FRC publishes suite of new and revised FRS 102 Factsheets

The Financial Reporting Council has published new and updated FRS 102 Factsheets to accompany the revised edition of FRS 102, effective for reporting periods beginning on or after 1 January 2026.

These should assist accounts preparers and auditors by highlighting certain FRS 102 requirements, but they don’t form part of FRS 102. The FRC emphasises in each Factsheet that it shouldn’t be relied upon as a definitive statement on the application of the standard nor is it a substitute for reading the detailed requirements of FRS 102.

Nine Factsheets have been published in total, including three brand new Factsheets: 9, 10 and 11.

Factsheets 1 and 2 relating to the previous revision of FRS 102 have been withdrawn.

The full suite of Factsheets and a summary of their content, focusing on revisions relating to the latest Periodic review, are set out below.

Timing of Periodic review amendments and changes to the company size criteria

With the size criteria for UK companies and LLPs set to rise for financial years (reporting periods) beginning on or after 6 April 2025 and the Periodic review amendments applying to periods beginning on or after 1 January 2026, companies and LLPs will wish to consider if and when they may be eligible to take advantage of accounts concessions available as a result of falling into a different size category and which editions of FRS 102 or FRS 105 may apply at that point.

For example, a company which becomes small would be eligible to apply FRS 102, Section 1A rather than full FRS 102 or a small company which meets the criteria for preparing micro-entity accounts may wish to apply FRS 105 rather than FRS 102, Section 1A.

Therefore, the timing of both of these significant developments may mean that for some companies and LLPs, early adoption of one of the revised standards may be a consideration. Of course, full consideration needs to be given to the implications of any such change.

Factsheet 3 – Statement of cash flows

Section 20 of FRS 102 Leases was revised to eliminate the distinction between operating leases and finance leases for lessees, leading to the recognition of more leases on the balance sheet.

Cash flows from operating leases would previously have been included within operating activities, whereas cash flows from finance leases would have related to:

·       The payment of interest (classified either as a financing cash flow or an operating cash flow).

·       The repayment of capital (classified as a financing cash flow).

Impact of Periodic review changes on accounting for leases

Under the new requirements of Section 20, cash flows from leases where a recognition exemption has been taken are included within operating activities. However, cash flows from leases recognised on the balance sheet relate to payment of interest (classified either as a financing cash flow or an operating cash flow) and repayment of capital (classified as a financing cash flow).

While the changes to Section 20 didn’t require significant consequential changes to Section 7 of FRS 102 Statement of cash flows, the result is that cash flows for the payment of interest and the repayment of capital will be more prevalent in the statement of cash flows.

Supporting notes

Section 7 requires the preparation of three main supporting notes:

·       A breakdown of the components that make up cash and cash equivalents.

·       An analysis of changes in net debt.

·       Disclosures about supplier finance arrangements.

It is important to note that disclosures about supplier finance arrangements are new disclosures which are required for reporting periods beginning on or after 1 January 2025. No comparative disclosures are required in the first year such disclosures are made.

Exemptions from presenting a statement of cash flows

Factsheet 3 highlights that certain entities applying FRS 102 can take an exemption from presenting a statement of cash flows and related notes:

·       An entity that qualifies as small, with reference to the size criteria in the Companies Act 2006, can take an exemption unless an applicable Statement of Recommended Practice (SORP), law or other relevant regulation requires it to present a statement of cash flows.

For example, the current edition of the Charities SORP (October 2019), requires charities with a gross income of more than £500,000 to prepare a statement of cash flows. The Charities SORP is being updated, and a consultation draft is expected in March 2025, so charities should familiarise themselves with any planned changes to this exemption as may be proposed.

Also, due to the increase in the size criteria in the Companies Act 2006, for financial years commencing on or after 6 April 2025, some companies may find that they qualify for the statement of cash flows exemption for the first time.

·       A qualifying entity, i.e. an entity included in publicly available consolidated financial statements which are intended to give a true and fair view, as set out in the Glossary to FRS 102, is permitted to take an exemption, provided that it complies with certain conditions set out in Section 1 of FRS 102 Scope (paragraph 1.11).

·       Mutual life assurance companies, retirement benefit plans, and investment funds meeting certain conditions are permitted to take an exemption.

Factsheet 4 – Financial instruments

Factsheet 4 has been prepared on the basis that the reporting entity has chosen to apply the recognition and measurement requirements of Section 11 of FRS 102 Basic financial instruments, and Section 12 of FRS 102 Other financial instruments issues. This point is emphasised as FRS 102 permits entities to apply the recognition and measurement requirements of either:

·       IAS 39 Financial instruments: Recognition and measurement; or

·       IFRS 9 Financial instruments.

Impact of the Periodic review amendments on financial instruments

As part of the Periodic review amendments, the option to adopt the recognition and measurement requirements of IAS 39 for the first time has been restricted to situations where it’s necessary to achieve consistency with group financial statements. This restriction is effective from 1 January 2026 (or earlier if an entity early-adopts the Periodic review 2024 amendments). This amendment has been made in preparation for the expected eventual removal of the option to apply IAS 39. For the time being, entities who have adopted the IAS 39 option may continue to apply it.

Leases

While leases are outside the scope of Section 11 of FRS 102, the derecognition and impairment accounting requirements of Section 11 apply to receivables recognised by a lessor, and the derecognition accounting requirements of Section 11 apply to lease liabilities recognised by a lessee.

Factsheet 5 – Property – fair value measurement and company law

Factsheet 5 focuses on how to account for the remeasurement of investment property to fair value under Section 17 of FRS 102 and the remeasurement of property, plant and equipment to fair value under Section 16 of FRS 102. It doesn’t address the basic accounting for these assets.

There are no significant changes to Factsheet 5, although references to the 2017 Triennial review amendments have been removed.

Factsheet 6 – Business combinations

Factsheet 6 has been prepared to provide a high-level overview to entities applying FRS 102 that undertake a business combination for the first time. It’s therefore relevant to entities applying Section 19 of FRS 102 on Business combinations and goodwill.

Impact of periodic review amendments clarification on accounting guidance on liabilities [H3]

The Periodic review amendments have clarified the accounting guidance on liabilities and contingent liabilities that would be within the scope of Section 21 of FRS 102 Provisions and contingencies if they were incurred separately rather than assumed in a business combination.

In such cases, an acquirer shall apply paragraph 21.6 of FRS 102 to determine whether, at the acquisition date, a present obligation exists as a result of past events for a provision or contingent liability.

Paragraph 21.6 provides guidance on the ‘present obligation’ criterion which is the first of three criteria which must exist before a provision is recognised. The ‘present obligation’ criterion is as follows:

“An entity shall recognise a provision only when the entity has an obligation at the reporting date as a result of a past event” (FRS 102.21.4(a)).

The International Accounting Standards Board (IASB) is currently consulting on IAS 37 Provisions, contingent liabilities and contingent assets, and its proposals focus on updating the ‘present obligation’ criterion to align it with the IFRS – Conceptual framework for financial reporting. Therefore, any amendments to IAS 37 are likely to be considered in a future Periodic review by the FRC.

Factsheet 7 – Transition to FRS 102

Factsheet 7 applies to entities adopting FRS 102 for the first time rather than those solely adopting the latest Periodic review amendments to FRS 102.

Financial instruments 

As amended by the Periodic review amendments, Section 11 of FRS 102 Basic financial instruments and Section 12 of FRS 102 Other financial instruments issues offer two accounting policy choices on transition to FRS 102:

·       Apply the requirements of Sections 11 and 12 of FRS 102; or

·       Apply the recognition and measurement requirements of IFRS 9 Financial Instruments and the presentation and disclosure requirements of Sections 11 and 12 of FRS 102.

Leases 

Factsheet 7 includes new commentary on transition to FRS 102 following the adoption of the single lease accounting model, for periods beginning on or after 1 January 2026.

Revenue

Factsheet 7 also includes new commentary on transition to FRS 102 following the adoption of the five-step model for accounting for revenue from contracts with customers, for periods commencing on or after 1 January 2026. The new commentary focuses on the practical expedients that can be applied retrospectively on first time adoption set out in Section 1 of FRS 102 Scope.

Factsheet 8 – Climate-related matters

Factsheet 8 was first published in March 2024 and no changes have been made since it was first published. This Factsheet isn’t impacted by the Periodic review amendments.

Factsheet 9 – Initial application of Periodic review 2024 amendments

Along with Factsheets 10 and 11, Factsheet 9 is essential reading for anyone looking to understand and implement the Periodic review amendments to FRS 102.

The Factsheet’s focus is on transitional matters in relation to the principal changes to FRS 102 on lease accounting and revenue accounting. But there is also commentary on some of the incremental improvements and clarifications introduced as a result of the Periodic review covering:

·       The new version of Section 2 of FRC 102 Concepts and pervasive principles, updated to align to the latest international framework.

·       The new Section 2A of FRS 102 Fair value measurement (replacing the previous appendix to Section 2 Fair value measurement), which differs from the previous material as it has been aligned to the latest international standard and provides additional guidance.

·       New disclosure requirements about supplier finance arrangements added to Section 7 Statement of Cash Flows. These changes aren’t strictly speaking part of the Periodic review, and they apply, as mentioned previously, to periods beginning on or after 1 January 2025.

·       Improvements to Section 19 of FRS 102 Business combinations and goodwill to clarify requirements and add guidance on identifying an acquirer.

·       Additional guidance to aid application of the principles in Section 26 of FRS 102 Share-based payment in certain situations.

·       Additional guidance on accounting for uncertain tax positions in Section 29 of FRS 102 Income tax.

·       Various improvements and clarifications to Section 34 of FRS 102 Specialised activities to clarify existing requirements and make consequential changes to reflect other amendments. These include changes made to the requirements for public benefit entities, particularly in relation to incoming resources from non-exchange transactions.

Factsheet 10 – Revenue from contracts with customers 

Section 23 of FRS 102 Revenue from contracts with customers has been rewritten (and renamed) to introduce a structured five-step model to be applied consistently to contracts with similar characteristics and similar circumstances.

The five-step model 

Determining how much revenue should be recognised and when, is addressed through the following five steps:

·       Step 1 – Identify the contract(s) with a customer.

·       Step 2 – Identify the performance obligations in the contract.

·       Step 3 – Determine the transaction price.

·       Step 4 – Allocate the transaction price to the performance obligations in the contract.

·       Step 5 – Recognise revenue when (or as) the entity satisfies a performance obligation.

Illustrative examples

Factsheet 10 provides an overview of the five-step model and key aspects of its application, including several helpful illustrative examples.

Factsheet 11 – Lease accounting for lessees

Section 20 of FRS 102 Leases has also been rewritten as part of the Periodic review.

The distinction between operating leases and finance leases for lessees has been removed, with the result that more leases will now require the recognition of a right-of-use asset and a lease liability on the balance sheet. This method of accounting is very similar to previous finance lease accounting.

The operating lease and finance lease distinction remains in place for lessors. While the lessor requirements have been rewritten, in many cases the accounting won’t differ significantly from that under the previous requirements.

Factsheet 11 has been prepared to provide an overview of key aspects of the new lease accounting requirements from the perspective of lessees, covering:

Recognition exemptions:

·       Identification of a lease

·       Lease term

·       Measurement

Illustrative examples dealing with various aspects of lease accounting are included throughout the Factsheet.

In this Factsheet, the FRC explicitly states that the recognition, measurement and presentation requirements of the revised Section 20 are applicable to all entities applying FRS 102, including those within scope of Section 1A Small Entities.

Read the FRC’s new and revised FRS 102 Factsheets.