The FRC published periodic changes to FRS 102 in March. So, what do these changes mean for you?
In a previous edition, we provided an overview of the proposals in FRED 82, which were issued at the end of 2022. In March this year the FRC made amendments to FRS 102. These include a new model of revenue recognition based on IFRS 15, a new model of lease accounting based on IFRS 16, and various other incremental improvements and clarifications. The revised standard is applicable from 1 January 2026.
Periodic amendments happen at least every five years, but these latest changes are significant. The FRC has considered proportionality in making them and allows for more flexibility and practical expedients compared to the equivalent IFRS 15 and IFRS 16 standards.
A key benefit of alignment with IFRS principles is that high quality financial information supports a range of broader effects, including improved access to capital. There is consistency with international accounting principles in key areas, which improves comparability and reduces ‘GAAP differences’. This means the consolidation process requires fewer topside adjustments for IFRS groups with subsidiaries reporting under UK GAAP. On the other hand, with further alignment while providing reduced disclosure frameworks, UK GAAP is a more attractive option for IFRS group subsidiaries.
What are the key changes?
Revenue recognition
In short, if you have revenue streams, you will be impacted.
The key change is the introduction of a single, comprehensive five-step model for revenue recognition. This will apply to all contracts with customers broadly aligned with IFRS 15, but with some simplifications. The five steps are:
- Identify the contracts with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognise revenue when each performance obligation is satisfied.
The FRC believes these changes will make it easier for entities to account for revenue transactions correctly and consistently, across all sizes of entity and all contract types. This means more reliable and useful information about the nature, amount and timing of revenue and cash flows arising from contracts with customers.
Leases
In short, if you have material operating leases you will be impacted.
The key changes to leases are:
- No longer a distinction between operating and finance leases
- More leases now recognised with an asset and liability on-balance sheet (similar to the now extant finance lease accounting)
- Recognition exemptions allow short-term leases and leases of low-value assets to remain off balance sheet
- Compared with IFRS 16 leases, a higher threshold for low-value assets means FRS 102 does not require recognition of as many leases on the balance sheet.
The FRC claims the changes provide several benefits. Financial information is improved through greater transparency over the indebtedness of the business. Information about assets and liabilities is more relevant, with a clearer picture of the economics of significant lease arrangements.
Other changes
Other amendments include:
- Section 2A Fair Value Measurement – updated to align definitions with latest international standards, and provide additional guidance
- Section 7 Statement of Cash Flows – new disclosure requirements for supplier finance arrangements (effective 1 January 2025)
- Section 26 Share-based Payment – additional guidance, making application of the principles easier in certain situations
- Section 29 Income Tax – introduction of guidance on accounting for uncertain tax positions
- Section 34 Specialised Activities – improvements and clarifications on existing requirements and how to make consequential changes to reflect other amendments.
How might you be impacted?
Revenue recognition
The commercial impact of these changes could be wide reaching for the insurance broking sector. So, it’s important to review all major customer contracts in detail to understand the potential impact. The new revenue standard has requirements for identifying distinct performance obligations.
Brokers should consider the various services they provide, make an allocation to performance obligations based on the relative stand-alone selling prices, and analyse potential patterns of revenue recognition. Entities might need to exercise judgement as to what constitutes a ‘distinct’ performance obligation and the period or pattern over which a customer receives the benefits of these distinct services.
The timing of revenue recognition for your business is also likely to be affected. Arrangements that feature multiple service obligations and contingent or variable consideration need particular attention. This is because the amended revenue standard requires entities to recognise revenue when a performance obligation is satisfied, even if the amount of revenue is uncertain.
This means that some entities might be able to recognise revenue earlier. But if the amount is highly susceptible to factors outside the entity’s influence, revenue recognition is constrained. An example of this might be profit commission that varies with a carrier’s claims experience. At the start of such contracts, the entity might need to constrain revenue recognised. Over time, as the uncertainty resolves and revenue becomes more assured, the entity can recognise more of it.
In many commercial lines of business, brokers perform ongoing post-placement services (for example, claims management, policy administration and customer care). But recognition of all the commissions upfront at initial placement would be inappropriate. The changes have made revenue recognition more prescriptive than under current UK GAAP, so more consistent recognition by different entities with similar contracts is likely to emerge over time. This is a good outcome for preparers and users of financial statements.
Leases
The new lease accounting model will see most material leases brought onto the balance sheet. This will impact your financial statements and key ratios, as your lease liabilities and right of use assets are reflected. It will also increase finance expenses and depreciation of the right of use assets and decrease the operating lease rentals in the income statement.
The IFRS 16 definition of what constitutes a lease might also mean that new contracts are identified as leases that were not previously accounted for under that heading. For example, in group scenarios, a decision on which entity has the right of use of an asset could mean new leases and sub-leases, in turn resulting in more complexity.
Broader impact and next steps
All these changes could affect your profit margins, reward schemes, and ability to meet financial obligations or pay dividends. So, it’s important to start planning for a successful transition now. While 2026 might seem a long way off, it’s still wise to put these amendments onto your finance team’s agenda, given the implementation costs and challenges brought by IFRS 15 and IFRS 16.
Why not start by drawing up an inventory of all revenue and lease contracts, including any side agreements and implied contracts? Consider setting up an implementation team that includes not just those in finance but also contract managers, legal, brokers and IT.
Start engaging with your contract counterparties to clarify any contract terms that are subject to interpretation and formalise any intercompany arrangements that could be impacted. Depending on the complexity of your contracts, consider seeking professional advice.
UK GAAP reporters can benefit from the lessons learned from IFRS 15 and IFRS 16 implementation. We highly recommend getting your finance team to look at some of the findings from the FRC’s thematic reviews of disclosures on the first year of application of IFRS 15 and IFRS 16.
Should you early adopt?
It depends on your circumstances. Early adoption might make sense for some.
The main effective date for the amendments is accounting periods beginning on or after 1 January 2026. Early application is allowed, so long as all amendments are applied at the same time.
This is a great opportunity for reporters to align UK GAAP accounting policies with IFRS groups, if applicable. Even if you’re not part of an IFRS group, doing so early has the benefit of adding credibility and comparability to your business as you become more aligned with IFRS reporters.
It could also make your business more valuable to a potential acquirer and/or lender and improve access to capital. In the broking sector, as we highlighted in a separate article on the accounting challenges faced by broking consolidators, alignment of accounting policies both during the due diligence process and subsequently is a key consideration.
These amendments make transition more attractive for entities reporting under full IFRS or FRS 101 within a group to FRS 102. That’s because there might be minimal changes to accounting policies, while significantly reducing disclosure requirements for eligible entities.
Whether or not early adoption is the best approach for you, our experience of helping others through the IFRS 15 and IFRS 16 transitions tells us you should tackle the potential transition issues early. This means they can be factored into your financial project plans and budgets, securing resources in advance and avoiding other potential future conflicts in your teams.
How can we help?
Our accounting advisory team can help you with impact assessment, implementation and transition to the amended FRS 102 standards. We have a team of experienced accounting specialists who have previously worked on IFRS 15 and IFRS 16 transition and understand the challenges these changes pose. Please don’t hesitate to contact Satya Beekarry to discuss further.
