FRS 102: What might change for revenue and leasing
The consultation is over, the responses are in, and now we wait to see how the Financial Reporting Council (FRC) will implement the changes it’s suggested for both revenue and leasing.
The latest of its five-yearly updates is set to incorporate two major International Financial Reporting Standards (IFRS) into the UK GAAP’s reporting benchmark FRS 102 – subject to what professionals and organisations have to say on the matter.
Chief among the changes is the proposed incorporation of IFRS 15 (on revenue) and IFRS 16 (on leases).
The advantages of aligning FRS 102 with IFRS
The proposed changes to revenue, leases and more have been detailed by the FRC in a Financial Reporting Exposure Draft (FRED 82).
By aligning FRS 102 with IFRS, it is thought you will be able to better compare the performance of any two companies globally, as they will speak a similar accounting language.
This is also useful from an internal standpoint, with global organisations being able to more easily compile reports on UK entities under FRS 102 while reporting for the wider group using IFRS.
The UK is not alone in aligning its domestic best practice with these international standards.
For instance, the USA has pledged to remove any difference between IFRS and US GAAP as part of what became known as the Norwalk Agreement.
What the proposed rules would look like in action
Let’s take a closer look at how the FRC’s suggested changes could affect how entities report on their finances in the UK and Ireland.
IFRS 15, revenue and FRS 102
By incorporating IFRS 15, the hope is FRS 102 will guide businesses, their accountants and bookkeepers to deliver a clear, step-by-step picture of their revenue.
Should all go ahead according to what has been set out in the FRED 82 document, then businesses, their accountants and bookkeepers will need to take the following five crucial steps when recognising revenue:
- Identify contracts with customers
- Identify the promises of each contract, setting out the specific products or assistance they agree to deliver
- Determine the price
- Allocate a price to each promise made
- Recognise revenue when or as the entity satisfies a promise
In bringing this IFRS guidance to FRS 102, the FRC says it has taken steps to make everything simple to understand, setting out requirements as they apply to the five stages.
It says there are other changes as well. For instance, businesses will have some flexibility when deciding how to recognise costs to obtain a contract – either as an asset or as an expense.
IFRS 16, leases and FRS 102
By incorporating IFRS 16, reports will remove ambiguity around leases, treating them as financial obligations – all while carefully valuing their long-term cost.
In the IFRS 16 rules, all significant leased assets go on the balance sheet.
In their suggested inclusion within FRS 102, the FRC has added a few optional simplifications.
For instance, businesses, bookkeepers and accountants have said discount rates have proven difficult to determine when working with IFRS 16. In IFRS 16, they are calculated using an Incremental Borrowing Rate. The FRC wants to make life easier in FRS 102 by allowing entities to use the simpler-to-determine Obtainable Borrowing Rate or (if that proves an obstacle) to resort to a publicly available gilt rate as a backstop. This will enable a more accurate picture of a lease as a long-term obligation.
Unsurprisingly, the FRC’s proposed changes take a similar approach to IFRS 16 regarding short-term and low-value leased asset exemptions. However, it has added new, easy-to-reference examples of what a low-value asset might be (such as an electronic tablet or a phone).
The FRC also says you will be able to determine the value of the asset at the start of the lease, as opposed to when it was new.
IFRS 13, fair value and FRS 102
Meanwhile, based on IFRS 13, the FRC has proposed a new, upgraded definition in FRS 102 that explains what constitutes a fair value measurement. Where required, financial assets will be valued by considering prices from the market or – if unavailable – using comparable assets. There is also guidance to help to determine a price when neither of these is available.
Non-financial assets are valued as if they generate economic benefits based on their “highest and best use” or as if they are sold to another entity that would use them in the same way.
However, one big difference from the international version is that the FRC is not seeking to adopt disclosure requirements as set out in IFRS 13 in FRS 102.
What happens now?
With comments collected on the FRED 82 document, the next step for the FRC will be to get new rules ready for accounting periods on or after 1 January 2025. This will be subject to what the response from businesses and financial experts has been.
We will have time to prepare, with the final standard being timetabled for publication later this year. Regardless of if this changes, the FRC wants entities to have the new standards to hand not less than 12 months prior to implementation.
Early adoption will be permitted if all elements are implemented at the same time.
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