Updates to FRS 102 & 105

The Financial Reporting Council (FRC) has recently published the 2024 Periodic Review. Reviews are typically undertaken every 3 years with an aim to improve financial reporting quality and support the access to capital for businesses.

The most notable changes from the current review are a new 5 step model for revenue recognition, applicable to both FRS 102 and 105 and new lease accounting requirements for FRS 102 only.

The 5-step revenue recognition model will apply to FRS 102 and FRS 105 and is a simplified version of that found in IFRS 15 Revenue from Contracts with Customers. Distinct goods or services promised to a customer will be recognised when they are transferred to the customer. The 5 steps are:

1. Identify contract.
2. Identify promises.
3. Allocate transaction price.
4. Match price to promise.
5. Recognise revenue as promises fulfilled.

A good example of this is a phone sold with a 2-year data plan.

1. The contract is for the phone and data purchase.
2. The promises are to provide a phone and then provide 2 years of data/calls.
3. The transaction price would be the monthly cost over the 2 years.
4. This price is appropriately allocated between the phone and data/calls.
5. The phone revenue would be recognised on day 1 when the customer receives it. The data/calls revenue would be recognised monthly over the 2-year contract.

This change may feel disproportionate to some FRS 105 entities.

The new lease accounting requirements only apply to FRS102, including small entities using section 1A, but not micro entities. The changes are aligning UK GAAP with IFRS 16 Leases by presenting leases on the Balance Sheet (unless short term or low value) to reflect the right of use of the asset over the lease term with a liability being recognised for the lease payment. The lease accounting under FRS 105 will not change and will continue to differentiate the off balance sheet accounting treatment of operating leases with the on balance sheet accounting for a finance lease.

There are a number of other changes which will have reduced accounting impact.

For supplier finance arrangements there are enhanced disclosure requirements to provide greater transparency in situations where another party pays an entity’s suppliers and the entity then reimburses them at a later point, effectively giving a period of credit. This particular change has an earlier implementation date than all other changes as set out below.

Other notable areas of change are:

• Enhanced disclosures to provide a true and fair view for FRS 102 section 1A.
• Alignment of the Concepts & Pervasive Principles to IASB's Conceptual Framework 2018.
• A new section on fair value measurement to reflect IFRS 13 Fair Value Measurement principles.
• Removal of the option to newly adopt IAS 39 Financial Instruments: Recognition and Measurement. Although entities currently applying IAS39 can continue to do so.

With the exception of the supplier finance arrangement disclosures, all changes will apply to accounting periods beginning on or after 1 January 2026 although early adoption is available if all changes are applied together.

The disclosures for supplier finance arrangements will be required a year earlier, for accounting periods commencing on or after 1 January 2025.

For further information, please contact Sarah Milsom or your usual Albert Goodman advisor.