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FRED 82: ICAEW’s initial views

Author: ICAEW Insights

Published: 04 Apr 2023

ICAEW is broadly supportive of the Financial Reporting Council’s (FRC) draft amendments to UK GAAP but highlights areas that need further consideration, including the approach to lease accounting requirements and the proposed effective date.

The FRC’s draft amendments to UK GAAP, published in FRED 82 Draft amendments to FRS 102 The Financial Reporting Standards applicable in the UK and Republic of Ireland and Other FRSs, propose significant changes to the approach to revenue recognition and accounting for leases as well as other amendments.

The FRC needs to ensure that the suite of UK GAAP standards is up to date and reflects the latest developments in international financial reporting standards (IFRS) as appropriate for their users. In ICAEW’s view, the proposed amendments generally meet that need effectively.

Having reviewed the proposals in depth, ICAEW’s preliminary conclusion is that there are no fundamental concerns with FRED 82. That said, there are some areas that need further consideration.

Lease accounting – it’s good but it's not (quite) right

ICAEW has long supported on-balance sheet lease accounting – a lease commitment clearly fulfils the definition of a liability. IFRS 16 Leases was always going to be an obvious place to start when considering how to bring the same accounting concept into FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. However, what is proposed in FRED 82 is almost the entire IFRS 16 standard. Isn’t that a bit much for FRS 102? While some simplifications have been proposed, we question whether the result is somewhat disproportionate for a standard that aims to be simpler to understand and apply when compared with the international standards.

Simplifications introduced to lease accounting within the proposed amendments include the introduction of two additional types of interest rate that are not available to IFRS reporters for the purpose of discounting the lease liability. FRED 82 proposes that entities may be able to use the lessee’s obtainable borrowing rate for this purpose, or in exceptional cases, a gilt rate may be used.

ICAEW is particularly supportive of the proposal to allow entities to use an obtainable borrowing rate to discount their lease liabilities, as it will be a rate that is far easier for entities to determine compared to the incremental borrowing rate, despite representing a broadly similar notion.

Is IFRS 15 too much for micro-entities?

ICAEW agrees with the proposals to align Section 23 of FRS 102 with IFRS 15 Revenue from Contracts with Customers and its five-step revenue recognition model. The existing guidance in the UK standard is out of date and arguably not adequate for accounting for anything beyond the simplest of revenue arrangements. ICAEW believes the approach taken by the FRC is the right one and the proposed simplifications are appropriate for FRS 102 reporters.

That said, there are certain areas of the proposals where the FRC has attempted to simplify the language from that used in IFRS 15 – referring to ‘promises’ instead of ‘performance obligations’ for example. However, doing so may result in users interpreting the wording in an inconsistent way and cause greater confusion. In these circumstances, ICAEW believes it might be better to maintain the existing language to avoid unintended consequences.

Also, unlike the lease proposals, the FRC has decided to introduce a further simplified version of IFRS 15 into FRS 105. In ICAEW’s view, this seems to be disproportionate for micro-entities and an inconsistent approach given the decision not to bring on-balance sheet lease accounting into FRS 105 at this juncture.

Deferring alignment with IFRS 9’s ECL model is the right decision

ICAEW agrees with the FRC’s decision to defer its conclusion as to whether to align FRS 102 with the expected credit loss (ECL) model of IFRS 9 Financial Instruments to a future date. Transitioning to an ECL model was a complex change for many IFRS reporters and, given the other significant proposed amendments within FRED 82, this would be a step too far at this stage.

Effective date requires careful consideration

The proposed effective date for the amendments set out in FRED 82 is accounting periods beginning on or after 1 January 2025. Early adoption will be permitted provided all amendments are applied at the same time.

ICAEW acknowledges that, no matter what is decided regarding the effective date of the amendments, most FRS 102 reporters are not likely to consider the impact of the changes on their accounting and reporting processes until they start to prepare their first financial statements under the revised standard.

That said, the proposed changes in this exposure draft are significant and entities are likely to want an appropriate period of time to prepare adequately. In its draft response, ICAEW has set out a number of factors for the FRC to consider before finalising the effective date.

Read a longer version of this article in By All Accounts.

Do you have something to say?

Read the full draft of ICAEW’s response to FRED 82.

If you’d like to contribute any views or comments on the FRC’s proposals, or ICAEW’s initial views, please get in touch by emailing frf@icaew.com.


Periodic review of UK GAAP

View the Corporate Reporting Faculty’s hub page on the Periodic review of UK GAAP to keep abreast of the latest developments.


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