Sustainability reporting: 2023 round-upRead more
What are the FRED 82 changes?
In December 2022, the Financial Reporting Council (FRC) published Financial Reporting Exposure Draft (FRED 82) proposing a suite of substantial changes to UK GAAP accounting standards, FRS 102 and FRS 105. SMEs reporting under UK GAAP, will be required to review all revenue and leasing arrangements (FRS 102 only) to assess how they will be impacted, and be ready to implement any changes to internal controls and processes by the effective date.
On the 29 September 2023, the Financial Reporting Council (“FRC”) extended the proposed effective date of FRED 82 to 1 January 2026. The intended effective date had been one year earlier; however, the extension was announced to allow more time for the FRC to consider its response to extensive written feedback from preparers. Feedback, in general, requested more time, and more transitional relief and ongoing simplification. However, the principle remains that broadly, these changes once effective, will facilitate greater comparability between financial statements prepared under UK GAAP and IFRS.
The updates proposed in FRED 82 were adopted into IFRS several years ago, significantly impacting most IFRS preparers. In particular, updates to revenue recognition and accounting for lease arrangements required earlier data capture points, affecting record-keeping requirements, systems and processes, performance measurement and reporting of results.
While the final version of FRED 82 is likely to contain a number of expedients compared the changes introduced to IFRS, its introduction will be highly impactful.
In addition to the above, there are other incremental improvements and clarifications which will be of lower impact but will still require consideration. Significantly the alignment of the expected credit loss model for the impairment of financial assets within IFRS 9 has been deferred, with FRS 102’s incurred loss model being retained for now.
The changes proposed in FRED 82 will require changes to systems and processes which will make the short implementation timeframe complex and expensive. It is highly recommended that companies act early and perform a detailed impact assessment.
Where multiple or complex revenue or leasing arrangements exist, the impact assessment should initially focus on the primary financial statement impact.
However, it is important that companies understand that implementation will go beyond a desktop exercise. A project-based approach should be applied, with a full implementation timetable and plan assessing the impact across:
- Teams, systems and processes requirements in order to capture relevant data appropriately to ensure complete and accurate accounting. As it relates to revenue, collating and analysing customer contracts, and for leases, ensuring data complete and accurate with any lease modifications post-transition, communicated in a timely manner.
- Financial performance and KPIs, including monthly and annual financial results and annual reporting disclosures.
- Internal and external reporting timetables and month end procedures.
- Key stakeholders and communication strategy.
- Any debt covenants included in lending arrangements.
Any strategic opportunities should also be considered for businesses considering a conversion to full IFRS for external reporting purposes. For example, companies or groups who may be anticipating listing their business publicly or engaging in other M&A activity in the medium to long term. Often in this instance, compliance with IFRS reporting convention (and metrics) is a pre-requisite.
If you have any questions or need help with any of the above, please reach out to David Campbell, Director of Technical Accounting & Quality.