Of the changes detailed the most significant apply to leases and revenue recognition, to closer align reporting in the UK to international financial reporting standards. It is expected that the changes will provide better information to users of the financial statements.
In this article we will consider the changes to the treatment of lease arrangements, and what companies could be doing now in readiness for the transition.
It is important to note that changes relate only to FRS102 – entities reporting under the micro-entity regime FRS105 are unaffected and will continue to apply the ‘risks and rewards’ approach when classifying leases.
The what…
Presently, finance leases are recognised on the balance sheet, with operating leases simply reflected through expenditure as the rental period passes. Under the new principles, there will no longer be a distinction between these different kinds of leases, and both will be reflected on the balance sheet, which will mean a change for a lot of businesses.
The when…
The amendments mandatorily apply for accounting periods commencing on or after 1 January 2026, so likely for years ending 31 December 2026, but unlike the transition to FRS102 back in 2015, there will be no requirement to restate comparatives. That sounds like great news, but the cumulative impact of the change in arrangements is still required to be calculated, as this will be recognised as an adjustment to the opening balance of retained earnings at the date of initial application.
The how…
A lease liability will need to be recognised at the date of initial application, at the present value of the remaining lease payments, using a discount rate equal to the lessees incremental or obtainable borrowing rate.
Pleasingly, there are some notable exceptions to this change, where assets are deemed to be of a low value - although this is not defined specifically in the standard, and assets under short-term leases (being those with a term of less than 12 months)
As ever, early adoption is available and while this might seem like an obvious ‘no’, there could be advantages of this approach to some business (for example if you operate in a sector where others in the marketplace already report under IFRS).
Though it feels early, it is advisable to start to prepare for this change sooner rather than later, in order to understand the financial impact as substantial changes in the make up of the balance sheet may require proactive communication with, and management of stakeholders.
The help…
Professional advice may be required to support in a number of ways relating to the change, including but not limited to the determination of appropriate discount rates, calculation of cumulative impact, classification of leases as low value, and whether early adoption is beneficial.