements, starting from 1 January 2025, with early application permitted). Early application is, however, permitted where all amendments are applied simultaneously.

So, what are the key amendments arising from this review, and how can you prepare for these changes?

FRS 102 review: key amendments

Single lease accounting approach for lessees (Section 20)

Under the current model, lessees classify leases as either finance or operating, depending on whether the lease transfers substantially all the risks and rewards of ownership from the lessor to the lessee.

This approach is similar to the model used under old Irish Generally Accepted Accounting Principles (GAAP) and IAS 17 – “Leases”.

The FRS 102 amendments will largely align Section 20 with IFRS 16 – “Leases”, eliminating the distinction between finance and operating leases for lessees.

This will require lessees to recognise right-of-use assets (ROU) and lease liabilities on the Statement of Financial Position (SOFP) for all leases, apart from short-term leases and low-value assets.

Subsequently, the ROU is depreciated over the lease term on a straight-line basis, while the lease liabilities are amortised using the effective interest method, which results in a frontloading of the lease expense, reflecting the underlying financing nature of leases.

Let’s illustrate this with an example.

SOFP – lease commencement (rounded to the nearest €000)

Present value (PV) of lease payments not paid at that date and discounted using the appropriate discount rate.

[PV of €50,000 × 3 years at 5%]

In most cases, the ROU and lease liability will be equal to each other on the inception of the lease.

Statement of Comprehensive Income (SOCI) – Year 1

SOFP – Year -1

The amendments provide guidance on what constitutes a lease, how to determine the lease term, how to account for modifications and remeasurements and other practical expedients.

It is important not to underestimate the complexity of this new lease model. Consideration must be given to several factors, such as whether an arrangement meets the definition of a lease and how to calculate an appropriate discount rate for every lease.

Five-step revenue recognition model (Section 23)

The FRS 102 amendments also introduce a comprehensive five-step model for revenue recognition aligning Section 23 of FRS 102 with IFRS 15 – “Revenue from contracts with customers.” The five steps are as follows:

1. Identify the contract(s) with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognise revenue when (or as) the entity satisfies a performance obligation.

The core principle is to align revenue recognition with the transfer of control of goods or services to customers which may either be over time or at a point in time.

This also aligns revenue recognition with the contractual terms in relation to the enforceable rights and obligations of the customer and supplier.

The five-step model aims to address the challenges in accounting for bundled goods and services by introducing the concept of allocating the consideration from the customer to the separate and distinct performance obligations, representing the promised goods or services within the contract.

The amendments also provide guidance on several topics, such as combining two or more contracts entered into, at or near the same time with the same customers, contract modifications and some practical expedients.

It is important to note that the new five-step revenue recognition model could alter the timing of revenue recognition, especially for complex contracts with bundled goods and variable consideration.

Other important amendments to note

The amendments to FRS 102 also contain several incremental improvements and clarifications including, but not limited to, the following:

• IAS 39 option removal: Entities not already applying IAS 39 recognition and measurement principles for financial instruments can no longer adopt such policies under Section 11 and 12 of FRS 102.
• Supplier financing: Section 7 of FRS 102 will now require additional disclosures about supplier finance arrangements and their impact on SOFP and cash flows.
• Fair Value measurement: A new Section 2A (Fair Value Measurement) replaces the Appendix to Section 2 of FRS 102, incorporating the principles of IFRS 13 – “Fair value measurement.”
• Going concern disclosures: Section 3 of FRS 102 has new requirements for management to affirm consideration of future information and to disclose significant judgments on going concerns.
• Business combinations: Section 19 of FRS 102 has been updated to include guidance on the identification of an acquirer in a business combination similar to the principles of IFRS 3 – “Business combinations.”
• Share based payments (SBP): Section 26 of FRS 102 includes enhanced guidance on accounting for vesting conditions, fair value determination and SBPs with cash alternatives.
• Uncertain tax treatments: Section 29 of FRS 102 includes guidance for uncertain tax treatments, which aligns with IFRIC 23 – “Uncertainty over Income Tax Treatments” principles.

FRS 102 amendments: next steps

We have outlined some practical steps you can take to help prepare for these changes.

Assess the impact on your financial statements and business metrics

As discussed above, the changes to Leases and Revenue may have a significant impact on financial statements (FS).

The new lease accounting model may affect your company’s financial metrics or key performance indicators (KPIs) such as EBITDA, net profit and net debt, to name a few.

Not only will the changes to KPIs have an impact on the FS but they may also impact your lending arrangements or covenants.

For the new revenue model, consideration must be given to how any potential changes to the timing of revenue recognition may impact both reported and forecasted revenue and profits.

You will also need to consider how the other amendments listed above will impact the FS and whether you have the necessary in-house expertise on your finance team to carry out the work required to comply with these amendments.

Increased disclosure will be required in the notes to the FS, and this may include some new and previously undisclosed information. Understanding these requirements will help guide your accounting processes and the preparation of the FS. Being well-prepared will ensure compliance and transparency in your financial reporting.

Consider whether operational changes are required

The new lease accounting and revenue recognition models are closely tied to contractual terms and conditions. This will require additional information and financial modelling from contracts.

An early assessment of your current accounting processes, systems and controls is essential to identify the necessary operational changes.

Other considerations, such as the number of lease agreements and revenue contracts a company may have, will determine the amount of work involved, especially with regard to preparing an amortisation table and the potential need for external valuation expertise to determine an appropriate discount rate for every lease agreement.

Determine the best game plan for the transition

It is critical to ensure that your finance team is ready for these changes. Engaging your finance team through training courses, workshops and other methods – before and during the transition phase – will be important in ensuring your team fully understands the upcoming changes.

Preparing for change: act now

The aim of these FRS 102 amendments is to improve financial reporting by aligning FRS 102 more closely with IFRS.

Although most of the amendments will not take effect until 2026, early application is allowed if all amendments are adopted simultaneously.

Thus, it is critical that companies put a game plan in place today to determine the optimal timing, scope and method for adopting the FRS 102 amendments. The time to act is now.

Emer Fitzpatrick is a Senior Manager in PwC Corporate Reporting Services and a member of the Financial Reporting Technical Committee of Chartered Accountants Ireland.

Cayetano Bautista III is a Senior Manager in PwC Capital Markets and Accounting Advisory Services.