RSM responds to the periodic review of FRS 102

The Financial Reporting Council (FRC) is now considering responses to its request for views to inform the periodic review of FRS 102 and other UK accounting standards. Our article “What’s next for FRS 102?” provided our predictions and invited your thoughts in our survey on areas that should be included in the review.

We considered the responses to the survey and consulted with our financial reporting and audit specialists to inform our response to the FRC which can be downloaded here; the four key themes are summarised below.

Any changes proposed as a result of the periodic review will be subject to public consultation, most likely in 2022. The effective date for any amendments is currently expected to be 1 January 2024.

Alignment with changes to international standards

We believe the overarching objective should be alignment of UK GAAP with the IFRS recognition and measurement principles with limited simplifications for those entities where the complexity of IFRS would not be relevant for users of their financial statements.

We therefore broadly support the introduction of the basic principles of IFRS 9, 15 and 16 covering financial instruments, revenue recognition and leases respectively. We also support exemptions from full retrospective application for any elements of these standards which are introduced into FRS 102.

With some caveats, we support:

• the introduction of IFRS 9, albeit restricting the Expected Credit Loss model to financial institutions.
• retaining the five-step process for revenue recognition in IFRS 15, with simplifications for revenue recognised over time, contract unbundling and contract costs.
• the adoption of the single lessee model under IFRS 16 to bring all leases on-balance sheet except low value and short term leases, and have requested specific guidance for group situations and informal arrangements between related parties.

How FRS 102 is working in practice

We consider FRS 102 is generally working well in practice. We have however highlighted areas of recognition and measurement in relation to business combinations and government grants where further clarity and guidance would be useful. In addition, we have raised suggestions in the areas of going concern, uncertain tax positions and cash flow classification, together with more general views on the benefits of presentation and disclosure principles, and a mechanism to provide practical application guidance within or alongside FRS 102.

Application to small entities

We note that if the principles of IFRS 16 are adopted to bring more lease assets on balance sheet, the resultant increase in gross assets may move some entities out of the small companies’ regime exemptions in relation to financial reporting and audit. We have also requested some practical exemptions for certain share-based payment transactions in small entities. 

Sector specific suggestions

We have highlighted that certain not-for-profit sectors may face challenges applying the principles of IFRS 16 for leases. We also provided feedback on where we believe improvements could be made to the recognition, measurement and disclosures within pension scheme accounts.

If you would like to discuss our response further, please get in touch with your usual RSM contact or Danielle Stewart OBE.