Foxley Kingham

Foxley Kingham Medical

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The Financial Reporting Standard 102 (FRS 102) is the principal accounting standard for small and medium-sized enterprises (SMEs) in the UK and the Republic of Ireland. Since its introduction in 2015, FRS 102 has provided a simpler alternative to International Financial Reporting Standards (IFRS), balancing ease of use with comprehensive financial reporting. However, accounting standards must evolve to reflect changes in business practices and to align with international frameworks.

The latest triennial review of FRS 102, which will apply to accounting periods from 1 January 2026 onwards, introduces several significant changes. These updates aim to enhance clarity, improve consistency, and ensure continued alignment with international standards, particularly IFRS 15 (Revenue from Contracts with Customers), IFRS 16 (Leases), and IFRS 9 (Financial Instruments). As a result of these updates, affected businesses will have to complete a series of reviews in line with the new frameworks – the most far reaching of these being the changes under point two, that relate to lease accounting. This article explores the key amendments and how we, as your trusted advisor, can help your business to navigate them.

  1. Revenue Recognition: Alignment with IFRS 15

One of the most significant changes to FRS 102 is the introduction of a new framework for revenue recognition, aligned more closely with IFRS 15.

What’s Changing?

Currently, revenue recognition under FRS 102 is based on the transfer of risks and rewards. The 2025 update will replace this approach with a five-step model for recognising revenue:

  1. Identify the contract with the customer.
  2. Identify the performance obligations within the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations.
  5. Recognise revenue when (or as) the performance obligation is satisfied.

How We Can Help:

We can assist your business by:

  • Reviewing existing contracts to identify performance obligations and ensure compliance with the new model.
  • Providing advice on the timing and recognition of revenue under the updated framework.

 

  1. Lease Accounting: Bringing Operating Leases On-Balance Sheet

Another significant change relates to lease accounting, aligning FRS 102 with IFRS 16. These changes are due to take effect for accounting periods on or after 1 January 2026. This particular change is likely to have a significant impact on SMEs above the other amendments listed above and below.

What’s Changing?

Currently, FRS 102 distinguishes between finance leases and operating leases. The 2025 update will require most leases with a term of more than 12 months to be recognised on the balance sheet as:

  • A right-of-use asset, representing the lessee’s right to use the leased asset.
  • A corresponding lease liability, representing the obligation to make lease payments.

How We Can Help:

Our team can:

  • Perform a review of your lease agreements to assess the impact on your balance sheet.
  • Provide ongoing support to manage the effect of lease accounting changes on financial reporting and debt covenants.

 

  1. Financial Instruments: Adoption of the Expected Credit Loss Model

The 2025 amendments to FRS 102 will replace the incurred loss model with an expected credit loss (ECL) model for recognizing impairment of financial assets.

Currently, businesses only recognise credit losses after they happen (the “incurred loss” model). Under the new ECL model, companies must estimate and recognise potential losses before they occur, based on future expectations.

How We Can Help:

We can assist you by:

  • Reviewing your receivables and loan portfolios to assess the potential impact of the ECL model.

 

  1. Investment Property: Fair Value Model as Default

The 2025 update will make the fair value model the default approach for measuring investment property, enhancing transparency but potentially increasing profit volatility.

How We Can Help:

We can:

  • Support you in transitioning to the fair value model by providing accurate and reliable property valuations.
  • Help you understand and manage the impact of fair value fluctuations on your financial statements.
  • Ensure compliance with the enhanced disclosure requirements for investment properties.

 

  1. Enhanced Disclosure Requirements

The amendments will introduce expanded disclosure requirements across various areas, including revenue recognition, lease obligations, and financial instruments.

How We Can Help:

Our expertise can:

  • Help you streamline the preparation of financial statement disclosures, ensuring they meet the new requirements.
  • Provide templates and guidance to simplify the reporting process.

How We Will Support You Through These Changes

As your trusted advisor, we understand the challenges that the upcoming changes to FRS 102 may bring. Our goal is to make this transition as seamless as possible for your business. Here’s how we’ll support you:

  1. Tailored Impact Assessments: We’ll review your current financial reporting processes to identify how the changes will affect your specific business.
  2. Custom Solutions: We’ll work with you to develop practical, tailored solutions to meet the new requirements without unnecessary complexity.
  3. Systems and Processes: We can help you update or implement financial systems to handle new reporting needs, ensuring compliance with minimal disruption.
  4. Training and Guidance: We can provide clear guidance and, where necessary, train your team to understand and apply the new standards confidently.
  5. Ongoing Support: Beyond implementation, we’ll continue to provide advice, answer your questions, and offer ongoing support to help you stay compliant and informed.

Our aim is to ensure that you not only meet these new requirements but also use them as an opportunity to improve the quality of your financial reporting and enhance stakeholder confidence. If you have any questions or would like to discuss the next steps, please reach out to your usual contact at our firm. Or, if you would like to arrange a discussion as to how our firm can help your business, we’d love to hear from you. Get in touch here.