All You Need to Know About the Major Changes to UK GAAP FRS 102 and Its Impacts
Home /Major Changes to UK GAAP FRS 102
Recent Blog
Arrange a FREE Consultation Call and Let’s Discuss your Goals!
The Financial Reporting Council (FRC) has made significant amendments to FRS 102; the Financial Reporting Standard which is applicable in the UK and Republic of Ireland. It aims to enhance the quality of UK financial reporting. Additionally, these changes mark a pivotal shift in the UK accounting standards, particularly for entities applying UK GAAP. Primarily, due to the fact that they bring it closer to International Financial Reporting Standards (IFRS). To know more about the changes, one needs an expert; experts from MMBA Accountants are well-versed about the IFRS changes and can guide you comprehensively about the impacts of the changes.
If you’re a financial professional, business owner, or simply trying to understand what is UK GAAP, below is all that you need to know about the latest accounting changes.
Table of Contents
Why Aligning UK GAAP to IFRS Matters
The latest amendments follow FRED 82. It is, however, part of the periodic review of UK GAAP. The revisions align UK accounting more closely with IFRS. The alignment is more pronounced in areas such as revenue recognition and lease accounting. These are the two areas that previously showed key differences between IFRS and UK GAAP.
In this second review, the FRC has updated multiple British accounting standards. This includes FRS 100, 101, 103, 104, and 105, and it brings UKGAAP nearer than ever to global benchmarks.
The Two Headline Changes in FRS 102
Following are the two headlines changes in FRS 102
1. Revenue Recognition
One of the most significant FRS 102 changes relates to revenue recognition. The new model is based on IFRS 15’s five-step model, which requires entities to:
- Identifying contracts with customers
- To identify performance obligations
- Determining the transaction price
- Allocate the price to performance obligations
- Lastly, recognising revenue when the entity transfers control
The model is simplified for UK application. However, it still requires more judgment and estimation than the previous UK GAAP. This is especially relevant for businesses with complex customer contracts, as very different revenue recognition outcomes could arise but it depends on the contractual terms.
2. Lease Accounting
Another headline revision is the overhaul of lease accounting under FRS 102. Now, it is modeled on IFRS 16. The changes mean most leases which were previously considered operating leases will now be recognised on the balance sheet. On those sheets, both an asset and a liability will be recorded.
This change will impact financial metrics like EBITDA, leverage ratios, and debt covenants. Entities will need to review all their lease arrangements, assess their present value, and identify which are in or out of scope. This one must keep these things in mind while preparing the accounts.
Other Significant Amendments
Other than these changes, the financial reporting standard includes a range of clarifications and updates across different sections:
Section 1A (Small Companies Regime)
This section provides clearer guidance on disclosures needed to present a true and fair view.
Section 2 (Concepts and Pervasive Principles)
The update in this section aligns with the IASB Conceptual Framework.
Section 2A (Fair Value Measurement)
This part replaces the previous appendix and it also reflects international norms on fair value.
Section 7 (Cash Flow Statement)
There are new disclosure requirements for supplier finance arrangements.
Section 26 (Share-Based Payments)
This part now includes guidance on equity instruments that are issued in a business combination.
Section 29 (Income Tax):
This segment adds detail for uncertain tax positions and deferred tax implications.
Section 34 (Specialised Activities)
The updates in this part cover agricultural activities, service concession arrangements, heritage assets, and public benefit entities.
Glossary
New terms added to support consistency.
These updates help provide better support for companies in preparing financial statements. It particularly applies to those companies that handle complex financial instruments, development costs, or operate under the micro entities regime.
What Hasn’t Changed?
Despite the drive to converge with IFRS, not all aspects have been brought into alignment. The FRC has, for now, decided not to adopt:
- The expected credit loss model of IFRS 9 for financial asset impairment
- The complex accounting treatment of insurance contracts under IFRS 17
These areas may be subject to future consultation, but for now, the FRC has opted to reduce disruption to preparers.
When Do These Changes Apply?
The updated accounting standards are different than UK tax year dates; they are effective for accounting periods that begins on or after 1 January 2026, with early application permitted. An important exception is the disclosure of supplier finance arrangements, which must be included for periods beginning on or after 1 January 2025.
If you’re currently preparing financial statements, this gives you some time.
What This Means for Your Business
In the UK, businesses need to prepare accounts now for the coming changes. These will affect your:
- Financial statements
- Accounting treatment
- Consolidated financial statements
- Financial ratios
- Tax positions
Changes in how you report intangible assets, finance leases, or borrowing costs can directly affect your financial position. For some UK companies, this might even mean losing out on small company exemptions unless legislation adjusts the thresholds for revenue and gross assets.
Thus, one must identify all contracts that impact revenue and leases, understand recognition and measurement principles, and must plan early stakeholder communication.
Also, read about the corporation tax to get more clarity on accounting and tax changes.
Key Action Points for Businesses
There are following key action points for businesses. They include:
Review Accounting Policies
Assess how well your existing policies align with the new financial reporting requirements.
Collect the Right Data
You’ll need more granular data on leases, revenue contracts, and debt instruments. This may require new systems or process upgrades.
Assess Contractual Clauses
Look into clauses tied to the annual financial statements, such as lending covenants or performance bonuses. Accounting changes could affect these metrics.
Communicate Changes
Start now with internal and external stakeholders. It includes investors, lenders, and employees. So, they’re not blindsided by changes in reported figures.
Plan Transition
Don’t just wait until 2026. Consider early adoption where beneficial, and model the impact of new rules on your individual financial statements and consolidated financial statements.
Conclusion
The updates to UK GAAP FRS 102 mark a major shift in UK accounting practices and reflect an effort to harmonise with international accounting standards. While many of these changes align with IFRS UK GAAP differences, they also retain some distinctions to cater to the UK context.
These changes are more than just technical; they’ll reshape how entities report their performance and financial health. Now is the time to prepare for transition.
Start by understanding the accounting principles behind these changes, and prepare your team to meet the extensive disclosure requirements. Because by the time the new accounting periods roll in, your business will need to be ready.
FAQs
What is the Financial Reporting Standard applicable in the UK?
The Financial Reporting Standard applicable is FRS 102. It governs how UK companies prepare consolidated financial statements and report on areas like investment property, revenue, and tax under UK GAAP.
Are there disclosure exemptions available for small businesses?
Yes, there are disclosure exemptions available for small businesses. Small company regulations and FRS 102 Section 1A offer disclosure exemptions for entities that qualify. It includes wholly owned subsidiaries and those that are under the micro-entities regime.
How does FRS 102 handle intangible assets acquired in a business combination?
Under FRS 102, intangible assets acquired must be identified and measured at fair value, particularly when preparing for international investment reporting or when applying adopted IFRS.
When do the changes to FRS 102 apply to my business?
The updates apply to accounting periods beginning on or after 1 January 2026, except new disclosures for supplier finance arrangements, which begin in 2025.
How are contractual cash flows and revenue recognised under FRS 102?
FRS 102 now generally recognises revenue on the basis of the entity transfers control. Also, it considers the contractual cash flows to assess the financial impact on income and assets. This, however, includes for any qualifying asset.
Facebook
Twitter
LinkedIn