Impact of Upcoming Changes to FRED 82

Impact of Upcoming Changes to FRED 82

The Financial Reporting Exposure Draft (FRED) 82 proposes key changes to financial reporting standards under UK GAAP, significantly impacting businesses preparing financial statements. This blog explores the draft's critical elements and what businesses should prepare for as these changes take shape.

What is FRED 82?

FRED 82 is a consultation document issued by the Financial Reporting Council (FRC) proposing updates to FRS 102 and related standards. These changes aim to align UK GAAP more closely with International Financial Reporting Standards (IFRS), reflecting economic realities and improving clarity for financial statement users.

Key Proposed Changes

1. Revenue Recognition
   The proposals include adopting principles similar to IFRS 15 Revenue from Contracts with Customers. Businesses must assess revenue based on performance obligations impacting industries like construction, software, and long-term service providers.

2. Leases
   The draft proposes significant changes inspired by IFRS 16 Leases. Lessees would recognise most leases on their balance sheet, shifting from an off-balance-sheet treatment to recognising right-of-use assets and lease liabilities.

3. Financial Instruments
   Enhanced guidance on hedge accounting and a refined classification of financial instruments bring greater transparency and a closer alignment with IFRS 9.

4. Fair Value Measurement
   The FRED incorporates more comprehensive fair value measurement guidelines, enhancing consistency in valuation practices across businesses.

5. Simplified Reporting for Small Entities
   To mitigate compliance burdens, there are provisions for simplified reporting for small and micro-entities while ensuring their financial statements remain meaningful.

Who is Affected?

Businesses using FRS 102, especially SMEs and those in industries with complex contracts, leases, or financial instruments, will face the most significant impact. Auditors, advisors, and preparers must adapt to ensure compliance with the revised standards.

What Should Businesses Do?

• Review Contracts and Agreements: Analyse existing contracts to assess revenue recognition and lease accounting changes.
• Upgrade Systems: Ensure systems can handle the increased complexity of tracking performance obligations and lease liabilities.
• Train Staff: Provide training for finance teams to understand and apply the new standards.
• Engage Advisors: Consult with accounting experts to navigate the transition smoothly.

Timeline and Consultation

The FRC has opened consultations for stakeholders to provide feedback. The final standard is expected in late 2024, with an effective date likely in 2025 or 2026.

Conclusion

The changes proposed in FRED 82 are transformative. They emphasise alignment with global standards while addressing the needs of UK businesses. Preparing early will minimise disruption and ensure a smooth transition to the new requirements.

Breaking the Mould Accounting specialises in helping businesses navigate complex financial reporting changes like FRED 82. Let our expert team guide you through the transition and ensure your financial statements remain compliant and accurate.

📞 Contact us today to book a consultation and get ahead of the changes!