These changes form part of the FRC’s periodic review of UK GAAP and are driven by a desire to bring UK standards closer to international norms—particularly IFRS 16 (Leases) and IFRS 15 (Revenue from Contracts with Customers). The aim is to enhance consistency, comparability, and transparency in financial reporting, and to ensure financial statements continue to meet the evolving needs of users.
Lease accounting: a fundamental shift for lessees
The most substantial change in this update relates to lease accounting.
Lessees will now be required to recognise right-of-use asset and a corresponding lease liability most leases on the balance sheet at the start of lease contracts, replacing the previous model which distinguished between finance and operating leases.
As a result of this change balance sheets will show increased liabilities and assets, which could affect debt covenants, gearing ratios, and EBITDA. For businesses with significant lease portfolios, such as those in retail, manufacturing, and logistics, the impact could be particularly pronounced. It may also prompt a need to engage with lenders or investors to explain changes in reported figures and covenant calculations. Internally, finance teams will need to assess lease data quality and may require updated systems or software to support compliance with the new model.
Additional updates: revenue recognition and disclosures
In addition to the above, other changes being introduced include:
- Adoption of a five-step model for revenue recognition, aligned with IFRS 15 principles.
- Updates to the impairment model and refinements to presentation and measurement requirements.
- Expanded disclosure requirements, including clearer reporting of key judgments and estimates.
While these changes may not be as visually impactful on the face of the financial statements as the lease changes, they may affect the timing and pattern of revenue recognition—particularly where contracts involve multiple performance obligations, variable pricing, or extended delivery periods. The revised disclosure requirements will also increase the need for clear documentation and internal coordination, especially around judgments used in applying the standard.
How we can help
With less than two years until implementation, you should begin reviewing lease arrangements, assessing the financial impact on key metrics, and evaluating whether existing systems and reporting processes are fit for purpose under the revised standard.
As ever, professional advice should be sought in advance of making any changes. Please speak to Huw Sheppard at huw.sheppard@kilsbywilliams.com and 01633 654155 or your usual Kilsby Williams contact to discuss.
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