New FRS 102 standards set to reshape company financial reporting

Major amendments to financial reporting standards will transform how SMEs account for revenue recognition, leases and supplier finance. With implementation due from January 2026, businesses need to start preparing now.

In 2024, the Financial Reporting Council (FRC) announced significant amendments to FRS 102, the primary financial reporting standard for SMEs in the Republic of Ireland and the UK.

These changes represent the most substantial update in recent years to accounting standards that are used by SMEs in particular, with most changes taking effect from 1 January 2026. The amendments aim to align accounting practices in Ireland and the UK more closely with international standards.

The changes, part of the second periodic review of FRS 102, are set to reshape how businesses deal with revenue recognition and lease accounting.

The implications for businesses in implementing these changes from a cost and practical perspective are not to be underestimated. It requires a reset of both systems and ways of thinking in terms of how business record transactions on a day-to-day basis.

Timeline and Implementation

The FRC published the final amendments on 27 March 2024 following an extensive consultation period. Most changes will become effective from 1 January 2026. Early adoption is permitted for all changes, provided they are implemented simultaneously.

For most businesses with calendar year ends, the first affected annual reports will be for the year ending 31 December 2026. However, where retrospective transition arrangements are required, earlier periods may also need to be considered.

Key Changes

Revenue Recognition

The new revenue recognition model aligns with IFRS 15 and introduces a comprehensive five-step approach to recognising revenue. Companies must first identify customer contracts, then determine distinct performance obligations within these contracts.

The next steps involve determining transaction prices and allocating them to the identified performance obligations. Finally, revenue is recognised when these obligations are satisfied.

This change will particularly impact businesses with complex contracts, bundled services, or variable pricing arrangements. The timing of revenue recognition may shift significantly for some organisations, especially those in technology, construction, and other sectors that typically operate under long-term contracts.

The standard includes practical simplifications compared to IFRS 15. Companies can apply the model to portfolios of similar contracts, and there are simplified approaches for allocating discounts. Businesses will need to review existing revenue streams and contracts to assess the impact on revenue timing and measurement.

Lease Accounting

The amendments introduce a significant change to lease accounting, requiring most leases to be recognised on the balance sheet. This change mirrors IFRS 16 but includes certain practical exemptions for Irish and UK businesses. Under the new requirements, companies must recognise right-of-use assets and lease liabilities for most leases, though exemptions exist for short-term leases of 12 months or less and low-value assets.

The presentation of lease expenses will change, with costs split between depreciation and interest rather than shown as a single operating lease expense. Companies can use a simplified approach for calculating borrowing rates, and there are modified requirements for sale and leaseback transactions.

These changes will impact key financial metrics including EBITDA, net debt ratios, and return on capital employed. Companies should review existing debt covenants and consider the impact on financial agreements, as the new approach may affect compliance with existing arrangements.

Fair Value Measurement

The amendments align fair value measurement guidance more closely with IFRS 13, providing clearer principles for measuring fair value. The changes include an updated definition of fair value and market participant assumptions, along with new guidance on valuation techniques and inputs. The treatment of transaction costs has been clarified, and there is enhanced guidance for measuring liabilities and own credit risk.

The standard now provides more detailed guidance on measuring fair value in inactive markets. These changes will particularly affect businesses with significant investment properties, financial instruments, or other assets measured at fair value. Companies will need to review their valuation methodologies and ensure they align with the new requirements.

Going Concern Disclosures

The enhanced requirements for going concern disclosures require businesses to be more transparent about their financial sustainability. Companies must now explicitly state their use of the going concern basis of accounting and disclose significant judgements made in assessing their going concern status. Management must provide more detailed information about material uncertainties and include their assessment of business viability.

Supplier Finance

Supplier finance arrangements are financing arrangements where a third-party finance provider pays an entity’s supplier, and the entity later repays the finance provider. Under the amended FRS 102, entities using supplier finance arrangements must provide comprehensive disclosures in their financial statements.

The requirements span several key areas of reporting. First, companies must disclose the key terms and conditions of their supplier finance arrangements. This includes explaining the essential features of the arrangements and how they operate in practice.

The disclosure should help users understand the nature of the financial obligations and any significant differences from standard payment terms.

Entities must also disclose the carrying amount of financial liabilities that are part of supplier finance arrangements and specify where these liabilities are presented in the balance sheet.

Companies must also provide information about the range of payment due dates for financial liabilities that are part of supplier finance arrangements, alongside the range of payment due dates for comparable trade payables not subject to such arrangements.

Business Impact and Preparation

For most SMEs, the main impact of these changes will arise from the revenue recognition and lease accounting aspects. The revenue recognition changes alter the way businesses will have to account for their day-to-day sales. For many firms, the impact on the financial statements will be minimal. However, the lease accounting changes will fundamentally alter the look and feel of the financial statements, including both primary statements and the notes.

Ultimately, these changes will require significant preparation from businesses. A thorough impact assessment should be conducted to understand how the changes affect your business. Companies will need to review existing systems and processes, identify required modifications and consider training needs for finance teams and wider business stakeholders.

Additional data collection and analysis requirements should be planned for, and existing contracts and agreements that might be affected should be reviewed. Companies should also consider the impact on key performance indicators and business metrics.

Next Steps

We recommend that businesses start preparing for these changes as soon as possible. With over 80 years of experience in advisory and accounting services in Ireland, Crowe is uniquely positioned to support you. Engaging early with our professional advisors will help ensure a smooth and well-managed transition to the new requirements. Contact us today to make sure you and your business are fully prepared.