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Impact Assessment and Feedback Statement - FRED 78
The FRC's purpose is to serve the public interest by setting high standards of corporate governance, reporting and audit and by holding to account those responsible for delivering them. The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries. As the Competent Authority for audit in the UK the FRC sets auditing and ethical standards and monitors and enforces audit quality.
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Overview
- In June 2021, FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime were amended by Amendments to FRS 102 and FRS 105 – COVID-19-related rent concessions beyond 30 June 2021. This Impact Assessment and Feedback Statement accompanies those amendments, which are in relation to temporary rent concessions that occur as a direct consequence of the COVID-19 pandemic which result in a reduction to lease payments originally due after 30 June 2021, but not beyond 30 June 2022.
- The Impact Assessment and Feedback Statement:
- sets out the Impact Assessment for these amendments, after taking account of respondents' comments on the Consultation stage impact assessment; and
- summarises the six responses received to FRED 78 Draft amendments to FRS 102 and FRS 105 – COVID-19-related rent concessions beyond 30 June 2021 and the FRC's response to them.
Impact Assessment
Introduction
1The Financial Reporting Council (FRC) is committed to a proportionate approach to the use of its powers, making effective use of impact assessments and having regard to the impact of regulation on small enterprises.
Amendments to FRS 102 and FRS 105
2These amendments will only affect entities that agree temporary rent concessions as a direct consequence of the COVID-19 pandemic which result in a reduction to lease payments originally due after 30 June 2021, but not beyond 30 June 2022; and meet the other conditions in FRS 102 and FRS 105 that require entities to recognise changes in operating lease payments on a systematic basis over the periods that the change is intended to compensate.
3The amendments extend the time conditions that apply to the existing requirements in FRS 102 and FRS 105 which specify how changes in operating lease payments that arise from COVID-19-related rent concessions should be recognised. As the circumstances that existed when these requirements were originally developed may extend beyond June 2021, the extension will allow concessions with similar characteristics that occur in similar circumstances to be accounted for consistently. This will improve the ability of users to compare the financial statements of different entities.
4The treatment requires entities to recognise those changes that reduce lease payments in this extended period, and meet the other specified conditions, on a systematic basis over the periods that the change is intended to compensate, rather than the impact of the change being extended into future periods. This is considered to reflect more accurately the temporary nature of these concessions and provide more useful information to users.
5These amendments introduce no other changes to the requirements of FRS 102 and FRS 105. For this reason, they are expected to be easy to apply and are not expected to increase the costs of preparing financial statements.
Conclusion
6Overall, the FRC believes that the amendments to FRS 102 and FRS 105 will have a positive impact on the relevance and consistency of reporting by entities.
Feedback Statement
7The purpose of this Feedback Statement is to summarise the comments received in response to FRED 78 Draft amendments to FRS 102 and FRS 105 – COVID-19-related rent concessions beyond 30 June 2021. FRED 78 was issued in April 2021 and the comment period closed on 11 May 2021.
8The table below shows the number of respondents and analyses them by category.
Table 1: Respondents by category
| Category | No. of respondents |
|---|---|
| Accounting professional bodies | 3 |
| Accountancy firms | 2 |
| Representative bodies of preparers | 1 |
| Total | 6 |
9FRED 78 posed two questions, and the feedback and FRC response to them are summarised below.
Question 1
Do you agree with the proposed amendments to FRS 102 and FRS 105? If not, why not?
Table 2: Respondents' views on Question 1
| Response | No. of respondents |
|---|---|
| Agreed1 | 6 |
| Disagreed | – |
| Total | 6 |
10All respondents agreed with the proposals.
11Two respondents made comments in relation to the existing requirements of FRS 102 and FRS 105 that require entities to apply the proposed amendments retrospectively. One respondent recommended that the description of the instances when retrospective application will be required should be expanded and include illustrative examples. Another suggested that consideration should be given to whether it would be appropriate to permit entities to apply the proposed amendments prospectively.
FRC response
12After considering all the comments made, the FRC proceeded with the proposed amendments to FRS 102 and FRS 105.
13The FRC acknowledges that the timing of the amendments may result in some entities having to apply them retrospectively in future periods, when financial statements containing a relevant concession have been authorised for issue prior to the amendments being issued. However, such instances are expected to be rare.
14Retrospective application ensures that these concessions are accounted for consistently across those reporting periods when they are expected most commonly to occur. Although the potential difficulties of this approach are acknowledged, the required accounting is not considered unduly complex.
Question 2
In relation to the Consultation stage impact assessment, do you have any comments on the costs and benefits identified? Please provide evidence to support your views.
Table 3: Respondents' views on Question 2
| Response | No. of respondents |
|---|---|
| Agreed | 2 |
| Disagreed | – |
| Did not comment2 | 4 |
| Total | 6 |
15Most respondents did not comment on the Consultation stage impact assessment. Those that did agreed with the conclusion that the proposed amendments will have a positive impact on the relevance and consistency of reporting by entities.
FRC response
16Overall, the FRC believes that the amendments to FRS 102 and FRS 105 will have a positive impact on the relevance and consistency of reporting by entities.
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