We welcome the opportunity to respond to FRED 82. 

In general, we consider that the UK financial reporting regime is working well and is achieving the intended objectives. We have developed our response in the context of the FRC’s overriding objective when developing financial reporting standards and, in particular, the aim to achieve consistency with global accounting standards through the application of an IFRS-based solution unless an alternative solution is clearly better.

While we believe that it has been worthwhile taking into account changes proposed in the IASB’s exposure draft IASB/ED/2022/1 (“the IFRS for SMEs ED”) in informing the FRC’s decisions and thought processes when developing FRED 82, in our view it does not necessarily follow that FRS 102 needs to remain consistently aligned to the IFRS for SMEs. The standards have already diverged in significant respects, both on and since their initial publication, and they serve different markets and user needs.

The population of entities applying FRS 102 is both broad in size and diverse in nature. The standard therefore needs to contain sufficient requirements which are comprehensive and understandable, enabling preparers to account appropriately for complex arrangements. While this may result in sections of FRS 102 which are longer than in previous versions, we believe this is appropriate and necessary in maintaining an effective standalone financial reporting standard that preparers are able to understand and apply to achieve an appropriate accounting outcome.

With this in mind, we strongly support incorporating the principles of both IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases into Section 23 Revenue and Section 20 Leases of FRS 102, with appropriate simplifications, clarifications and transitional provisions to achieve a proportionate solution. We are broadly supportive of the overall proposals for Sections 20 and 23 and commend the FRC for its work in these areas. 

We are also supportive of aligning the definition of fair value with that in IFRS 13 Fair Value Measurement and including a new Section 2A Fair Value Measurement to address this topic. We note that entities applying FRS 101 Reduced Disclosure Framework as well as those adopting an accounting policy of applying the recognition and measurement requirements of IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments under FRS 102 are already required to apply this definition and we consider that it is generally unhelpful to have more than one definition of such a core concept in common usage. However, there are currently no transitional provisions proposed in relation to the change in the definition of fair value. We suggest that, consistent with IFRS 13, provisions are included in Section 1 Scope to apply the revised definition of fair value prospectively from the start of the reporting period in which the requirements of Section 2A are first applied.

We agree with delaying the consideration of introducing an expected credit loss (ECL) model into FRS 102, at least until after the IASB has issued the third edition of the IFRS for SMEs Accounting Standard.  However, we do not support an approach that involves incorporating a simplified ECL model directly into the requirements of Section 11 Basic Financial Instruments and Section 12 Other Financial Instruments Issues. Instead, we propose that the FRC follows the simplest approach of requiring the application of the full recognition and measurement requirements of IFRS 9 for a subset of entities. That subset should be determined based on the activities of the entity, and not the entity’s size or whether it meets the definition of a public interest entity.

Although we are broadly supportive of the other changes to FRS 102 and the other FRSs, we have concerns that proposed changes to FRS 103 Insurance Contracts may have unintended consequences. Further, we do not agree with the inclusion of IFRS 15 revenue principles in FRS 105 The Financial Reporting Standard applicable to the Micro‑entities Regime; the cost of requiring micro-entities to work through these requirements would exceed the benefit of doing so, and we consider it likely that in the majority of cases the resulting answer would not differ materially from that arrived at under the extant Section 18.

In principle, we are supportive of the proposed effective date of 1 January 2025, provided that the FRC consults and engages with SORP-making bodies to ensure that they will have sufficient time, once the revised standard is published, to develop, consult on and finalise updates to their respective SORPs. We also believe it is essential that the FRC conducts appropriate outreach and stakeholder engagement in the time between publication of the final standard and the effective date to help stakeholders understand and prepare for the changes, particularly in respect of lease accounting which will affect a very broad range of entities. Finally, if the effective date is to be 1 January 2025, we also believe it is essential that the FRC issues the revisions to FRS 102 in final form by the end of 2023 so as to allow preparers sufficient time for implementation.

The full response is contained within our comment letter.