Background
On 27 March 2024, the FRC released The Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs – Periodic Review 2024 (FRS 102 (2024)).
The key accounting changes bring closer alignment with International Financial Reporting Standards (IFRS). These include a new lease accounting model (Section 20 Leases) which will result in a number of leases that would have previously been classed as operating leases being recognised on balance sheet.
Our latest guide provides in depth analysis into the transitional arrangements and disclosure requirements of Section 20.
For further commentary and analysis on the impact of the revisions to FRS 102, visit our FRS 102 hub.
How could this impact you?
For most leases an entity will need to recognise a lease liability and corresponding Right-of-Use (‘ROU’) asset on their balance sheet.
- Company size: capitalising ROU assets will increase the level of gross assets and could push a Company into a higher size category under the revised Companies Act thresholds.
- Availability of funding: higher gross assets may restrict access to certain funding, including SEIS/EIS investments, which are subject to strict gross asset limits. Advanced planning for future funding rounds may be required.
- Bank covenants: recognising lease liabilities on balance sheet will increase an entity’s reported borrowings, which may affect covenant metrics such as gearing and net debt/EBITDA.
- Complexity: the new lease requirements may increase reporting complexity, particular for entities with multiple leases where lease by lease calculations will be required and judgements over discount rates will need to be made.
The adoption of the new Standard will also result in considerably more detailed disclosure requirements in an entity’s financial statements. Careful consideration should be paid to these disclosures in the transition year so that the impact of the adoption of these new requirements is concisely explained to your key stakeholders.
Transition and practical expedients
Whilst there are no transition choices available in Section 20 there are a number of practical expedients available to an entity on transition.
These practical expedients can help simplify the transition to the standard but will require careful disclosure in an entity’s financial statements so that it is clear to your stakeholders how you have transitioned to the new Standard.
Next Steps: Access our full guide
It is important to understand the transition and disclosure requirements of Section 20 now. This includes an impact assessment not only on how this will impact on your statutory financial reporting but the wider implications that this could have.
For more comprehensive analysis and practical considerations for your business, please fill the form below to download our full guide, speak to your usual PEM contact, or contact us with any questions.
Please note that this content is not intended to give specific technical advice. It is designed to highlight some of the key issues rather than provide an exhaustive explanation of the topics. Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein.