2024 Periodic Review amendments to FRS 102 and FRS 105

FRS 102 and FRS 105 are accounting standards which will be very familiar to many members. They are regularly used by small, medium and large companies in Ireland and the UK, as the financial reporting standards to prepare financial statements. The Financial Reporting Council (FRC), in their recent impact assessment, estimated that approximately 3.4 million entities currently use the two standards in the UK and Ireland. The standards have been effective since they were issued by the FRC in 2015 and, as part of their ongoing maintenance, the FRC carries out a periodic review of the standards approximately every 5 years. The most recent periodic review of the standards was completed in March 2024, and the resulting amendments are included in the September 2024 editions of FRS 102 and FRS 105. The amendments will lead to some significant changes for reporters under both standards.

This page addresses some of the key aspects of the changes arising from the periodic review and includes some changes made outside of the periodic review, but which have been incorporated into the September 2024 edition of the standards. Whilst we hope that the questions and answers are beneficial to you, they are not a substitute for reading the relevant accounting standards in full and are not intended to replace the accounting standards.

The 2024 Periodic Review amends the FRS 100, FRS 101, FRS 102, FRS 103, FRS 104 and FRS 105 standards. While this page may make reference to these standards throughout the FAQs, the primary focus is on FRS 102. Unless otherwise stated, the questions can be assumed to address the amendments to FRS 102. 

1. Why were the FRS 102 and FRS 105 standards updated?
2. What are the most significant changes arising from the 2024 Periodic Review?
3. What are the new leasing rules?
4. What exemptions are available in relation to the new leasing requirements?
5. What simplifications are available in relation to the new leasing requirements compared to IFRS 16?
6. What are the requirements for applying the new leasing rules for the first time?
7. What are the new revenue recognition rules?
8. What exemptions/simplifications are available for the new revenue recognition rules?
9. What are the options for applying the new revenue recognition rules for the first time?
10. Are there any other changes of note to FRS 102?
11. What is the mandatory effective date for the changes?
12. Can I early adopt the Periodic Review 2024 amendments?
13. How can I prepare for the changes?
14. Where can I find some more information on this?

1. Why were the FRS 102 and FRS 105 standards updated?

   UK and Irish accounting standards are constantly evolving and the FRS 100 to FRS 105 standards have been updated several times since they first became effective in 2015. Sometimes these changes are made to address a one-off issue and sometimes the changes are made as a result of a more formal process known as a “periodic review”.

   FRS 102 and FRS 105 are subject to a periodic review approximately every five years. The first periodic review, the Triennial Review 2017, was completed in December 2017, with an effective date of 1 January 2019. The second review, the Periodic Review 2024, was completed in March 2024, with an effective date (for most of the amendments) of 1 January 2026.

   There are several reasons why the FRC periodically review their standards, including:

   • Consideration of feedback received from stakeholders regarding what is and isn’t working in the standards as drafted.
   • Consideration of any changes that have been made to the IFRS standards in recent times, and whether similar changes should also be made to FRS 102 and FRS 105.
   • Consideration of any new or developing issues that have emerged which now need to be addressed in the financial reporting standards.
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2. What are the most significant changes arising from the 2024 Periodic Review?

   While different users of FRS 102 and FRS 105 will have different perspectives on the impact and significance that the various amendments will have on their financial statements, the most notable changes are arguably those made to revenue recognition (in FRS 102 and FRS 105) and to leasing (in FRS 102). This will result in some measurement, recognition and disclosure requirements changing for FRS 102 and FRS 105 reporters and the implications are covered in more detail below.

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3. What are the new leasing rules?

   Section 20 of FRS 102 has been completely rewritten and will change the way in which many leases are accounted for. The rewritten section is based on the principles of IFRS 16 - Leases and removes the distinction between operating and finance leases for lessees, with the result that more leases will be recognised on the balance sheet in the form of a right-of-use asset and lease liability.

   These new requirements are applicable to FRS 102 users, including users applying Section 1A. However, there are no similar changes made to lessee accounting under FRS 105.

   The leasing rules will not apply to all leases however, and there are some exemptions available for certain types of leases. These are discussed below.

   When accounting for leases from the lessor’s perspective, there still remains a distinction between operating and finance leases and, while there are amendments to lessor accounting, the new requirements do not differ significantly from the previous requirements.

   For more information on the revised leasing rules and requirements refer to the FRC’s FRS 102 Factsheet 11 Lease accounting for lessees.

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4. What exemptions are available in relation to the new leasing requirements?

   There are two key exemptions from the new leasing requirements under FRS 102.

   Short-term leases

   An entity applying FRS 102 may choose not to apply the new leasing requirements to “short-term leases”. A short-term lease is defined as “a lease that, at the commencement date, has a lease term of 12 months or less”. FRS 102 also clarifies that “a lease that contains a purchase option is not a short-term lease”. The election for short-term leases must be made by class of underlying asset to which the right of use relates.

   Low-value leases

   An entity applying FRS 102 may choose not to apply the new leasing requirements to “leases for which the underlying asset is of low value”. The standard provides some guidance regarding the circumstances where assets may be classed as such. It also provides some examples of assets which would typically not be considered to be of “low value”. These include:

   • cars, vans, buses, coaches, trams, trucks and lorries
   • cranes, excavators, loaders and bulldozers
   • telehandlers and forklifts
   • tractors, harvesters and related attachments
   • boats and ships
   • railway rolling stock
   • aircraft and aero engines
   • land and buildings
   • production line equipment
   The election for leases for which the underlying asset is of low value can be made on a lease-by-lease basis.

    

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5. What simplifications are available in relation to the new leasing requirements compared to IFRS 16?

   The leasing amendments are based on the principles of IFRS 16 Leases. However, there are some differences between the two standards, many of which are intended to simplify the process of lessee accounting for FRS 102 preparers. Some of these simplifications include:

   Alternative options for calculating discount rates compared to IFRS 16

   Section 20.49 requires a lessee to measure the lease liability at the present value of the unpaid lease payments. In doing this, it sets out that:

   “The lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the lessee shall choose, on a lease-by-lease basis, to apply either the lessee’s incremental borrowing rate or the lessee’s obtainable borrowing rate”.

   While the use of rates implicit in the lease and incremental borrowing rates, are consistent with the initial measurement approaches set out in IFRS 16, the further option for a lessee to use its “obtainable borrowing rate” offers greater choice to FRS 102 preparers. The FRC have noted that this rate is expected to be simpler to determine.

   FRS 102 defines a lessee’s obtainable borrowing rate as follows:

   “The rate of interest a lessee would have to pay to borrow, over a similar term, an amount similar to the total undiscounted value of lease payments to be included in the measurement of the lease liability”.

   Simpler accounting for lease modifications

   Occasionally, a lease may be modified. This occurs when there is a change in the scope of a lease or a change in the consideration for a lease, that was not part of the original terms and conditions. This may occur, for example, where there is a change in the duration of a lease term or where the right to use one or more of the underlying assets in the lease agreement is added or terminated.

   Section 20.72 sets out some additional circumstances where a lessee may use an unchanged discount rate when accounting for such modifications.

   Simpler accounting for sale and leaseback

   Where an entity transfers an asset to another entity and leases that asset back from that other entity, a sale and leaseback transaction occurs. Section 20.123 of FRS 102 offers a simpler approach, compared to IFRS 16, to how these transactions should be accounted for, with an accounting policy choice available if the transfer of the asset satisfies the requirements of Section 23 to be classified as a sale.

   Option to apply the requirements of IFRS 16 in full

   The revised Section 20 of FRS 102 has been written in such a manner whereby an entity can choose not to avail of the exemptions and simplifications on offer. If this choice is taken, then the preparer should arrive at a lease accounting outcome which is comparable to that of IFRS 16 Leases.

   While this may not sound like a simplification, it could be of significant benefit to certain entities, for example, entities who prepare their financial statements under FRS 102 but who have a parent company who prepares consolidated financial statements under IFRS. Choosing to align more closely with IFRS 16 Leases may help to ensure that the process of preparing consolidated accounts is more streamlined for these entities.

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6. What are the requirements for applying the new leasing rules for the first time?

   Entities applying the new leasing rules for the first time are required to apply the retrospective approach, with the cumulative effect of the initial application recognised as an adjustment to opening equity at the date of initial application.

   In addition to the above, there are some practical expedients, disclosure exemptions and rules relating to specific lease types which entities may find beneficial when applying the amendments for the first time. These can be found in Sections 1.44 to 1.60 of FRS 102.

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7. What are the new revenue recognition rules?

   Both Section 23 of FRS 102 and Section 18 of FRS 105 have been entirely rewritten as part of the Periodic Review. The rewritten sections are based on the principles of IFRS 15 Revenue from Contracts with Customers. Central to the newly drafted sections is a five-step model for revenue recognition. These steps aim to provide a structured and consistent model that users of the standards can apply in accounting for revenue.

   The five-step model introduces the following steps for revenue recognition under FRS 102 and FRS 105:

   • Step 1- Identify the contract(s) with a customer
   • Step 2- Identify the performance obligations in the contract
   • Step 3- Determine the transaction price
   • Step 4- Allocate the transaction price to the performance obligations in the contract
   • Step 5- Recognise revenue when (or as) the entity satisfies a performance obligation
   Both FRS 102 and FRS 105 contain additional rules and requirements in relation to the revenue recognition and further information regarding this can be found in FRS 102 Factsheet 10 Revenue from Contracts with Customers which was issued by the FRC.
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8. What exemptions/simplifications are available for the new revenue recognition rules?

   Along with the new requirements for revenue recognition are some exemptions and simplifications available to preparers. Some of these include:

   Capitalisation of costs to obtain a contract

   Section 23.113 of FRS 102 allows an accounting policy choice regarding whether or not an entity capitalises the costs to obtain a contract, unlike IFRS 15 which requires such costs to be capitalised.

   By contrast, Section 18 of FRS 105 requires a micro-entity to recognise costs to obtain a contract with a customer as an expense when incurred, unless those costs are explicitly chargeable to the customer regardless of whether the contract is obtained.

    

   Significant financing components

   Section 23.59 of FRS 102 allows an accounting policy choice regarding whether or not an adjustment for the time value of money relating to payments received in advance should be recognised.

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9. What are the options for applying the new revenue recognition rules for the first time?

   FRS 102 reporters applying the 2024 Periodic Review amendments relating to revenue recognition for the first time have an accounting policy choice. They may either:

   • Apply the amendments retrospectively, recognising the impact of applying Section 23 as an adjustment to the opening balance of retained earnings on the date of initial application. Under this method comparatives do not need to be restated, and the amendments are only applied to contracts that are not completed at the date of initial application: or
   • Apply the amendments on a fully retrospective basis, restating comparatives and applying the new requirements from the earliest practicable date, as if they had always applied.
   In addition to the above, there are some practical expedients and disclosure exemptions which entities may find beneficial when applying the amendments for the first time. These can be found in Section 1.62 to 1.67 of FRS 102.

    

   FRS 105 reporters shall apply the revised Section 18 Revenue from Contracts with Customers prospectively to contracts that begin after the date it first applies the Periodic Review 2024 amendments, as an exception to retrospective application, and therefore shall not change its accounting policy for any contracts in progress at that date.

    

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10. Are there any other changes of note to FRS 102?

    The 2024 Periodic Review is not just about changes to revenue recognition and lease accounting. There are many other areas where the standards have been updated. Some of these changes include:

    Supplier finance arrangements

    Supplier finance arrangements occur when one or more finance providers pay amounts an entity owes its suppliers and the entity agrees to pay according to the terms and conditions of the arrangements at the same date as, or a date later than, suppliers are paid. This provides the entity with extended payment terms, or the entity’s suppliers with early payment terms, compared to the related invoice payment due date.

    The September 2024 edition of FRS 102 includes some additional disclosure requirements for FRS 102 reporters where such financing arrangements are in place.

    Fair value measurement

    Section 2A Fair Value Measurement has been introduced to FRS 102, (replacing the previous appendix to Section 2 Fair Value Measurement). This has been updated to mirror more closely the requirements of IFRS 13 Fair Value Measurement. The appendix addresses topics such as valuation techniques and how a valuation technique would be expected to arrive at a reliable measure of fair value.

    The definition of fair value has been updated as follows:

    “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”.

    Business combinations and goodwill

    A new appendix to Section 19 has been introduced to FRS 102. This provides some guidance on how to identity the acquirer in a business combination. There is also some new guidance, within Section 19 on accounting for contingent consideration and remuneration for future services

    Uncertain tax treatments

    Section 29 of FRS 102 now includes guidance on uncertain tax treatments. This is closely aligned with IFRIC 23 Uncertainty over Income Tax Treatments. Included in this guidance is:

    • The assumption that a taxation authority will examine amounts it has a right to examine and have full knowledge of all related information when making those examinations.
    • Two clear measurement bases to choose from when it is not probable that the taxation authority will accept an uncertain tax treatment.

    Material accounting policy information

    The amended standard requires disclosure of “Material Accounting Policy” information, as distinct from the previous requirement to disclose “Significant Accounting Policies”. While this amendment may appear subtle, entities will need to consider if this changes the way in which they disclose accounting policies.

    Small UK entities applying Section 1A

    Since the UK’s exit from the European Union, the FRC is able to set extra disclosure requirements for UK small entities. In light of this, it has revised Section 1A to include more required disclosures for small UK companies applying Section 1A. This is intended to reduce the amount of judgement used in determining whether certain disclosures are needed in order to meet the true and fair view requirements. The required disclosures are set out in Appendix C of Section 1A.

    Going concern disclosures

    A new paragraph has been included in Section 3 of FRS 102 requiring a more comprehensive disclosure in relation to going concern. Paragraph 3.8A requires an entity who prepares financial statements on a going concern basis, to disclose this fact, together with confirmation that management has considered information about the future as set out in paragraph 3.8. An entity is also required to disclose any significant judgements made in assessing the entity’s ability to continue as a going concern.

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11. What is the mandatory effective date for the changes?

    FRS 102

    Most of the changes have a mandatory effective date of 1 January 2026.

    However, the requirements of paragraphs 7.20B and 7.20C (disclosures relating to Supplier Finance Arrangements) have a mandatory effective date of 1 January 2025.

    FRS 105

    The FRS 105 amendments have a mandatory effective date of 1 January 2026.

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12. Can I early adopt the Periodic Review 2024 amendments?

    The amendments effective from 1 January 2025 for FRS 102 can be early adopted.

    The amendments effective from 1 January 2026 for FRS 102 and FRS 105 can be early adopted, provided all of the amendments are applied together.

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13. How can I prepare for the changes?

    There are many ways in which companies can prepare for the upcoming changes, but there will be no one-size-fits-all method which will work for all entities. Accountants should consider the following when preparing for implementation:

    • Engage with the assignment early. Whether you are an accountant in business or in practice, early engagement is important. The Periodic Review amendments will require additional considerations, education and resources. Sales contracts may need to be reviewed to assess their treatment under the 5-step revenue recognition model, similarly, an assessment of the leases in the company may need to be carried out. All of these may require additional information and reporting tools and the time taken to prepare can be underestimated. With this in mind, it is very important to face the challenge head-on.
    • Conduct an impact assessment. The changes will significantly impact some entities and will have less of an impact on others. In order to establish the extent of this, it is essential that an impact assessment is performed. This might involve a review of prior year financial statements, assessment of lease contracts and assessment of sales contracts with customers.
    • Choose the appropriate transition method. As mentioned earlier, there are some options available regarding the transition methods that can be used in year 1. Many of these options are intended to simplify the process, so users of the standards should familiarise themselves with the available practical expedients and disclosure exemptions available on transition.
    • Consider what updates are required to your reporting system. Entities will have existing systems in place to manage their reporting obligations. When the periodic review amendments come into effect, these systems may need to be updated. This might include a change to the disclosure checklist that a company uses, a change in accounts production software or an upgrade to reporting tools and working papers.
    • Learn from the implementation of IFRS 16 and IFRS 15. Many of the entities who have transitioned to these standards will have encountered many similar challenges to those which will be encountered by FRS 102 and FRS 105 adopters. While both IFRS standards are more comprehensive and complex to their local GAAP counterparts, there will be valuable lessons learned by those preparers which can be applied to FRS 102 and FRS 105.
    • Ensure appropriate training is undertaken in relation to the amendments. Training is not just important, it is essential. This can take many forms (including webinars, reading, tailored in-house sessions and workshops). Whether you are an accountant in practice or in business, you should consider how best you can ensure that your training is adequate.

     

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14. Where can I find some more information on this?

    The above FAQs are not a substitute for reading the relevant accounting standards in full and are not intended to replace the accounting standards. Therefore, before applying the amended standards, or advising your clients on how to apply the amended standards, it is important to familiarise yourself with the revised standards. These standards, as well as some useful guidance material and articles, are listed below.

    • Copy of the FRS 102 Standard
    • Copy of the FRS 105 Standard
    • FRC Factsheet 9 on initial application of Periodic Review 2024 amendments
    • FRC Factsheet 10 on Revenue from Contracts with Customers
    • FRC Factsheet 11 on Lease accounting for Lessees
    • Accountancy Ireland Article "Amendments to FRS 102 Are you ready for change?" by Emer Fitzpatrick and Cayetano Bautista III discuss some of the key changes from the periodic review
    • FRC Summary of the 2024 Periodic Review Key Changes
    • FRC Feedback Statement from the periodic review, which summarises the feedback received, as well as some of the decisions taken

     

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These pages are provided as resources and information only and nothing in these pages purports to provide professional or legal advice or definitive legal interpretation(s) or opinion(s) on the applicable legislation or legal or other matters referred to in the pages. If the reader is in doubt on any matter in this complex area further legal or other advice must be obtained. While every reasonable care has been taken by the Institute in the preparation of these pages, we do not guarantee the accuracy or veracity of any resource, guidance, information or opinion, or the appropriateness, suitability or applicability of any practice or procedure contained therein. The Institute is not responsible for any errors or omissions or for the results obtained from the use of the resources or information contained in these pages.