FRC's key changes to FRS 102
Published: 28 May 2024
7 minute read
In our latest In Conversation podcast, Kate O’Neill, the FRC’s Director of Stakeholder Engagement and Corporate Affairs, speaks to Jenny Carter, the FRC’s Director of Accounting and Reporting Policy on the key changes to FRS 102 and tips for those applying the revised standard.
You can also listen on Apple Podcasts and Spotify.
Transcript
0:09
Good morning and welcome to another FRC In Conversation. My name is Kate O'Neill. I'm the Director of Stakeholder Engagement and Corporate Affairs here at the FRC. And this morning I'm joined by Jenny Carter, the FRC's Director of Accounting and Reporting Policy team. Welcome, Jenny. Thanks, Kate, and hello everybody. Jenny, this must feel like a momentous time for you because we recently published amendments to FRS 102 which included a three-year period of extensive stakeholder engagement.
0:40
I think anything that requires the three-year period of extensive stakeholder engagement needs some explaining about why FRS 102 is so important as the standard for our stakeholders. Yes. So we're very pleased to have completed the project and of course it is important that we do these stakeholder engagement activities and get people's views, but ever as 102, It's our main UK GAAP standard. So it applies to those entities that are not applying IFRS. Obviously, listed groups need to apply IFRS and others may choose to, but FRS 102 is the main standard applicable
1:18
to other entities. So it includes very large private companies and also small private companies, but also other types of entity like charities, universities, housing associations, credit unions, all sorts of types of entity apply FRS 102 - Jenny, just to jump in there. I mean, that's a really big range of companies with very different operating models, different perspectives, different strategies. Why do people choose to use FRS 102 even if they don't need to? So I think for those that would have the option to apply IFRS, FRS 102 should be a more proportionate
1:58
standard. So we do try to keep it fairly succinct. I know it does run to several 100 pages, but that's quite a lot less than the full IFRS book. So it is relatively succinct and we try and keep the disclosure requirements proportionate. So hopefully the accounting reporting is proportionate to the entities that are applying it and the needs of the users of those financial statements. So what are the key changes to the standard and what is the rationale behind bringing in these changes? So two of the most significant changes are that we've aligned with some of the more recent major
2:36
standards from the IASB. So with IFRS 15 revenue from contracts with customers and I for a 16 leases as well as a variety of other changes. Inevitably when we do these reviews every five years, there's going to be quite a few things to consider. But we do have a general approach of alignment with IFRS standards. Now that doesn't mean taking every word of those IFRS standards. What we try and do is to do that in a proportionate way so that the broad principles are included in the standard that much of the time you might get a similar outcome in reporting terms, but that is simpler
3:15
to apply and the disclosures are less. And we think some of the benefits of this include that sort of all entities in the UK are using broadly the same principles. So any set of financial statements that somebody might pick up as a user are using, you know, broadly the same principles and should have a similar understanding of what's being presented. And that makes things easier as well in terms of things like education and training for accountants and other people using financial statements. But also we're keeping up to date with the latest financial reporting thinking and the transactions are then
3:54
being presented faithfully. So in the case of leasing, it does mean more leases will come on balance sheet than previously, but that is reflecting the economics of those transactions and showing the borrowings and the right to use the assets that's involved. And on the revenue side, there's a clear five step process for accounting for revenue, which takes people through a process where the previous requirements were not so clear. And so that should give people better guidance to deal with some types of transaction than they had in the past. And it means that revenue, which is obviously a key figure in a set of
4:32
accounts, as I was saying before, is prepared on a sort of consistent basis regardless of the accounting framework that's being applied. Well, Jenny, I guess you've mentioned airfares. Why is it important that FRS 102 aligns with IFRS? And who does that really benefit? Well, it should benefit anybody who's using those financial statements because they're getting information that reflects the current thinking about the substance of those transactions as it should help with things like education and training, as all accountants are trained in IFRS. And so actually having UK GAAP
5:11
on a different basis or significantly different basis actually sort of creates costs for people to understand those differences. So alignment with IFRS is helpful there. And the information which should be getting good quality reporting out of this, which is useful to users of those financial statements, which could include those involved in the business, but others that might want to invest in a business. And so good quality reporting should be positive in terms of access to capital for those companies. Yeah. It's a really interesting point Jenny, because I think people often think these standards could be burdensome, but actually they underpin a company's ability to give people
5:50
faith and credence in their accounts, but also the way in which they report them, which must, as you say, lead to a better opportunity to access capital in whatever form it's access, whether it's debt, equity, borrowing, public markets.
6:06
Yes, absolutely. Maybe fewer users of private company accounts than there are for listed groups, but there are still users and it is still around decision useful information for those companies and for those that are, as you say, sort of investing, whether that's debt or equity. Yeah, we're trying to get high quality reporting, but keep it proportionate. So as I've said, there may be less disclosure. Some of the requirements might be less complex. One of the things that we have done for example on the leasing is be more flexible around the threshold for low value leases which don't need to be recognised
6:44
on balance sheet. And so these things make the requirements more proportionate but still lead to what we believe will be high quality in the context. And I guess for a smaller company, you're saying then it's how you apply these standards to your operating model, the type of business you're in, because not all companies will be reporting in the same way about the same things, depending on what they do, but also their complexity.
7:10
Yes, exactly. So there will be things in the standards that don't apply to all entities because they don't have the transactions in question. And what we try to do is make sure that we've thought about how we can simplify some of the more complex parts of accounting standards. And sometimes it's how they've been presented as well so that we can show core requirements. And then some of the things that occur less frequently are presented slightly differently so people can focus on the core requirements. So we do a variety of different things to make the standards proportionate and hopefully that helps entities in applying them.
7:48
Absolutely. And also given over IFRS, do you think that the changes to 102 will help those companies who operate internationally get more consistency about the way they're reporting on these issues?
8:02
Yes. We've had this premise for a while now that UK standards are eye for US based. And that should be helpful for entities if they are seeking international investment, but they're not required to apply IFRS. They could choose to apply IFRS, but if they're IRS based, then that should still give people broadly comparable information if they've got users that are used to that from another jurisdiction.
8:30
Absolutely. So it's all about now thinking about these, applying them. Is there a transition period? And what advice would you be giving to someone looking to apply these changes so they're properly prepared for when they come into force?
8:46
Yes. So the main effective date for these changes is the 1st of January 2026. And of course that's a periods beginning the 1st of January 2026. So the reporting won't be until a year later. So that does sound like it's a little way away. Some of the respondents did ask for more time to prepare and we've given people more time than we'd initially indicated, so hopefully that's helpful to people. But people should start thinking about it now, identifying transactions or contracts that they might need to look at, working out how the changes might affect them and preparing because you know, time will pass and it's good to be prepared. So start
9:24
thinking about it now, start reading the standard. We will be doing some other things to help people, including updating some of our fact sheets which people might find helpful. So we'll be doing that later on this year. But it's just sort of reading the new requirements and thinking about transactions, how it might affect them, and getting things ready in advance. So we've got a webinar coming up and I suppose that will be very well attended by people who have had an opportunity to digest the 200 odd pages. What are you expecting to get out of that webinar? Is it really detailed questions or are you interested in how people are thinking about it and how they will
10:03
implement these changes or a bit of both? Probably a bit of both. We will be running through some of the key changes in more detail than we have done today. And as I say, we're going to be looking at our fact sheets and of course, the sorts of comments and questions people have on that webinar would be a source of ideas of where people are looking for additional information from us. We do try to keep the amount of additional guidance to a minimum, but that certainly will help us in identifying areas where people are looking for a bit more help that we could perhaps put into those fact sheets. Sure. Interesting. Closing. I mean these are not very sensible changes
10:41
to standards, really clearing up some areas around leases in particular. So would you be surprised to hear from anybody saying there's a burdensome or difficult or do you think that they will be largely welcomed as clarity and really getting people moving towards implementation sooner rather than later?
11:03
Yeah, I think from what we've seen so far, they are largely welcomed and we think they will improve reporting. Of course, we only do these periodic reviews every five years or so and Parliament about that soon
11:19
indeed. And part of the idea about that is that people get a number of changes in one go, but then that becomes a stable platform until the next periodic review. So we're not seeing changes of this magnitude on an annual basis and people have time to put them in place that beds in before the next round. Of course, sometimes we do need to make minor changes in between, but those are often narrow scope and often driven by urgent issues. And it's helpful in fact to people to respond to those. So, yes, so we're hoping that the reaction and let's say what we've heard so far has been generally positive and that it will
11:56
improved reporting. Terrific. Well, I guess we've got all the details for the webinar on our website. We look forward to as many people as possible coming along that day and firing your questions or feedback. So please do sign up. As I say, you'll find the details for how to do that on the FRC website and look forward to seeing all of you then.