The amendments to FRS 102 are effective for accounting periods beginning on or after 1 January 2026, except for supplier finance disclosures which are required from 1 January 2025. Early adoption is permitted although we've seen limited cases of this, most often when the entity is subject to a transaction. Even if you don't plan to implement them in advance of the deadline, awareness of the key changes is important to ensure a smooth process when the time comes.
The most important updates relate to revenue recognition and lease accounting; however, there have also been changes to section 2: Concepts and Pervasive Principles, and a new section on fair value measurement. There are also various improvements, clarifications, and consequential changes across several other sections.
The revised Section 23 Revenue sets out a five-step model aligned to IFRS 15 Revenue from contracts with customer, and requires five key actions:
Depending on the business and contractual arrangements in place, this could result in significant changes to the pattern of revenue recognition. This will most likely impact businesses that have long-term contracts or provide services, such as telecoms providers, professional services and construction companies – rather than ship and bill businesses.
Finance teams will need to analyse their customer contracts to identify whether amended terms need to be issued, particularly if contractual relationships don't demonstrate:
Contract terms will direct the accounting conclusion on whether revenue can be recognised over time, or at a point in time. This may lead to significant changes to the way revenue was previously recognised.
The revised Section 20 Leases requires almost all leases to be brought on the balance sheet if you're a lessee. Accounting for lessors remains largely unchanged. The new requirements mean recognising a right-of-use (ROU) asset in respect of the lease contract, and a corresponding lease liability, being the present value of remaining payments under the lease.
The ROU asset will comprise:
The lease liability will need to be discounted using the interest rate implicit in the lease. If that rate can't be readily determined, the company’s incremental or obtainable borrowing rate should be used.
Any difference between the ROU asset value and lease liability is shown as an adjustment to opening reserves on the transition date (for example, 1 January 2026).
The ROU asset needs to be depreciated over the remaining term of the lease, and the lease liability unwound as cash payments are made. The result is that the operating lease expense is replaced by a depreciation charge on the ROU asset, and a finance charge on the lease liability.
There are certain exemptions. If you have leases with fewer than 12 months remaining at the transition date or leases for assets of low value, these can continue to be accounted for as operating leases, taking the rent expense to profit or loss over the course of the lease term.
Businesses won't be required to go back and reconsider whether an arrangement constituted a lease prior to the transition date. Furthermore, no prior year restatement will be required – the impact of the transition will be posted as an adjustment to opening reserves on the transition date.
Here's a visual representation of what the new lease rules could mean for your primary financial statements:
Any business with operating leases, as a lessee, will see substantial changes to their EBITDA figures, and balance sheet presentation because of the amendments. Entities with lease portfolios of retail spaces, vehicle fleets, or other such properties will be significantly impacted. Operating profit will likely increase, as part of the cost of the lease will now sit in finance costs, and both gross assets and liabilities will increase as a result of the on-balance sheet lease commitments.
While revenue and lease accounting are the most significant changes, there are other amendments that you should be aware of. For example:
You can find tabular summaries of the most important changes and section-by-section guidance here [ 4944 kb ].
On 11 September 2024, we hosted a webinar explaining the impact of the changes on business processes and financial statements. You can now catch up on it on demand.
The key is to ensure that your business has the information collated, and systems set up, to capture all relevant information. As it relates to revenue, collate and analyse your customer contracts, and for leases, your lease data – ensuring this is complete and accurate. Finance teams need to determine the appropriate borrowing rates attached to each lease, and the lease term, taking into account options to extend, or terminate, if these are reasonably certain to be exercised.
For more insight and guidance, get in touch with Pinkesh Patel.
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