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).
These new requirements are effective for accounting periods beginning on or after 1 January 2026.
What’s the impact on Lessees?
The amendments to FRS 102 Section 20 (leases) result in a number of leases that would have previously been classed as operating leases being recognised on balance sheet. For existing finance leases and lessors, there are minimal changes.
Exemptions
There are certain exemptions for short-term leases or low value assets exemption. However, any entity with cars, buildings, or production line equipment, should prepare to bring those assets on balance sheet regardless of materiality to the entity as they are specifically excluded from low value assets, more below.
Implications for your business
The impact of including a right of use asset and a lease liability on the balance sheet could have a number of unexpected consequences, as gearing ratios change and entities have interest and depreciation costs rather than operating expenses:
- Breach of covenants around debt
- Reframing results and expectations around profit
- Impact on profit related bonus schemes or other remuneration
- Impact on internal budgets if interest and depreciation are central rather than departmental costs
- Breach of audit thresholds
- Non comparable accounts on transition as assets and liabilities are recognised at the start of the period
- Non comparable performance measures (for example where performance is measured on an adjusted profit measure such as EBITDA)
Getting ready for the transition
It is important that entities prepare for these changes:
- Start to model the impact of the changes so that you can prepare stakeholders in advance and highlight issues sooner rather than later.
- Entities will also need to assess whether their current systems and processes are adequate to document the data and make the calculations in an accurate, reliable and consistent manner.
Consider the impact on stakeholders and practical challenges
Start now. Until the liabilities and asset values are calculated then the impact of existing leases held cannot be identified. Make sure that staff and systems are prepared to capture and analyse the information needed to make the calculations. Talk to your bank in advance if there may be pressure on covenants – agree discount rates to be used.
Document your judgements as the amount of disclosure required in your financial statements has increased and all the key assumptions will need to be disclosed. Hindsight can be used, as you transition, particularly when considering decisions around lease terms and options.
Next Steps: Access our full guide
Staying compliant with the new FRS 102 is crucial for future financial health and transparency.
For a comprehensive breakdown of the 2024 updates and practical steps for your business, fill in the form below to download our full guide.
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.