The Financial Reporting Council (FRC) carries out a periodic review of all UK and Ireland accounting standards. FRED 82, refers to the ‘Financial Reporting Exposure Draft 82’, which proposes a number of changes to UK GAAP (Generally Accepted Accounting Principles).
We’ve asked Joanne Beamish, Client Services Director from our Manchester office, to explain more.
Over to Joanne
As hinted to above, FRED 82, which was issued by the FRC in December 2022, proposes several major changes as a result of the second periodic review of FRS 102 as well as other Financial Reporting Standards. The key changes are as follows:
- A new model of Revenue Recognition
- A new model of Lease accounting.
The proposed changes in more detail
Revenue
A five-step revenue recognition model that originates from IFRS 15, Revenue from contracts with customers, will be introduced and the five steps are as follows:
- Identify the contract(s) with a customer
- Identify the promises in the contract
- Determine the transaction price
- Allocate the transaction price to the promises in the contract
- Recognise revenue when (or as) the entity satisfies a promise.
Businesses will need to review the terms of their contracts with customers to determine the impact this change may have on their Revenue Recognition. Some business sectors will be affected more than others.
It is important to note that as well as a change to FRS102, this change will also affect FRS105, the micro entity regime.
Leases
Perhaps the biggest proposed change is the removal of the distinction between a finance lease and an operating lease for lessees.
Currently, an operating lease would be accounted for as payments are made, with the future liability shown only as a disclosure within the financial statements.
Under FRED 82, all leases (with limited exceptions) will need to be recognised on the balance sheet with a corresponding lease liability.
Available Exemptions:
There are two main exemptions. The first is for a short lease that is less than 12 months, and the second is for a low value asset. No monetary amount is given for a low value asset, but these would include items such as computers, printers and small pieces of office furniture. In these circumstances the lease is exempt from on balance sheet accounting.
What do you need to do?
The FRC originally planned for the changes to be effective for periods commencing 1 January 2025. It then announced a delay to the publication, and confirmed future changes to UK GAAP, so will now have an effective date not before 1 January 2026.
January 2026 may seem some time away, but it is important to consider what these changes will mean for your business. Do you have Revenue streams that may be significantly affected by the new standard? Do you understand all your lease arrangements and the terms of these agreements? How will these changes affect your financial statements, KPI’s and covenants? Reviewing these changes and their impact on the financial statements, will enable management to consider if any action needs to be taken before their implemented.
Here to help
Although the proposed changes aren’t set to take place before 1 January 2026, it’s always best to be prepared. If you’d like to discuss the changes further, please fill out the form below and one of our team will be in touch.
