Are you ready for the amendments to FRS 102?

What is FRS 102 and when is it applied? 

Irish company law requires directors of companies incorporated in Ireland to prepare entity financial statements in respect of each financial year.  Such financial statements must be prepared either in accordance with: 

1. International Financial Reporting Standards (‘IFRS’)  
   IFRS are published by the International Accounting Standards Board (IASB), as adopted by the European Union.  Companies with debt or equity securities listed on a regulated EU market are required to be prepared in accordance with IFRS.  Commonly large, listed firms or those seeking global investment prepare financial statements under IFRS.   

Or as 

1. Companies Act Financial Statements 
   These are prepared in accordance with the accounting and disclosure requirements of Irish company law and with the Financial Reporting Standards (‘FRS’) published by the Financial Reporting Council (‘FRC’), the accounting standard setter for both Ireland and the UK.  Commonly small and medium sized entities prepare financial statements under FRS 102 as it is less complex to apply than IFRS. 

FRS 102, (”FRS102 The Financial Reporting Standard applicable in the UK and Republic of Ireland’) is the principal accounting standard in the Companies Act financial reporting regime.  It is largely based on IFRS for SMEs but with significant adaptations for UK & Ireland.   

It is subject to periodic review by the FRC.  The most recent review in 2024 introduced significant changes which are mandatory for accounting periods beginning on or after 1 January 2026. 

What are the updates to FRS 102?

The periodic review 2024 introduces significant amendments to the following sections: 

• Section 20 Leases; and  

• Section 23 Revenue from Contracts with Customers.   

In addition, incremental improvements and clarifications have been made throughout the text of FRS 102 to align the standard with the latest international accounting standards (i.e. IFRS) in certain respects, and to include new and additional guidance to make the requirements easier to understand and apply consistently.  

When the amendments are effective  

The September 2024 edition of FRS 102 will be mandatory for accounting periods beginning on or after 1 January 2026. 

Impact of the amendments to Section 20 Leases 

The amendments to Section 20 Leases are based on the principles of IFRS 16 Leases and consequently, for lessees, the distinction between operating and finance leases is removed.  This means that the majority of leases will be recognised on-balance sheet. 

While lessor accounting remains largely unchanged, the amendments have a significant impact on the recognition, measurement, presentation and disclosure requirements of leases for lessees.  

In summary, lessees will be required to: 

• Identify lease arrangements by assessing whether a contract is, or contains, a lease. 

• At the commencement date of the lease, measure the lease liability at the present value of the lease payments that are not paid as at that date.  The calculation of the lease liability requires a suitable discount rate with which to discount the relevant cash flows. 

• Measure the right of use (“ROU”) asset at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments. 

• Depreciate the ROU asset, generally over the life of the lease.  

• Accrue interest on the lease liability at the rate implicit in the lease.  If that rate cannot be readily determined, the lessee shall choose to apply either the lessee’s incremental borrowing rate or the lessee’s obtainable borrowing rate – to reflect the financing of the ROU asset. 
• The discount rate is the periodic rate of interest as described above, the determination of which can take significant judgment. 

Illustrative example 

Lease term: 3 years 

Annual payment payable in arrears: €100,000 

Discount rate: 5% 

• Indicative present value of ROU asset and lease liability at initial recognition: €272,000.  [Present value of lease payments of €100,000 over 3 years at 5%]  

Impact of the amendments to Section 23 Revenue from contracts with customers  

Section 23 Revenue from Contracts with Customers of FRS 102 was completely rewritten as part of the periodic review 2024 to be based on the principles in IFRS 15 Revenue from Contracts with Customers. 

Revenue recognition model 

The updated Section 23 replaces the previous risks-and-rewards-based revenue model with a single, principles-based framework focused on the transfer of goods or services to customers, aligning more closely with IFRS 15. 

To apply the model, an entity shall take the following steps:  

Step 1 – Identify the contract(s) with a customer;  

Step 2 – Identify the performance obligations in the contract;  

Step 3 – Determine the transaction price;  

Step 4 – Allocate the transaction price to the performance obligations in the contract; and  

Step 5 – Recognise revenue when (or as) the entity satisfies a performance obligation. 

Many contracts will have a single performance obligation.  However, when a contract has more than one performance obligation the subsequent steps of the revenue recognition model are designed to ensure that the revenue associated with each performance obligation is recognised at the appropriate time. 

There are more disclosure requirements in the new Section 23 which are intended to provide more useful information to users of financial statements about the nature, amount and timing of revenue and cashflows arising from an entity’s contracts with customers. 

Entities will need to reassess the accounting treatment of revenue contracts.  The application of Section 23 will affect contracts with bundled goods and services, variable consideration, warranties, customer options, financing components and principal vs agent arrangements, as well as obligations satisfied over time. 

How can you ensure you are prepared for these changes?   

To prepare for the amendments, Finance teams should assess how the revised requirements, particularly on revenue recognition and leases, affect existing contracts, accounting policies, systems, and KPIs. 

If you would like to have an initial conversation about FRS 102 changes and the potential impacts on your business or if you need specific advice or assistance in respect of the above requirements, feel free to reach out directly. My contact details are as follows: Gavin Redmond on +353 1 2933471 or gavin.redmond@eisneramper.ie 

Authors