The Financial Reporting Council (FRC) has recently published changes to Financial Reporting Standards (FRS) that will impact how members recognise revenue. The most important of these will see a requirement for operating leases to be reported on the balance sheet.
FRS 102 is the Financial Reporting Standard applicable in the UK and Republic of Ireland. FRS 105 is the Financial Reporting Standard applicable to the Microentities Regime (broadly, a simplified version of FRS 102 to reflect the simpler nature and smaller size of micro-entities).
There are two key changes published in the March 2024 review.
The first relates to revenue recognition. A five-step revenue recognition model has been introduced into both FRS 102 and FRS 105. It is based on the International Financial Reporting Standard (IFRS) 15 Revenue from Contracts with Customers.
The extent to which this will change an entity’s revenue recognition will depend on the nature of a business’ contracts with customers. Members should think about what exactly they are providing to customers (not just the vehicle but potentially also a warranty, buy-back option etc.) and discuss with their accountant how much revenue should be included in each accounting period.
The second change in FRS 102 is in relation to lease accounting. Leases will need to be included on an entity’s Balance Sheet. This is similar to the rules in IFRS 16 Leases.
For entities that are not reporting under IFRS, this change in FRS 102 is expected to impact the financial statements of most lessees with operating leases. Changing how operating leases are reported in annual accounts, from a profit and loss account to the balance sheet, is a significant change.
For entities that are already reporting under IFRS, there is no change - however, members should be aware of potential impacts for their customers if customers are required to report their leasing transactions on balance sheets for the first time.
The review can be downloaded from the FRC website: Changes to the Financial Reporting Standard. The above changes will apply from 1 January 2026.
Members looking to discuss these issues in more detail can email [email protected].
