Kathryn Donkersley: Good morning and welcome to the first of our two accounting and reporting updates special events. My name is Kathryn Donkersley. I'm a Director in PwC's Corporate Reporting Services or CRS team.
Today we're going to be talking about the changes brought in by the periodic review of FRS 102. And with that in mind, I am super pleased to be joined this morning by two special guest PwC partners who are experts in the two biggest changes coming in.
Firstly, we have Avni Mashru, who has lots of wisdom to share with us on lease accounting.
And secondly, we have Andrea Alloco, our resident revenue accounting guru. So many thanks, both of you, for joining us today.
So, today's agenda is straightforward. A quick overview and then we'll get straight into those two big areas of change, leases and revenue. We'll be asking Avni and Andrea to share their experience on the key practical implementation issues. We'll then highlight other changes brought in by the periodic review and of course we will be saving time for your questions. So please use the box on your screen to submit those throughout the webcast and they will come through to us here in the studio.
So, the periodic review of FRS102. Now this was issued at the end of March and the changes become effective on the 1st of January 2026. So, the FRC's objective in doing this, or one of the objectives, was about lining things up with IFRS, which would be of benefit to groups that are IFRS reporters. One of the things that does mean is that there are a couple of really big changes, and the biggest are, of course, lining up revenue with IFRS 15 and leases with IFRS 16. Now, people might be thinking, 2026, I've got a lot of time.
But Avni, if we start with you, I know that you were very involved in IFRS 16 back in the day. Can you start with what's changing here?
Avni Mashru: Yeah, I mean, we had, what, a couple of years run up to IFRS 16 and that, for some, was tight in the end. So, I mean, the big change with IFRS 16 is obviously all leases will come on balance sheets. So we won't have this distinction for lessees between operating finance leases and something we've been used to under IFRS for quite some time. There are some exceptions to that. And again, they are similar to IFRS 16. So one is for short term leases. That's really kind of quite similar to what is in IFRS 16. And the other is on low value leases. Now, this is interesting because the way the FRC has thought about this one is slightly different to IFRS. So, you know, you don't have the 5,000. In IFRS 16, you have a $5,000 sort of value and the basis for conclusions that kind of gives you an indication of what is low value. And they go on to explain some examples of low value items. FRS 102 is kind of almost approached in completely the opposite way of it singles out actually what is not a low value item.
So, in the standard, there's a list of these are the kinds of things that are not low value. And most of them are obvious things, land and buildings, cars, equipment, forklifts and harvesters. I was quite amused by those. So, the really kind of big ticket items. And the idea and the basis conclusions kind of gives us an insight into where their thinking is.
The idea is that they want to catch the big things. And then there's judgment you apply as to what is low value. Now, interestingly, on things like laptops and phones, which was the thing that we got lots of questions on under IFRS 16. the basis for conclusions actually does make reference to the fact that you know under IFRS 16 or kind of under IFRS you know sort of have these items were low value and that would be okay also under FRS 102. So likely it might well be similar things that fall into low value but again the line isn't as sort of strict I guess.
The other sort of things I'm moving on to the middle column on the side the other sort of things that are simplified I guess in FRS 102 one is the discount rate so again, on transition to IFRS 16, we had a lot of discussions around discount rate. You know, discount rate ideally should be the rate implicit in the lease. Often that is difficult, if not impossible, to calculate. And if not, you go to the lessee's incremental borrowing rate.
Now, that can be tricky because there are lots of elements to that calculation. You know, key aspects that are difficult are, you know, borrowing against an asset of similar sort of security in the economic environment. So, if those, again, under FRS 102, if those are equally areas that are difficult in application, the standard gives you another option, which is the obtainable borrowing rate or OBR. And that is purely the rate at which the lessee could borrow to just obtain the funds to make the lease payments effectively. So, that is quite a big sort of simplification.
Another one is around situations where you might have to revise the discount rate you're using, so if you have a modification of a lease. So, FRS102 says, well, actually, you don't need to calculate a revised discount rate if the modification is insignificant, or if the modification decreases the scope of the lease with a commensurate sort of decrease in consideration. Again, you don't have to change a discount rate. Or if there's a decrease in the consideration, but the scope of the lease remains unchanged.
So, there's quite a few scenarios where actually, you don't now have to, under FRS 102, you wouldn't have to calculate a revised discount rate.
The other area of simplification is sale and lease pack. So again, for anyone that has had to deal with sale and lease pack under IFRS 16, there's quite a few complicated number examples in the standard, and it gets quite tricky with calculations.
Again, a lot of that is simplified under FRS 102. So, again, makes life easier.
Kathryn: Can I ask, part of the objective of all of this was about benefiting groups that might report into one or two and have some IFRS group reporting. Everything that you've just described in terms of differences between IFRS and the new Section 20, is that all mandatory? Do companies have to do that if they're already doing some group?
Avni: It's a really, it's a very good question. And actually, the helpful, I think, simplification is if you are an IFRS 16 group reporter, you already have these IFRS 16 numbers you've been reporting on that basis, you can use IFRS 16. So you can actually use that as a basis under FRS 102. So that definitely makes it easier for those using FRS 102 that already have some group reporting under IFRS. and actually kind of moving on to the last bit around transition, you don't have to restate comparative periods, so it's all prospective. The options around how you apply it on day one, if you like, are sort of similar to IFRS in the sense of you can calculate a discount rate as of your of date of application, and then your right of use asset equals your lease liability, and you move forward from that point onwards. So, yeah, a lot of simplifications around both sort of transition and equally, if you are an IFRS 16 reporter, that makes life a lot easier.
Kathryn:Thanks, Avni. So, in summary, everything on balance sheet, by the exceptions you mentioned, if you group report under IFRS, you can use a lot of what you're already doing to implement this. But there are some simplifications compared to IFRS 16 if they are helpful to you. OK, I think the question I've heard the most on this topic, Avni, is, you know, what do I have to do between now and 2026? Can you share with us, you know, the most important things?
Avni: I feel like I'm going back in time, like a good five, six years. Certainly, I mean, a lot of it is, again, very similar, Kathryn, you'll be very aware. You know, when we went through IFRS 16 implementation, one of the biggest things, if not the biggest thing, was identify all your leases. The thing with operating leases is where then, you know, times where they haven't been on balance sheet, they are everywhere.
And often the controls around operating leases aren't quite the same as finance leases because, you know, the implications are very different from an accounting standpoint. So actually, identifying all your leases is probably the first task.
Second one around system set up. We saw a lot of spreadsheet workarounds. Systems have very clearly moved on since we went to IFRS 16 I think during IFRS 16 the lead up to IFRS 16 a lot of the software solutions were sort of just being built and being on made available on the market we've obviously got quite a few years of experience of that so but again system setup is not an insignificant task so that's something that's worth those two things are definitely sort of the first two things to think about establishing discount rate I think again I mentioned it that under IFRS 16 transition that was one of the trickier areas.
I think the fact that you've got the option of obtainable borrowing rate makes life a lot easier and you know the calculations are slightly less complicated and then other things like establishing lease terms so again that was something that we spent a bit of time on IFRS 16 transition and again for operating leases that weren't on the balance sheet that thought process around what the lease term was, perhaps hadn't been as robust.
So that, again, in addition to identifying where these operating leases are, I think those are sort of the areas where you have to have the most thought around actually what is going on balance sheet.
And then I guess that the sort of second and third order effects, things like covenants would be the other area. So having a look at debt agreements and actually the basis on which covenants might be calculated. And we still do have, even for IFS reporters you know companies that are have still got frozen gap covenant calculations so again that's something still to watch out for even though we're quite a few years down the line from that so.
Kathryn: Thanks, Avni so quite a few things to think about there and I think perhaps our overarching advice today is it's not one to leave until 2026. Just a reminder that we will be taking questions at the end so do go ahead and submit those if you have any but for now, we'll give Avni a break and go from leases to revenue.
Andrea, I know you were very involved in IFRS 15 implementation back in the day. Can you tell us what you're expecting here?
Andrea Alloco: Yeah, I mean, it's interesting you said, I do feel like I'm walking back in time to some degree and remembering how it was at the time, but it is different now. And as Kathryn started with, I mean, the main thing here is they're bringing the principles of IFRS 15 and IFRS 102. It is based on the IFRS for SME, so it's shorter. There's not as much guidance as there is in IFRS 15. There's some simplified words. There's guidance that they haven't included in. There's actually some practical simplifications as well that we can chat about. However, it's still a lot longer and more comprehensive than what we have today. And actually, IFRS 15 was a fairly complex intermingled standard, and you weren't able to necessarily unwind that or simplify that as much as maybe some people would like. So, you know, I actually looked at it. We've got like 120, 125 paragraphs now in Section 23 before we were in the 30s with some guidance. So, it's significantly expanded. So, it is more complex than what people are dealing with today, but hopefully more helpful.
I think the other thing I just pick up on is that the objective when IFRS 15 came out and the objective of Section 23 is slightly different than what we see with leases, right? I mean, it wasn't like, let's bring leases on balance sheet. The objective was really about giving more robust guidance around a really important topic, which is the recognition of revenue, the top line of many people's financial statements.
So there's not a particular outcome that the standard setters are really looking for in this area, like recognizing revenue earlier or later or for different amounts.
But what I would say, again, reflecting on how it was many years ago, it is an absolute total change in mindset of the way you think about revenue. Rather than thinking about what are my revenue streams and what do I do with this cash coming in the door, you're going straight down to the contract level. What are my contracts with my customers? And you walk through it that way, which I suppose kind of brings me to the you know, the first column there on the slide.
What it's doing is introducing kind of the robust five-step model that gets applied across all contracts with customers, regardless of the industry you're in. And that's identifying the contracts, identifying your POs, which are your individual, what are those goods and services you're delivering? What is the transaction price? How much you can get paid for it? How do you allocate that? And then when do you recognize revenue.
And actually, one of the things that actually I say is a major change in mindset is just the whole kind of separation of identifying the units of count, thinking about recognition and thinking about measurement. Because if you look at kind of the guidance that exists today in Section 23, it's very commingled. So that's very much part of the mindset change.
The other thing is obviously we have more guidance in areas that we haven't had guidance for years, such as variable consideration, contract modifications. There's a lot more guidance on things like repurchase agreements. So, areas that we've kind of been operating on practice in the past, we now have a lot more guidance.
So, we do have some simplifications, which I think is a good thing. I'll pick up on a few of them as a piece of the good news.
The first one is around time value of money. So, this is the question of when you have kind of a significant financing element of the transaction. IFRS 15 requires you to account for that, whether or not it's a prepayment or it's a deferred payment. IFRS 102 has just said only look at deferred payments. You can look at prepayments if you want to. So, I think that's a really good simplification.
There is also a bit more flexibility in allocating transaction price. And I guess the impact of this is it's much easier to get to the outcome where you're either following the prices in the contract or following the cash as long as those actually reflect the economics and kind of the normal standard in selling price of those items. So, it's just easier to make those conclusions.
There's a policy choice around capitalizing cost to obtain a contract. And I can tell you this is like people thought this was really painful under IFRS 15 because it was a requirement. A cost to obtain a contract is the best example of this is the sales commission, and actually sometimes you need a really complicated system to capitalize these things. But the good news is under Section 23, this is optional, which means entities will probably continue their practice in the past. Some industries commonly capitalise; some do not. There are less disclosure requirements. There's still more than there is today, but there's not as much as there is in IFRS 15. Some of the complicated disclosure requirements about allocating across multiple periods and some of these stricter requirements around the balance sheet disclosures have kind of been pulled back a little bit. So, it should make easier. But there are more disclosure requirements than people will be used to today.
Transition. So, there's two approaches to transition. There's fully retrospective or there's the modified, which again is very, very similar to IFRS 15. And we saw entities taking both the fully retrospective, obviously you go all the way back, cumulative effect at the beginning of that balance sheet, the opening balance sheet period of what's presented. Modified, you don't need to restate the comparative. You have a cumulative effect. And then you've got some reliefs around completed contracts. You know, entities will have to make decisions. It's going to be based on, you know, how much change you have, what type of systems you have available, whether you've been reporting elsewhere under IFRS 15 in the past, what are the interests of your stakeholders?
I'd say, you know, the challenges around taking that modified approach is that you just have two kind of non-comparative periods when you have a lot of change. And that then requires robust explanation about what's going on. So I don't go straight to that, thinking that that's definitely going to be the easier outcome. So I think hopefully that's a really good summary of all the changes that we will see, the good stuff and the bad.
Kathryn: Could I jump in with a question, Andrea? I haven't warned you about this, but I think what I took from that was complex but helpful. You sound very enthusiastic about it. If anyone listening to this is thinking, well, what Avni described sounds like the FRC expected the financial statements to look completely different. There's loads to do there. You indicated that in a standard setting sense, there isn't a particular reporting outcome here that is explicitly desired in all cases. it's more about thinking differently.
So if a company is thinking well unlike with IFRS 15 which came a year earlier than IFRS 16 I've got to do both of these things at the same time because this is just the one standard can I focus on 16 and if I don't think you know my revenue is actually going to change is that something I could come to at the last minute and that be realistic. What are your views.
Andrea: It's not recommended it's not recommended um I listen I do think we do have the benefit of hindsight of watching IFRS preparers move to IFRS 15. And there was, I mean, there was like, there was an element of panic. There was a lot of words in that standard. There was a lot of change and a lot of fear, right? And I do think that, you know, the FRS 1 or 2 reporters are really going to benefit from being able to be at the other side of that.
However, as I said at the beginning, it is a totally different mindset. And you really do need to get into your contracts in a way that you've never gotten into it before. And so I would not I would not start late. And again, you know, people get quite excited about the revenue number. So it's something you want to start thinking about early. And maybe it's helpful just to go on to the next slide and give my good segue there, Kathryn.
So I guess these are the things that I would do when we're thinking about this. So the first thing is, you know, get an inventory of all your customer contracts and understand what the contracts are. And I know I've heard some people say, oh, I don't have any contracts with my customers. Right. If you're not a company that's got like, you know, 50 page contracts with every one of your customers, but you still have a contract. What is it? It might be the invoice. It might be, you know, some sort of other type of billing aspect. You do have a contract. What is it? It might be written. It might be implied, but it exists.
When I go in and buy a tube of toothpaste at a shop, I've entered into a contract. It's very short, and I've walked away and moved on. So just identify what your contracts are.
Then the next thing is kind of make sure that you're grouping together contracts that are similar, right? Because as much as I say we started at the contract level, I mean, nobody's systems are designed to say let's do everything on a contract by contract basis and do a separate set of journal entries for every contract. So, pulling your contracts together, what's similar, what's different, and trying to identify that.
And I suppose the other thing I'd say at this point in time is one of the things I think has been really useful that's come out of IFRS 15 is some of the disclosures around disaggregation. And these are the types of contracts I enter into. This is how I account for them. And that flows through from the accounting policies to the disclosures that says this is how much revenue is recognized from them.
And I think actually that's been a massive improvement under FRS-15, and I hope we get the same mentality under FRS-102.
Then you're getting in and trying to understand what do those contracts say about the nature of the goods and services that are being provided. So, again, this is a different mindset. The guidance on separating contracts into different units under FRS-102 today is very, very limited. So, there's a lot more guidance on that.
And then I'd say what you really want to do is get into those new areas of judgment, things like variable consideration. The highly probable constraint is going to be completely new to people who haven't been involved in IFRS 15, so really understanding what those things are, customer options, material rights, all the types of stuff, repurchase options, what in the contract where now we have more guidance about how do I deal with those, how do I set my policies.
And the last one I think is interesting. I mean, we have found that there's a lot of people in the business that are interested in the accounting for revenue. And one of the challenges around IFRS 15 was just how do you get that balance between having the accountants do the accounting but get the sales team on board, right?
And things such as marketing incentives that are being offered at the table of sales could have a significant impact on the revenue in a different way under IFRS 15 than maybe you would have looked at under IFRS 102.
So it's important that there's some education out to kind of the sales team so they understand the implications of different clauses in the contract on the revenue recognition. And again, I think that's great that we're learning from history because I think some companies left that a bit late.
And then you had sales and management being like, this can't be, this can't be. So, again, engage in those conversations early would be my recommendation.
Kathryn: Thanks, Andrea. OK, before we move to audience questions, we will just put up a slide that shows the other most substantial changes. So, as you've both described, revenue and leases really are the big hitters here. But FRS2 is one big standard, and there have been tweaks throughout, which people should be aware of.
The slide summarises some of the bigger ones. And just to highlight a couple, fair value measurement, Section 2A, has been revised to bring in essentially IFRS 13 principles.
And the other one to highlight here, we've talked a lot about 2026 and that being the effective date. There is one exception to that. Within the revisions to 102, there are new disclosure requirements on supplier finance arrangements. Those new disclosure requirements are effective from 2025, so less than six months away.
So, you can see on there a number of other specifics that have changed. And on that, if anyone looks at any of those and thinks I've got that situation, be aware. Revenue and leases are the big ones and the ones to jump on right now. But that's not the only changes. So that is 102.
We're going to move to audience questions. I can see that they are they are flying in. The first one we have people would like to early adopt. There you go. But you've both been so convincing. People want to want to go early. I mean, I think the challenge here would be the fact that you'd need to take it all. Right. You couldn't early adopt just leases or just revenue. So straight. Yes. From the panel. There we go.
OK. Disclosure requirements. I think this question applies to both. Are there any new disclosures? Andrea, you mentioned there are new disclosures, but less so than in IFRS 15.
Andrea: Yeah, there are some new disclosures. I mentioned the disaggregation disclosures. And again, we get some of that a little bit with Companies Act Accounting. But now that's, you know, that's really important. And again, just going back, I think that has driven people to do their accounting policies or should be driving entities to do their accounting policies different.
The other thing that I think sticks out to me is just the balance sheet disclosures. And if I look historically under FS102, where we do see balance sheet disclosures as entities that are doing long -term contracting, and they'll be used to doing some sort of balance sheet disclosures because they will have had unbilled, you know, deferred revenue on the books, right? This has actually brought in some balance sheet disclosures for all types of contracts, because, again, the whole thing applies to all contracts.
So, thinking a little bit more about whether or not you got the entity has contract assets and contract liabilities. And although the disclosures are less onerous than IFRS 15, they're still new and need to be thought about.
Kathryn: Thanks, Andrea. And on leases there again, new stuff compared to one or two today.
Avni: Yeah, I mean, I think the other thing the other thing that is interesting with leases is, you know, very crudely. We're sort of going to finance lease accounting for everything. So, in a sense, some of the disclosures aren't entirely new in terms of on balance sheet leases. They just obviously stretch a bit further. But I wouldn't say if the question was asking, is it completely new things that, you know, we haven't seen anywhere? No, no.
Kathryn: Thanks, Avni. OK, a couple of lease specific questions. I think you've touched on this, Avni, but it's a very important point. OK, on transition, can we utilise the IFRS balance sheet position as it is?
Avni: Yeah, I think we did have on the side, we did, we sort of, I didn't touch on it specifically, but yes, on adoption, you can use that as, that is a transition option to use your IFRS 16 position.
Kathryn: Brilliant. So if you are IFRS 16, group reporting, reporting in any way, you've got those numbers. That's good news, I think.
OK, a question, Avni, on borrowing rates in terms of almost the order of events. So, we've got interest rate implicit in the lease. We've got incremental borrowing rate. We've got obtainable borrowing rates. Order of events there.
Avni: Yeah, I mean, again, similar to IFRS 16. So the first bit is exactly the same. So implicit rate in the lease is your ideal. Then it's incremental borrowing rate and then it's the OBR obtainable borrowing rate. So it's the same sort of order of progression.
And again, this is all down to the information available. The thing with obtainable borrowing rate is it is helpful where you do a bit of a cost benefit and you say well actually the costs you know because all of these rates are in theory calculable and you know certainly with incremental borrowing rate it is in theory calculable. The obtainable borrowing rate is is just a concession on that on the basis of effort.
Kathryn: Okay and that am I right in thinking that is lease by lease choice so if you can't get incremental borrowing rate you're not forced to do the same thing for you know.
Avni: Yeah, incremental borrowing rate is very specific to a lease so yeah okay um.
Kathryn: And then on that we have had another question on lease simplifications generally and whether they are policy choice or lease by lease. I believe there's a bit of a mixture here right so I think I think sale and Lease back is policy choice that you mentioned. And I think lower value, lease by lease, short term.
Avni: Exactly, policy choice. So, it's, again, it's mixed, mixed, mixed, mixed. But yeah, the lease by lease on the low value and the policy choice on the short term, again, same as IFRS 16. So yeah, awesome.
Kathryn: Perfect. When can we early adopt from? People are super keen to align their accounting policies. You're super keen to crack on to align. It's really very keen. Those were the exact words used by the questioner. I mean, I think in reality, the thing has only just been issued. So it's almost going to be 2025 by virtue of reality. They don't put a start date on it, but in practical terms, it's going to be your first full reporting period that hasn't already applied.
Avni: I mean, you know, it's going back to the point that we were talking about before. To an extent, if you are a group reporter and you've kind of gone through IFRS 15, you've gone through FRS16 and you've looked at the other changes in FRS102 and went, OK, actually, that is manageable. Absolutely. I think you could crack on.
And but I think it's on the basis that you're comfortable that actually the information that you need is available, is there and you can report on it. Then, yeah, absolutely.
Andrea: And I'd almost say, I mean, from the revenue side, probably a little bit easier than the lease aside. The choices that are out there and the simplifications, there's really not very much where you'd say you can't just completely import IFRS 15, apply it, if that's what you're doing, and it would be compliant with FRS 1 or 2.
There's probably less to deal with on that. So, they've tried to, in developing the standard, make it open so that anything that's compliant with IFRS 15 is going to work under FRS 1 or 2. So that should help in that particular area. But there are a lot of other changes. you need to get. So, beware as much as we're spending this time talking about leases and revenue. There's a lot of other track changes to have a gander through.
Kathryn: Absolutely. Well, thank you both. I'm afraid we have run out of time now, but I think you've given a great insight into what's ahead. So, thanks for sharing your expertise with us.
Now, as we spoke about last week, we have got another special event this time next week. That one will be on IFRS 18. and then we will be back with our usual accounting and reporting update in November.
So do watch out for notifications coming about that. So, we hope you found this useful. I certainly did. Thank you both.
We would be very grateful if you could take just a couple of minutes to fill in the feedback form that's going to appear on your screen as soon as we finish.
And all that leaves me to say is thank you very much for joining us. Thank you for your questions and we will see you next time. Thank you.
