Amendments to FRS 102
On 27 March 2024, the FRC issued Amendments to FRS 102, which concluded its second periodic review of the financial reporting standard. The effective date for most amendments is accounting periods beginning on or after 1 January 2026, with earlier adoption permitted. The amendments for supplier finance arrangements will be effective from 1 January 2025.
The most significant amendments are to Revenue (Section 23) and Leases (Section 20). Refer to the FRC’s summary of key changes to FRS 102 (PDF).
Revenue
The amendment to FRS 102 Section 23 brings revenue recognition broadly in line with IFRS 15, ‘Revenue from Contracts with Customers’, and the five-step revenue recognition model, but with some minor simplifications.
Entities will need to reassess the accounting treatment of all but the simplest revenue contracts. Examples of contracts that may be affected include those with bundles of goods/services, variable consideration, warranties, customer options, and significant financing components. Principal vs agent conclusions, and the applicability of ‘over time’ revenue recognition may also change.
An entity is required to apply the Section 23 amendments retrospectively, recognising the cumulative effect of initial application as an adjustment to the opening balance of retained earnings (or other component of equity) at the date of initial application. Restatement of comparatives is not required. Alternatively, an entity can choose to apply the amendments fully retrospectively in accordance with Section 10, Accounting policies, estimates and errors.
Lease accounting
The amendment to FRS 102 Section 20 will result in an on-balance sheet lease accounting model which is based on IFRS 16, ‘Leases’, with certain practical exemptions. This means that for almost all lessees, leases, other than those that are either short-term leases or leases of low-value assets, will be recognised on the balance sheet. From a lessee’s perspective, there will be no need to make a distinction between operating and finance leases. Lessor accounting has remained in largely unchanged.
The amendments to Section 20 must be applied retrospectively. Recognising the cumulative effect of initial application as an adjustment to the opening balance of retained earnings (or other component of equity) at the date of initial application. Restatement of comparatives is not required. A number of simplifications or practical expedients are available under the transition guidance. For lessors, generally, no adjustments are required on transition.
Summary
We encourage entities to plan today for the adoption of the changes, which may require changes to existing systems and processes.
Entities may need to review existing revenue and lease contracts to determine the recognition, measurement, presentation and disclosure impact on their financial statements.
The commercial impact of the new requirements may be wide reaching, and entities will need to consider the impact on factors such as key financial metrics, current remuneration structures, the level of distributable reserves and compliance with covenants.
For more details on the amendments, refer to Amendments to FRS 102 periodic review 2024 (PDF) on the FRCs website.
