In today’s blog we will be discussing on the incremental improvements and clarifications of the FRS102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland which will impact the financial statements.
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The Financial Reporting Council (FRC) conducts periodic review every four to five years to allow time for experience of the existing requirements of FRS 102 to develop before considering stakeholder feedback, changes in IFRS accounting standards and the IFRS for SMEs Accounting Standard and other issues. Apart from that, periodic reviews ensure that the implementation of the standards has achieved high quality level with the aim to provide continuous improvement and clarity to the users and preparers.
So, what is changing?
In July 2023, the FRC has introduced a temporary exception to the accounting for deferred taxes arising from the implementation of the OECD’s Pillar Two model rules, alongside targeted disclosure requirements. The OECD’s Pillar Two model rules introduce a global system of interlocking top-up taxes that aim to ensure that large multinational groups pay a minimum amount of income tax. This amendment was introduced to address the tax challenges arising from the globalised and digitalised economy. The temporary exception is effective immediately and the disclosure requirements are effective for accounting periods beginning on or after 1 January 2023, with early application permitted.
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The FRC has also published Financial Reporting Exposure Draft 82 (FRED 82) draft amendments to FRS 102 on 15 December 2022 which proposes a number of changes resulting from the second periodic review of FRS 102 and other Financial Reporting Standards. These proposed amendments focused on updating accounting requirements to reflect changes in IFRS Accounting Standards, particularly with respect to revenue and leases ensuring the requirements remain cost effective to apply, and making other incremental improvements and clarifications. The FRC proposes that the amendments will be effective from 1 January 2025.
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One of the principal amendments from FRED 82 that should be expected to have an impact on the financial statements would be the accounting treatment for revenue in FRS 102 and FRS 105 The Financial Reporting Standard applicable to Micro-entities will be based on the five-step model for revenue recognition from the IFRS Revenue from Contracts with Customers, with appropriate simplification. The extent of the change will depend on the nature of its contracts with customers that will affect the current practice of the entity’s revenue recognition.
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Entities with leases might also want to take this proposed amendment into consideration as FRED 82 proposed that the on-balance sheet model from IFRS 16 Leases will serve as the foundation for the lease accounting requirements in FRS 102, with appropriate simplifications. Majority of the entities that are lessees under one or more operating leases are projected to experience an impact on their financial statements as a result of this amendment.
Apart from that, the proposed amendments to FRS102 also include greater clarity regarding the disclosures that must be made by small firms in the UK applying Section 1A Small Entities in order to present a true and fair view financial statements.
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On top of that, FRED 82 proposed a revised Section 2 Concepts and Pervasive Principles of FRS 102 and FRS 105, updated to align to the IASB’s Conceptual Framework for Financial Reporting, issued in 2018. The purpose of this proposal is to develop financial reporting standards that are consistent with global accounting standards.
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Furthermore, the proposal also includes the replacement of Appendix Fair Value Measurement to Section 2 to a new Section 2A Fair Value Measurement of FRS 102 that has been updated to ensure it aligns to the concepts of fair value and the guidance on fair value measurement, with that in IFRS 13 Fair Value Measurement.
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Last but not least, the FRC intends to remove the option in paragraphs 11.2(b) and 12.2(b) of FRS 102 to align with the recognition and measurement requirements of IAS 39 Financial Instruments: Recognition and Measurement. This intention was communicated in paragraph B11.5 of the Basis of Conclusions to FRS 102 following the Triennial Review 2017. In preparation for the eventual removal of the IAS 39 option, the FRC proposes to prevent an entity from newly adopting this accounting policy. However, entities that has already applied this option, has been permitted to continue to do so in the meantime.
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To conclude, the intention of these proposals is to promote comparability between the financial statements of companies in the UK and Ireland. All in all, these proposals should be a great news for FRS102 users with global focus, given that IFRS is widely used in the world and US GAAP has a relatively harmonised approach to these topics.
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Thanisha Zawawi
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