Changes to FRS 102: What businesses need to know

In March 2024, the Financial Reporting Council (FRC) issued amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs – Periodic Review 2024. The aim of these changes is to bring FRS 102 accounting in line with the International Financial Reporting Standards (IFRS).

The effective date for these amendments is periods beginning on or after 1 January 2026. However, companies can choose to early adopt these changes and apply them for periods beginning on or after 1 January 2025. If early adoption is applied, it must be applied to all the accounting standard changes, there is no option to be selective.

For the first period in which the change in accounting standards applies, the prior period will need to be restated to be comparable. If, for example, your accounting year end is 31 December 2026, which will be the first year you are applying the below changes, you will also need to restate 31 December 2025 to be comparable. Therefore, it is recommended carrying out the below assessment from 1 January 2025, so that you can assess what the impact will be in the 2026 accounts for 2025 and 2026.

What are the changes to FRS 102?

The main key changes under the revised FRS 102 are:

• Revenue recognition, to bring this in line with the five step model of IFRS 15;
• Accounting for leases as a lessee on the balance sheet, to align with IFRS 16;
• Supplier Finance Arrangements and new disclosure requirements;
• Fair Value Measurement, to align with IFRS 13; and
• Uncertain Tax Positions, to align with IFRIC 23.

The key changes to lease accounting for those accounting under UK GAAP

What does this mean for businesses?

Under the previous FRS 102 accounting standards, there were finance leases (balance sheet) and operating leases (off-balance sheet/disclosure only). Going forward, the majority of leases will be recognised as finance leases. Here, we will summarise how operating leases will be converted into finance leases for their accounting treatment.

Accounting for finance leases

When a lease begins (or at the date of application of the change in FRS 102), a lessee will need to recognise a lease liability which is based on the present value of future lease payments. The other side of this transaction will be accounted for as a right of use asset (in line with IFRS 16).

The lease liability will need to be calculated based on the present value of the future lease payments. Therefore, a discount rate will need to be applied over the period of the financial obligation. If an implicit rate is known, then use this. If it is not, then use an incremental borrowing rate, or an obtainable market rate of borrowing.

Each year, the asset will be depreciated in line with the period of the lease. The depreciation will reduce the asset, and increase the depreciation charge in the profit and loss (p&l), which was previously recorded as the rent expense recognised in the p&l. The finance lease liability will then be unwound based on the payments made, and the unwinding of the discounted cashflow of the liability will be recorded as the finance cost in the p&l. This in turn will reduce the amount of the loan.

Are there any exceptions from these changes?

In line with IFRS 16, there are types of leases which are exempt from this treatment:

• Short-term leases – leases with 12 months or less as at the date of commencement, and no option to purchase the asset at the end of the lease. If the short-term exemption has been taken for a lease, and either there is a lease modification or a change to the lease term (for example, a purchase option is exercised that was not considered reasonably certain), such a change shall be accounted for as if it is a new lease.
• Low-value asset leases – what is considered low-value will range from company to company. For example, one laptop may be considered low-value, but 1,000 laptops may not.

For these exceptions, they can continue to be accounted for in line with the previous FRS 102 accounting standards as operating leases.

How these transactions should be disclosed in the financial statements

Right-of-use assets should be:

• Presented separately to other assets on the face of the statement of financial position, or
• Included in PPE and disclosed separately in the notes to the accounts, or
• Included in intangible assets if relevant and disclosed separately in the notes to the accounts, or
• For investment properties they should be within the investment property line on the statement of financial position.
• The expense side of this transaction (depreciation) should be included in the income statement. Depending on the use of the asset, this may be ‘Cost of sales’ or ‘Admin expenses’.

Lease liabilities should be:

• Presented separately on the face of the statement of financial position, or
• Included with other liabilities, however there should be a note to separately disclose the lease liability balance held within other liabilities.
• The expense side of this transaction (interest expense) should be included in the income statement under ‘Interest payable and similar expenses’.

What to do if the lease price includes multiple costs

If the lease of the asset has multiple elements to the cost (such as the use of the lease, but also the maintenance and service charges for it), then the entity must determine the relative stand-alone price of each part of the agreement, between the parts that relate to the lease, and the non-lease components. If this is clearly separated in the pricing arrangement, then this will be straight forward to calculate. However, if it is all combined in one price, the entity must assess the price that the supplier would charge an entity for each separate component. The entity will then account for the lease component under Section 20, and non-lease components under the relevant section of FRS 102.

Technical areas to consider

This article is to provide a broad summary of the impact of the changes in FRS 102. However, this assessment should be carried out specifically on your company/group, and therefore there may be additional factors to consider. Such as:

• What is an appropriate discount rate to use?
• Have there been any modifications to the lease since initial recognition?
• Are there any direct costs relating to the leases that should be considered? Such as legal fees to obtain the lease.
• Are there any lease incentives (such as rent free periods) to factor in? Lease incentives receivable at the commencement date reduce the value of the lease liability, whereas lease incentives received at or before the commencement date reduce the value of the right-of-use asset.
• Are there any restoration or dilapidation costs expected?
• Are there other costs included in the lease of the asset? Such as maintenance or servicing that makes up the price paid?
• Is the transaction a sale and leaseback transaction.

Key terms

• Commencement date – The date when the lessor makes the underlying asset available for use by a lessee.
• Lessee – The entity which obtains the right to use the asset and provides the consideration.
• Lessor – The entity which provides the right to use an asset and receives the consideration.
• Right-of-use asset – This refers to the underlying asset in the lease. It is considered a ‘right-of-use’ asset as it is not owned by the lessee but they have the right to use it over the lease term.
• Lease term – The period over which the lessee has the right to use the underlying asset. The term of a lease is determined as the non-cancellable period of a lease, plus: Any extensions which are reasonably certain to be exercised, When it is fairly likely that any periods with an option to terminate the lease are not to be exercised.
• Discount rate – An interest rate used to calculate the present value of future cash flows, accounting for the time value of money and the risk of an investment.
• Identified asset – This refers to a specific asset. If the asset can easily be replaced by the lessor for another asset, then this does not constitute an identified asset. For example if the company you lease your laptops from will swap out the laptop for a new one if a different one is required, this would not be considered a specific asset.

For more information around the upcoming changes, contact our team today.