Major changes for UK GAAP

3 Apr 2024


Following extensive consultation, the Financial Reporting Council (FRC) has published revisions to UK GAAP which will be effective for accounting periods commencing on or after 1 January 2026.

Who will the changes impact?

Amendments will affect both micro-entities adopting FRS 105 (The Financial Reporting Standard applicable to the Micro-entities Regime) as well as those businesses adopting FRS 102 (The Financial Reporting Standard applicable in the UK and the Republic of Ireland). Principal revisions are around the accounting for revenue and leases as the standards are brought closer in alignment with International Financial Reporting Standards (IFRS) albeit with some simplifications. Other revisions provide clarifications for small entities adopting FRS 102 section 1A, updated fair value measurement principles, revisions to the conceptual and pervasive principles and updated guidance around share-based payments and accounting for uncertain tax positions.

Changes to FRS 102

Amendments to section 23 of FRS 102, Revenue introduce the five-step model of revenue recognition for both FRS 102 and FRS 105 reporters, which brings UK GAAP in line with IFRS albeit with some simplifications. As the five-step model has been in place under IFRS for several years, industry-specific guidance has developed over time which should assist businesses in preparing for the changes.

The new approach will apply to all contracts with customers and requires businesses to identify the distinct performance obligations or promises to deliver goods or services. Once identified, the transaction price is allocated between obligations and revenue recognised as the obligations are satisfied, be that over time or at a point in time. Although the accounting can be applied to a portfolio of similar contracts, the hard work will be reviewing contracts and identifying performance obligations as this will be a new concept for many businesses. Also new will be the identification of contract assets and liabilities, which represent the difference between the performance of the obligation and the payment from the customer.

The revised section does contain more comprehensive guidance in certain areas, such as licences and principal versus agent considerations. The impact will be felt most where contracts potentially include multiple performance obligations for example, a sale of goods with a service contract or warranty attached, sales of software with multiple deliverables or telecoms contracts which include a handset as well as data and texts. In these instances, the timing and profile of revenue recognition may change. The full impact for businesses will not be known until a detailed analysis is performed under the five-step model of the contracts specific to them.

Perhaps a more obvious impact will be the amendments relating to leases for FRS 102 reporters, note that these have not been introduced for micro-entities. The distinction between an operating lease and a finance lease has been removed for lessees and upon commencement of a lease, the lessee recognises a right-of use-asset and a lease liability. The ongoing operating lease rental expense in the profit and loss account would be replaced by depreciation of the right-of-use asset and a finance charge relating to the unwinding of the lease liability. Again, this reflects the treatment under IFRS, although there are certain simplifications compared to IFRS.

For example, in determining the discount rate used in calculating the lease liability, a lessee may use the obtainable borrowing rate rather than the incremental borrowing rate. A practical expedient does allow the accounting to be applied to a portfolio of leases with similar characteristics. Also, exemptions are available for short-term leases (less than 12 months) and leases for which the underlying asset is of low value, regardless of whether those leases are material to the lessee, with more examples of what would not be considered to be low value compared to IFRS.

IFRS principles are reflected in additional amendments, including changes to the concepts and pervasive principles and the introduction of guidance on accounting for uncertain tax positions. Guidance on fair value measurement within FRS 102 has been aligned with IFRS, but the comprehensive disclosure requirements for fair value have not. Neither has the expected credit loss model of financial asset impairment from IFRS 9 Financial Instruments or any alignment with IFRS 17 Insurance Contracts.

When will the amendments come into effect?

The effective date for the amendments is accounting periods commencing on or after 1 January 2026. Early adoption is permitted but only if all amendments are adopted at the same time. In respect of revenue, the amendments are applied retrospectively. However, there is an option where the impact is recognised as an adjustment to the opening balance of retained earnings at the date of initial application, which would mean that comparatives would not need to be restated. Micro-entities would be required to adopt this section prospectively. In respect of leases a modified retrospective approach is required, which again requires no restatement of comparatives but the impact of initial application to be recognised in the opening balance sheet at the date of initial application.

The FRC are expected to issue new versions of the standards as well as updated factsheets which will include guidance to support preparers. Businesses will need to start identifying contracts, whether those are leases or revenue contracts with customers, in order to fully understand the impacts.

While the timing of cash receipts will not change as these will be determined by contractual terms, any change in the timing of revenue recognition could have a knock-on impact on the timing of tax charges. Consideration should also be made of how key performance indicators may be affected, and it may be necessary to start conversations with lenders regarding covenants.

How we can help

Although 2026 does give a longer than originally proposed lead time for implementation, the work involved should not be underestimated. If you’d like to discuss any of the points raised, please get in touch with Anna Hicks.

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Anna Hicks
Partner, London

Key experience

Anna leads on the firm’s audit and financial reporting technical activity.