Catch up on our webinar on proposed changes to UK GAAP
Watch our recent webinar, in which Jenny Carter highlights the key proposed changes to UK Generally Accepted Accounting Practice (GAAP).
On 23 February we held a webinar where Jenny Carter, the Financial Reporting Council’s Director of Accounting and Reporting Policy, set out the FRC’s proposed key changes to UK GAAP, included in the Financial Reporting Exposure Draft (FRED) 82.
Key proposed changes
The FRC’s proposed changes arise as a result of its second periodic review of UK financial reporting standards and are intended to improve the quality of UK financial reporting.
The proposals impact Financial Reporting Standard (FRS) 102, FRS 105, and to some extent FRS 103.
The key proposed changes to FRS 102, the main UK financial reporting standard, originate from changes made to International Financial Reporting Standards (IFRS Accounting Standards) and include:
- A simplified version of the five step revenue recognition model contained in IFRS 15 ‘Revenue from contracts with customers’.
- A simplified version of the ‘right of use’ asset and lease liability model in IFRS 16 ‘Leases’.
- A revised section 2 which reflects the International Accounting Standards Board (IASB)’s 'Cconceptual framework for financial reporting' that was modified in 2018. This provides a stronger foundation for entities that may have to use this as the basis for determining the accounting treatment of unusual types of transactions not covered by the main provisions in FRS 102.
- A new section 2A on fair value measurement to replace the appendix to section 2 of the existing standard which reflects the principles of IFRS 13 ‘Fair value measurement’.
The encouraged disclosures currently included in Section 1A of FRS 102 are also being made mandatory for UK entities.
Some additional commentary on the proposals is set out below.
Lease accounting proposals
At the start date of a lease, an entity is required to measure the lease liability at the present value of the lease payments not paid at that date, discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, an entity is required to use the lessee’s incremental borrowing rate or obtainable borrowing rate.
The FRC is proposing the concept of an ‘obtainable borrowing rate’ to simplify the challenges that some financial statement preparers faced when trying to comply with the concept of the incremental borrowing rate as per IFRS 16.
As a further exception, where the lessee’s incremental borrowing rate or obtainable borrowing rate, as applicable, cannot be readily determined, the lessee will be able to use a publicly available gilt rate as a proxy. Additionally, fewer lease modifications will require a new discount rate to be determined.
The FRC is also proposing that a modified retrospective approach be adopted by which entities do not need to restate comparatives, as may be the case when an entity is a group entity.
Proposed changes impacting entities when applying Section 1A to FRS 102
Section 1A of FRS 102 now requires certain additional disclosures that are currently just ‘encouraged’, with all disclosure requirements for small UK entities now contained in Appendix C of Section 1A.
Encouraged disclosures which are near certain to be mandated include a requirement to disclose that Section 1A has been complied with, and a requirement to disclose that the financial statements have been prepared on a going concern basis when this is the case.
These changes are possible following the UK’s exit from the European Union. For small Republic of Ireland entities, the disclosures in a revised Appendix E of Section 1A would remain ‘encouraged’.
Accounting for expected credit losses
The proposed revised FRS 102 does not take account of any of the expected credit loss model that was introduced by IFRS 9 ‘Financial Instruments’. The FRC is monitoring the IASB’s current consultation on the IFRS for SMEs Accounting Standard. The IASB is proposing limited use of the IFRS 9 expected credit loss model within the IFRS for SMEs Accounting Standard, and the FRC will consider the responses received to the IASB’s consultation.
As the FRC has not consulted on the inclusion of an expected credit loss model, any future changes to FRS 102 would be subject to consultation, meaning that no related changes will be made to the next edition.
FRS 105: micro entities
In relation to FRS 105, the proposed revisions take account of the five step revenue recognition model, but not the right of use asset requirements, meaning that operating leases will remain off balance sheet. Although the FRC has not ruled out moving to an on balance sheet approach to operating lease accounting (beyond this next edition), this would also be subject to future consultation.
Comments on FRED 82
The closing date for responses to the FRED 82 consultation is 30 April 2023. The FRC will then redeliberate and finalise its revisions. The proposed effective date is accounting periods commencing on or after 1 January 2025. This is subject to the FRC finalising its standards in time for entities to have twelve months to prepare.
If you would like to contribute to the ICAS response to FRED 82 please contact the Policy team at connect@icas.com.