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FRC considers amendments to accounting standards

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Steve Collings explores the accounting regulator’s periodic review of UK GAAP which suggests amendments to on-balance sheet lease accounting, revenue recognition and expected credit loss.

19th Apr 2022
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The Financial Reporting Council (FRC) is currently underway with the next periodic review of UK and Ireland accounting standards.

The ‘Request for Views’ phase which started in March 2021 ended on 31 October 2021 and over 450 stakeholder comments have been recorded during this phase.

Initial feedback suggests that the standards are working well, but stakeholders have raised issues on various subjects including government grants, share-based payment, accounting for climate-related issues and other targeted amendments.

The main standard which is the focus of the periodic review is FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, but other standards in the suite of UK GAAP could also see consequential amendments as a result of this next review.

There are some proposed amendments to UK and Ireland accounting standards which are being considered by the FRC that interested parties may wish to have some input in or send in feedback and comments to the FRC, in particular:

On-balance sheet lease accounting (FRS 102, Section 20 Leases)

The FRC has heard support for on-balance sheet lease accounting under FRS 102. Views on this are likely to be mixed, particularly for those practitioners acting for clients in the SME sector. Indeed, feedback from the majority of practitioners I have met in various lectures would not support this proposed change.

Broadly, the proposal would recognise all leases for lessees on the balance sheet to align the principles in FRS 102 (and possibly FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime) to that of IFRS 16 Leases.

The FRC would have to introduce appropriate simplifications in any proposed amendments because the concepts in IFRS 16 are inherently too complex and disproportionate for private entities reporting under UK GAAP. I also suspect the FRC would include certain limited exceptions to on-balance sheet recognition, as there is in IFRS 16 for low-value and short-life leases.

Interestingly, the International Accounting Standards Board (IASB) has tentatively decided not to update the Section 20 Leases in IFRS for SMEs to align that section with IFRS 16 principles in their comprehensive review of the standard which is currently ongoing.

Revenue recognition (FRS 102, Section 23 Revenue)

The FRC has received support for updating the revenue recognition requirements in FRS 102, Section 23 Revenue. This is likely to propose aligning FRS 102, Section 23 with some sort of model approach to revenue recognition as is the case in IFRS 15 Revenue from Contracts with Customers. Again, there would have to be simplifications made to this because IFRS 15 is a complex standard.

During the second comprehensive review of IFRS for SMEs, the IASB has proposed to rewrite Section 23 Revenue to align it with the five-step model approach contained in IFRS 15.

Expected credit loss (ECL) model (FRS 102, Section 11 Basic Financial Instruments and Section 12 Other Financial Instruments Issues)

This is an issue which, for me personally, I do not want to see come into UK GAAP. Currently, UK GAAP uses an incurred credit loss model to bring financial assets (eg trade debtors and loans receivable) down to recoverable amount in the financial statements.

The ECL model in IFRS 9 Financial Instruments is far too complex for private entities and, in my opinion, the FRC should abandon the idea of bringing any form of it into UK GAAP. In any event, should the FRC conclude a version of the ECL model is needed in UK GAAP, there would have to be some serious simplifications made to the way in which it would work as the model in IFRS 9 is disproportionate.

In their comprehensive review of IFRS for SMEs, the IASB is proposing a hybrid model. This would mean all financial assets except trade receivables and contract assets would use an ECL model.

Next steps

The FRC is planning on issuing an Exposure Draft of the amendments to UK GAAP not before September 2022. This will follow the IFRS for SMEs Exposure Draft which is expected in the second half of 2022.

Currently, the FRC do not expect any proposed amendments arising from this periodic review to take effect before 1 January 2025.

To assist the FRC during the development phase of the proposals, the regulator is holding a number of roundtable discussions in which interested parties can have their say. These are planned as follows:

  • Preparers – lease accounting – 17 May 2022, 10am till 12noon
  • Preparers – credit loss accounting – 7 June 2022, 10am till 12noon
  • Preparers – revenue accounting – 14 June 2022, 10am till 12noon
  • Users – revenue, leases and credit losses – 21 June 2022, 10am till 12noon

Sessions will be video-enabled and if you wish to attend of the discussions, and have your say in the proposed amendments, email [email protected].

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