Following the completion of the second periodic review of its Financial Reporting Standards (FRSs), the Financial Reporting Council (FRC) has published FRED 82 ‘Draft amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs – Periodic Review’. The exposure draft proposes the most significant changes so far to the recognition and measurement requirements of not only FRS 102 but also FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime. 

What is the periodic review?

The FRC maintains six FRSs, with FRS 102 serving as the primary standard and FRS 105 available for micro-entities.

The FRC undertakes a periodic review of its standards at least every five years to ensure that they remain up to date and continue to require high-quality and cost-effective financial reporting from entities within their scope. In doing so, they take into account stakeholder feedback, changes in international standards and other pertinent factors.

In line with its standard-setting principles, the FRC seeks IFRS-based solutions, so as part of its latest periodic review it has considered new or amended IFRS Accounting Standards, including the proposed changes to the IFRS for SMEs Accounting Standard, on which FRS 102 was originally based. In addition, in March 2021 the FRC issued a request for views from stakeholders. The feedback received has also informed the development of the proposals that are now open for consultation.

What is FRED 82?

FRED 82 sets out for formal public consultation the proposed amendments arising from the periodic review. The FRED is a vital element in the standard-setting process as it allows the FRC to obtain stakeholders’ views on its detailed proposals. FRED 82 and various supporting resources can be found at frc.org.uk/fred82. The staff draft of FRS 102, which shows the proposed changes to that standard in context, may be a particularly useful reference.

What are the key proposals in FRED 82 for FRS 102?

The proposed amendments to FRS 102 are extensive – only one section has no proposed changes. Given the very wide range of entities that apply FRS 102, the amendments of most interest and relevance will, of course, vary. However, two major proposals have certainly attracted the most attention – the introduction of a ‘five-step’ approach to revenue recognition based on IFRS 15 Revenue from Contracts with Customers and the introduction of an on-balance sheet lessee accounting model based on IFRS 16 Leases. 

The revenue recognition proposals would, like IFRS 15, require preparers to apply a single comprehensive model to their contracts with customers. Each entity will need to determine whether and how it will be affected, because the accounting fundamentally depends on the terms of those specific contracts. The rationale for these changes is that a consistent, comprehensive framework for revenue recognition across all entities should provide more reliable information to users of financial statements and improve comparability between entities.

The lease accounting proposals would, like IFRS 16, result in lessees recognising a lease liability and a right-of-use asset on-balance sheet for most leases. Based on stakeholder feedback, the FRC has proposed a number of simplifications to the more complex aspects of that standard. To promote efficiency in groups, these simplifications are generally optional. The rationale for these changes is that moving away from off-balance sheet operating leases should provide more relevant information to users of financial statements and, again, improve comparability between entities.

What other changes to FRS 102 are proposed?

Some of the other key changes include:

• A rewritten Section 2 Concepts and Pervasive Principles, based on the IASB’s latest Conceptual Framework. This will provide foundations for future standard-setting that are consistent with international principles, as well as aiding preparers who, occasionally, may need to develop accounting policies for unusual transactions.
• A new Section 2A Fair Value Measurement, formerly the Appendix to Section 2, rewritten to align with the fair value definition and guidance from IFRS 13 Fair Value Measurement. This should help to ensure clarity and consistency.
• New guidance on uncertain tax treatments derived from IFRIC 23 Uncertainty over Income Tax Treatments.
• Numerous incremental improvements and clarifications throughout the standard.

What about small entities applying Section 1A of FRS 102?

The recognition and measurement changes proposed to FRS 102 will affect small entities as well as larger entities.

In terms of disclosure, the requirement to present sufficient information to give a true and fair view is unchanged. But for UK small entities, the FRC is proposing to extend the list of minimum disclosures that must be provided in meeting that requirement. This should reduce the amount of judgement required by preparers in deciding which disclosures to provide.

See Small businesses beware – FRS 102 changes may require additional disclosures for more information on the proposed changes to Section 1A.

What’s changing in the other FRSs?

Amendments are proposed to every FRS, but the changes to FRS 100 Application of Financial Reporting Requirements, FRS 101 Reduced Disclosure Framework and FRS 104 Interim Financial Reporting are fairly limited. More substantive updates are proposed to FRS 103 Insurance Contracts and its implementation guidance, to align with the proposed changes to the revenue recognition model in FRS 102.

The proposed amendments to FRS 105 are more comprehensive. Generally speaking, they mirror the amendments to FRS 102, with proportionate simplifications. There is one key exception: at this stage, the FRC is not proposing an on-balance sheet lessee accounting model for FRS 105. 

What isn’t covered by the proposals?

Although FRED 82 contains proposals based on IFRS 15 and IFRS 16, it does not contain any proposals to align UK standards with the expected credit loss model of financial asset impairment from IFRS 9 Financial Instruments. This does not mean the FRC has decided never to bring in an expected credit loss model, but any such proposals will be subject to separate consultation at a later date.

FRED 82 also contains no specific proposals addressing climate-related matters. The FRC recognises the importance of ESG topics, including climate change, but believe that, as set out in its Factsheet 8: Climate-related matters, the extant requirements of FRS 102 provide a sufficient basis for preparers to consider significant climate-related matters. Therefore, preparers shouldn’t wait for any further action from the FRC in order to address climate-related matters in their financial statements. The FRC will continue to monitor external developments in case a need for standard-setting emerges.

What are the next steps and when will all this become effective?

After the consultation closes, the FRC will consider the responses received and move towards publishing its final amendments. 

The proposed effective date for the amendments is accounting periods beginning on or after 1 January 2025. The FRC intends to allow an implementation period of at least 12 months between the publication of the final amendments and their effective date. This means that the FRC hope to issue the final amendments before the end of 2023 – but the timeline will depend, in part, on the responses received to FRED 82.

After the final amendments are published, the FRC will publish updated editions of each FRS, reflecting the amendments made.

How can I respond to the proposals?

The FRC is committed to developing standards based on evidence from consultation with users, preparers and others. Comments on FRED 82 are requested by 30 April 2023. The FRC invites comments in writing on all aspects of the draft amendments and hopes to hear from a wide range of stakeholders. In the ‘invitation to comment’ within the FRED, the FRC has set out questions in 10 areas where comments are particularly sought. However, respondents need not answer all 10 questions and need not limit their comments to these areas. 

The FRC prefers comments to be sent by email to ukfrsperiodicreview@frc.org.uk, although responses can also be sent by post. All responses will be published on the FRC website.

Stephen Maloney, Senior Project Director, Accounts and Reporting Policy, Financial Reporting Council