The implementation of major updates to UK GAAP has been postponed by the Financial Reporting Council (“FRC”), providing companies with more time to prepare; it has just announced that the revised accounting standards will now take effect for fiscal years starting January 1, 2026, rather than the originally planned 2025 date. The delay comes after extensive feedback was received in response to the initial proposals and alongside the recent release of further proposed amendments.
The proposals are expected to broadly remain in their current form, driving towards alignment with international standards, most notably around:
- Lease accounting – putting virtually all leases on the balance sheet by creating an asset and associated liability for operating leases, as opposed to the current model of expensing rent. The FRC has now acknowledged that exemptions for low-value assets may be of use, which is a welcome stance, although it has not yet defined “low value”.
- Revenue recognition – aligning with the 5-step model to determine the period of revenue recognition.
These changes would still apply to any company applying FRS 102, which is most SME’s except for micro-entities (although micro-entities are expected to have similar changes to revenue in due course). However, there are suggestions that the final rules may be simplified compared to what was originally proposed.
This delay is great news for many in light of ongoing challenges facing businesses in the UK and with the proposed timings previously just a short period to transition date. However, companies should review all contracts and leases to understand where revenue timing and lease accounting changes may affect financial ratios, debt covenants, taxes, and small company exemption eligibility, as these changes still look like a major challenge for many. The loss of small company exemptions may even push some into the scope of audit for the first time.
Planning for stakeholder communications is also key. The new standards will likely require more judgment and estimates, so explaining impacts clearly will be important. Companies may need to renegotiate commercial agreements tied to financial statement results to avoid unintended consequences from the accounting changes. The extra time may support in negotiating changes to covenants with banks, for example. However, we caution not to take action too early as the final amendments are not expected until the first half of 2024.
Overall, businesses should start assessing systems, processes, and data needs now to ensure an efficient transition, and for those impacted, a proactive approach will ensure that the changes are effectively implemented and problems minimised.
If you would like to discuss these changes with us, please get in touch with Alex Hird, Financial Reporting and Valuations Partner.
