UK financial reporting changes: Are you prepared?
Claire Thomson CA highlights recent developments in UK financial reporting and the ongoing uncertainty about potential changes to company size thresholds.
Amendments to FRS 101
FRS 101 ‘Reduced disclosure framework’ sets out the disclosure exemptions available to qualifying entities. A qualifying entity is a member of a group where the parent of that group prepares publicly available consolidated financial statements which are intended to give a true and fair view (of the assets, liabilities, financial position and profit or loss), and that member is included in the consolidation.
Following its 2023/24 annual review cycle, the Financial Reporting Council (FRC) has published minor amendments to FRS 101.
These amendments:
- Provide a disclosure exemption from presenting certain comparative information about right-of-use assets.
- Accommodate a conditional exemption for qualifying entities in respect of certain disclosures about supplier finance arrangements required by IAS 7 ‘Statement of cash flows’.
Amendments have also been made to Appendix II ‘Note on legal requirements’ for consistency with IAS 1 ‘Presentation of financial statements’.
The exemptions provided by these amendments are available from whenever the relevant International Financial Reporting Accounting Standard (IFRS Accounting Standard) is applied.
Amendments to FRS 102: Statement of cash flows
Section 7 of FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ has been amended to require entities preparing a statement of cash flows to make accompanying disclosures on an aggregated basis about supplier finance arrangements. This includes the carrying amounts and associated line items presented in the entity’s balance sheet of related financial liabilities. A detailed explanation of what constitutes a supplier finance arrangement is also provided.
These new disclosures are applicable for periods beginning on or after 1 January 2025, with early adoption permitted. There is no requirement for comparative figures to be prepared in the first year these disclosures are made.
Periodic review amendments
On 27 March 2024, the FRC issued amendments to FRS 100 to FRS105 (known as GAAP - Generally Accepted Accounting Practice). This suite of accounting standards, applicable in the UK and Ireland, is used by an estimated 3.4 million businesses when preparing their financial statements.
The changes represent the largest revision of the standards since their launch in 2013 and increase the degree of alignment of UK and Irish GAAP with IFRS Accounting Standards.
Accounts preparers should consider the practical steps they need to take to make sure that reporting entities comply with the UK GAAP changes in full and on time.
Key changes have been made to FRS 102 and FRS 105 ‘The Financial Reporting Standard applicable to the micro-entities regime’.
The specific revisions made, and their potential implications for entities reporting under these standards, are as follows:
Revenue from contracts with customers
Section 23 of FRS 102, and the corresponding Section 18 of FRS 105, have been updated to closely align them with the provisions in IFRS 15 ‘Revenue from contracts with customers’.
A five-step model is being introduced, with revenue recognition based on the identification of distinct goods and services, performance obligations on the part of the seller and the consideration the seller will be entitled to on completion of the contract.
Although the changes apply to both FRS 102 and FRS 105, additional simplifications have been included in Section 18 of FRS 105 on revenue from contracts with customers to assist micro-entities.
Leases
Section 20 of FRS 102 has been updated to closely align it with the provisions in IFRS 16 ‘Leases’.
The underlying aim of the standard is to remove off-balance sheet financing, and effectively remove the concept of operating leases for lessees.
All leases, other than short-term or low-value asset leases, will be recognised on the balance sheet, with a right-of-use asset and a corresponding lease liability being presented. Lessor accounting, however, remains largely unchanged.
These amendments haven’t been applied to FRS 105, which retains the existing finance lease and operating lease models.
Concepts and pervasive principles
Section 2 of both standards has been rewritten to align with the IFRS Conceptual Framework. These sections have also doubled in length to align them closely with the equivalent international standard and provide additional guidance for UK GAAP preparers.
The ‘Fair value’ appendix of the existing Section 2 has been removed, and replaced with a new Section2A, aligning it with IFRS 13 ‘Fair value’.
Small companies
In Section 1A of FRS 102, more clarity is provided on which disclosures are expected to be necessary for financial statements to give a true and fair view, as required by law. These changes will impact UK entities only. Republic of Ireland entities will continue to be “encouraged” to present additional disclosures, but will not be mandated.
Other incremental changes
Other incremental changes are noted in areas such as share-based payments, deferred tax and specialised activities. These primarily relate to additional guidance being provided, rather than substantive changes in accounting treatment or disclosures.
Effective date
Periodic review amendments to FRS 102 and FRS 105 come into effect for periods beginning on or after 1 January 2026. Early adoption is permitted, provided all the changes to the respective standards are adopted at the same time.
Transitional arrangements
For some periodic review amendments to FRS 102, comparatives will need to be restated, although Section 1 of FRS 102 on ‘Scope’ sets out the reliefs and exemptions available in certain areas.
Under FRS 105, the periodic review amendments should be implemented as set out in FRS 102, with one exception. Section 18 of FRS 105 on ‘Revenue from contracts with customers’ applies prospectively to contacts that begin after the date an entity first applies the periodic review amendments. This means that the entity must not change its accounting policy for any contracts in progress at the date of implementation. ICAS will be providing more detailed information on the significant changes in due course.
Changes to company size thresholds
The Companies (Non-financial reporting) (Amendment) Regulations 2024, drafted by the previous government, included an uplift of approximately 50% to the company size thresholds in the Companies Act 2006.
The threshold changes had been expected to take effect for periods beginning on or after 1 October 2024. However, the draft regulations haven’t been laid before the UK parliament by the new government and clarification from the Department for Business and Trade (DBT) on their future is awaited.
Audit and consolidation exemptions are linked to these size thresholds, and therefore more companies may find themselves eligible for such exemptions where they weren’t previously within scope.
ICAS reported in more detail about the proposed changes to company size thresholds in March 2024.
In the lead up to the General Election, DBT also consulted on increasing the employee numbers condition for medium-sized companies from not more than 250 to not more than 500. The outcome of this consultation hasn’t been made public and the expected timing of this change was outside the consultation’s scope.
About the author
Claire Thomson CA is Director, UK Financial Reporting and Accounting Technical at Grant Thornton (NI) LLP. Claire is also a member of the ICAS Corporate and Financial Reporting Panel.
To find out more about the periodic review changes, join us and the FRC for ‘Periodic review amendments to UK GAAP: What do these mean for me?’. You can either register for our online webinar on 5 September or attend our in-person event in Edinburgh on 18 September.
