Changes to FRS 102 announced - What do I need to know?

The two significant changes see a new five-step model for revenue recognition more
closely aligned with IFRS 15 Revenue from Contracts with Customers (IFRS 15) and
alignment with IFRS 16 Leases (IFRS 16) with certain practical expedients.

The effective date of these amendments is 1 January 2026 but early adoption is
permitted. Early adopting the amendments could give you a head start on preparing for these changes. A few examples for where this may be an advantage are:

• You already prepare information under UK-adopted international accounting
  standards (IFRS) for the purposes of group reporting to your parent
• Other parts of your wider corporate group report under IFRS so there may be a
  benefit to aligning your reporting more closely to theirs
• Potential acquirers are IFRS reporters, or potential acquisitions are IFRS
  reporters, so again, there could be a preference to align your reporting
  accordingly
• You operate in a sector where it would be beneficial for your financial statements
  to be consistent and comparable with others in the market (who report under
  IFRS)

A key point to note on early adoption however, is that all the Amendments must be
applied in full, at the same time, i.e. you can’t pick and choose.

Early adopting means is that for a company with a 31 December year end, the transition
date for the new Amendments would be 1 January 2025, instead of 1 January 2026, and
your first set of financial statements adopting the Amendments would be for the 31
December 2025 year end.

Changes proposed to revenue recognition and leases

Under the proposed amendments, there are significant changes to revenue recognition and leases to align FRS 102 with International Financial Reporting Standards (IFRS).

The new FRS 102 Section 23 for revenue recognition will introduce a five-step revenue recognition model aligned with IFRS 15, potentially altering how revenue is recognised. There are some simplifications compared to IFRS 15 regarding the treatment of costs to obtain a contract, treatment of licence revenues, principal vs agent considerations, application of a portfolio to a group of similar contracts as well as the treatment of discounts and contract modifications.

Under the new FRS 102 Section 20, almost all lessees will need to include leases on their balance sheets, recognising a right-of-use (ROU) asset and a corresponding lease liability. The ROU asset is based on the present value of the lease liability and certain adjustments, while the liability should be discounted using a simplified method to IFRS 16. These changes replace the operating lease expense with depreciation on the ROU asset and a finance charge on the lease liability.

These changes will likely impact the calculation of earnings before interest, depreciation, taxes, and amortisation (EBITDA) and other key performance indicators, which means there could be consequences for: 

• the value of earn-outs paid on deals
• the amount to be paid under employee incentive schemes
• compliance with debt covenants
•  whether a company falls within the scope of statutory audit.

What does this mean for companies?

Satisfying the new standards typically means companies may need to invest in updated data collection, assessing system capabilities and processes, and revisit management reporting and forecasting formats to meet these requirements. This could represent a considerable operational and financial commitment. Additionally, companies will need to train and enhance the skills of their accounting and finance teams to ensure a seamless transition and continued compliance with the proposed changes. 

Although the proposed effective date is 1 January 2026, it is crucial for businesses to commence their strategic preparations now to best prepare for the transition and understand how the changes will impact them. It is important to take a proactive stance and avoid delaying the preparation process. 

Companies should carefully evaluate the potential impact of the proposed changes on their financial statements, systems, and processes. This includes planning for effective communication with stakeholders such as investors, lenders, and employees, to provide clarity and transparency around any changes to financial metrics or tax position. 

For more insight and guidance, get in touch with Jennifer Ilsley and Pinkesh Patel.