by John McCarthy Consulting Ltd. | Aug 13, 2025 | Blog, News
In this second of two blogs, we look at the impact of the leasing changes to FRS 102 coming soon. Last week we looked at the main balance sheet impact. This week we look at the P&L impact.
The familiar rent expense in the P&L will largely disappear and will be replaced by:
- Depreciation of the ROU asset, along with an
- Interest expense for the lease liability.
The impact of these changes will often result in a higher EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation) as lease costs move from operating expenses to depreciation and finance costs.
The other impacts will be:
- Businesses, not for profit entities and charities with loan agreements tied to financial covenants (e.g., debt-to-EBITDA ratios, interest cover) will need to carefully assess the potential impact of these changes. The sooner they start having conversations with lenders the better.
- An increase in reported assets could push some businesses over the audit exemption size thresholds, potentially triggering the requirement for a statutory audit.
Work to be done:
The preparatory work to be done in advance of 1 January 2026 will include:
- Identifying all affected lease contracts
- Identifying leases ‘hidden’ within service agreements
- Obtaining detailed information from lease agreements so as to have an accurate calculation of the ROU asset and lease liability along with the payment schedules, extension options, and an appropriate discount rate.
This change in Irish GAAP lease accounting is a significant one, promising more transparency but also requiring advance preparation. The sooner the changes are understood, the sooner businesses and charities/not for profit entities can plan to ensure effective compliance by the application date.
For audit cold file reviews and tailored training sessions explaining more about various topics like AML, Audit, FRS 102, please send a mail to john@jmcc.ie.
For more on engagement and representation letter templates and a variety of CPD webinars on money laundering and other accounting/audit related topics, please go to our website for:
ISQM TOOLKIT, or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard. We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. Please contact John McCarthy FCA by email at john@jmcc.ie.
by John McCarthy Consulting Ltd. | Aug 13, 2025 | Blog, News
In this first of two blogs, we look at the impact of the leasing changes to FRS 102 coming soon.
For accounting periods commencing on 1 January 2026, lease liabilities for most entities will now be on the balance sheet at 31 December 2026 and could spell trouble for EBITDA, loan covenants, and audit thresholds. The changes do not apply to micro entities (if they qualify to apply FRS 105).
Heretofore many businesses in Ireland have enjoyed the relative simplicity of ‘off-balance sheet’ accounting for their operating leases where a rent expense hit the P & L account, and for a multitude of entities, that was the end of the matter.
However, there is a significant change coming soon for Irish Generally Accepted Accounting Practice (known as Irish GAAP) under the Financial Reporting Standard (FRS) 102, bringing the treatment of lease accounting more in line with the international standard, International Financial Reporting Standard (IFRS) 16 Leases.
The good news is that there is some time to prepare, but not too long as there needs to be advance preparation but only four months at this stage.
The main change is that FRS 102 introduces the concept of the ‘right-of-use’ (ROU) model for lessees, largely based on IFRS 16 and virtually all leases will come on balance sheet. Businesses and charities will soon be required to recognise:
- A Right-of-Use (ROU) Asset: This asset represents the lessee’s right to use the leased asset over the lease term. It will appear on the balance sheet, typically alongside property, plant and equipment; and an equivalent
- A lease liability: This liability represents the obligation to make lease payments over the lease term. It will also be recognised on the balance sheet, divided into current and non-current portions.
Impact on financial statements
The impact of this change will be significant for many businesses and not for profit entities, particularly those with a substantial portfolio of operating leases. Examples include:
- Retailers with multiple leases,
- Manufacturers leasing machinery and
- Logistics firms with rolling fleet contracts.
These businesses can expect their balance sheets to grow, with an increase in both assets (ROU assets) and liabilities (lease liabilities). This will change key financial ratios, such as
- leverage and
- debt-to-equity.
More on this topic next week.
For audit cold file reviews and tailored training sessions explaining more about various topics like AML, Audit, FRS 102, please send a mail to john@jmcc.ie.
For more on engagement and representation letter templates and a variety of CPD webinars on money laundering and other accounting/audit related topics, please go to our website for:
ISQM TOOLKIT, or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard. We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. Please contact John McCarthy FCA by email at john@jmcc.ie.
by John McCarthy Consulting Ltd. | Jul 15, 2024 | Blog, News
Below we compare the differences between FRS 102 (focusing on ‘small’ entities) and FRS 105 (‘micro’ entities) along with some other factors to consider when deciding whether to prepare accounts using the ‘small’ or ‘micro’-entities regime. The ‘small’ and ‘micro’ entities regime thresholds have changed recently. See our separate blog here about these changes.
An entity entitled to and choosing to apply the ‘micro-entities’ regime must apply FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime. The micro-entities regime is optional and therefore, when preparing their financial statements, entities may wish to consider the differences between applying FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and FRS 105 when deciding on the most suitable regime. The links given here are to the January 2022 versions of FRS 102/105.
New editions of both standards are expected to be published in the summer of 2024, effective for accounting periods commencing on/after 1 January 2026.
Users of the accounts
The most important aspect to consider is the needs of users. Different stakeholders will have different expectations. For example:
- Suppliers/trade creditors
- Banks and
- Credit rating agencies may require more information than is provided by micro-entity accounts.
The level of information required by FRS 105 is very limited when compared to other standards, so be careful to advise your client about the implications for making a good impression on such stakeholders where that might be important.
Future growth plans
An entity that is entitled to either the ‘small’ or ‘micro-entities’ regime but is close to the size limits should consider carefully any decision on which regime to adopt. This is particularly relevant for a micro-entity if the business is expected to grow to the extent that it will be necessary to switch to the small entities’ regime in the near future. Transition from FRS 105 to FRS 102 Section 1A will involve significant changes to the presentation of the accounts and the accounting policies applied (see below).
Accounting Differences Between FRS 102 and FRS 105
Outlined below are eleven of the key accounting differences between FRS 102 and FRS 102:
|
TOPIC
|
FRS 102
|
FRS 105
|
| Revenue Recognition |
Section 23 completely revised (in the changes published in March 2024) to include a simplified version of the IFRS 15 Five Step Model effective for accounting periods starting 1 January 2026 with early adoption allowed from 1 January 2024.
See our July 2024 webinar on these changes called ‘The Main Changes in Irish GAAP’. |
Section 20 revised in a similar fashion to FRS 102 (in the changes published in March 2024) with the simplified version of the IFRS 15 Five Step Model introduced effective for accounting periods starting 1 January 2026 with early adoption allowed from 1 January 2024. |
| Leasing |
Section 20 is completely revised with the introduction of rules similar to those in IFRS 16, where almost all leases will go on balance sheet, and only certain types of operating lease will remain off balance sheet.
These changes are effective for accounting periods starting 1 January 2026 with early adoption allowed from 1 January 2024. |
No change to the previous regime of only capitalizing finance leases. All operating leases remain as they were before.
See our July 2024 webinar on these changes called ‘The Main Changes in Irish GAAP’. |
| Investment properties |
With the exception of investment property rented to another group entity, a revaluation each year is required, with changes recognised in profit or loss. |
Measured at cost less depreciation and impairment. |
| Property plant and equipment |
Measured at cost less depreciation and impairment but can choose to adopt a revaluation accounting policy for fixed assets of the same class |
Measured at cost less depreciation and impairment. |
| Intangible assets |
Measured at cost less amortisation and impairment but can choose in limited circumstances to adopt a revaluation accounting policy for intangible assets of the same class |
Measured at cost less amortisation and impairment. |
| Development costs and borrowing costs |
These costs can, subject to certain conditions, be capitalised. |
No option to capitalise. Must be expensed to the profit and loss account in the period in which they are incurred. |
| Trade and asset acquisition |
An intangible asset purchased with a business is normally recognised as an asset when separable and arises from a contractual or other legal basis |
An intangible asset purchased with a business must not be recognised separately from goodwill. |
| Financial instruments |
Financial instruments are divided into ‘basic’ and ‘other’ instruments.
The former are mostly measured at amortised cost, the latter mostly at fair value with movements generally recognised in profit or loss.
Entities can instead choose to apply the recognition and measurement requirements of IAS 39 Financial Instruments: Recognition and Measurement and/or IFRS 9.
The exception is directors’ loans which may be measured initially at transaction price. |
No distinction between ‘basic’ and ‘other’ with all financial instruments initially recognised at cost, which will be the transaction price. Subsequent revaluation or measurement of financial instruments at fair value not permitted.
For lending arrangements, simplifications are made in relation to the allocation of interest and transaction costs, and no requirement to calculate an effective interest rate.
Also, there is no requirement to impute a market rate of interest in arrangements conducted at non-market rates. |
| Equity-settled share-based payments |
Recognised at the fair value of the goods or services when received. For arrangements with employees, fair value is measured at the grant date and the expense recognised over the vesting period. |
Not recognised in the accounts until the shares are issued.
|
| Foreign exchange forward contract |
Recognised on the balance sheet as a financial instrument at fair value and the associated debtor or creditor retranslated at the year-end rate. Hedge accounting can be applied in certain circumstances. |
When a trading transaction is covered by a related or matching forward contract, the requirement is to use the rate specified in the contract.
If not matched to a trading transaction the cost of the foreign exchange forward contract will be recognised as a financial asset, unless it is not material in which case it will be recognised immediately as an expense in profit or loss. |
| Defined benefit pension plans |
Net interest on the net defined benefit asset or liability is recognised in the profit and loss account, and is calculated with reference to high quality corporate bonds i.e., the same rate is applied to both the plan assets and liabilities. |
Recognition of the surplus or deficit of the plan on the balance sheet not permitted. Agreed funding of deficit must, however, be recognised as a liability. Contributions payable to the plan accounted for as an expense. |
| Government grants |
Government grants can be accounted for using either the performance model or the accruals model. |
Requirement to use the accruals model.
|
| Deferred tax |
Based on timing differences |
No deferred tax |
Please see our latest CPD Webinar on The Main Changes in Irish GAAP (recorded July 2024).
See our webinar entitled ‘The Main Changes in Irish GAAP’ on the latest changes to FRS 102 here.
For more on the whole ISQM process for audit firms, please see our ISQM 1 Toolkit on our website here.
Please go to our website to see our:
- Anti-Money Laundering Policies Controls and Procedures Manual (March 2022) — View the table of contents
- AML Webinar (December 2023) available here, which accompanies the AML Manual. It explains the latest legal AML reporting position for accountancy firms and includes a quiz. Upon completion you receive a CPD certificate for attendance in your inbox.
- Letters of engagement and similar templates—Please visit our website here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items bought together.
- ISQM TOOLKIT, or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by email at john@jmcc.ie.
- We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.
by John McCarthy Consulting Ltd. | Jul 15, 2024 | Blog, News
As we discussed in last week’s blog, the Financial Reporting Council announced some important changes to FRS 102 in March 2024.
These changes are effective for accounting periods commencing 1 January 2026, with early adoption allowed. There were no lease accounting changes to FRS 105, but this article focuses on FRS 102. See last week’s blog for the Revenue Recognition changes to FRS 102.
Lease Accounting Changes
IFRS 16 first introduced an on-balance sheet model for lessees five years ago in 2019. FRS 102 is doing something similar now. Essentially, it means that companies will need to recognise a lease liability on the balance sheet and a corresponding right of use asset for those operating lease commitments that are currently expensed to the profit or loss.
The lease liability will be calculated using the present value of the company’s payment obligations over the remaining lease term based on a bank quotation for an interest rate for a right of use asset for the same amount.
There are recognition exemptions available for ‘low value’ or ‘short leases’ as well.
Implications of these changes
- Balance sheet – there will be an increase in total assets and total liabilities.
- Income statement – we are going to see amortisation charges for leases increase over the life of the lease unless the company is already measuring the respective asset categories on a ‘fair value basis’ where they will continue to do so using the effective interest rate.
- Operating lease expenses currently in the profit or loss will be replaced by a combination of depreciation plus finance lease interest expenses which will ultimately lead to an increase in EBITDA.
- Cash flow statement – the cash paid under the lease will remain the same, but the classification in the cash flow statement will lead to:
- An increase in cash flows from operating activities
- An increase in the outflows from financing activities
- Impact on financial ratios especially those linked to EBITDA, gearing, and net debt. Companies may need to examine more closely their:
- Debt covenants;
- Incentives; and
- other obligations that involve these EBITDA measures.
Other Disclosure Changes
Additional disclosures will also be required – both qualitative and quantitative information for lease commitments. Additionally, those companies that avail of the recognition exemption for ‘short term’ or ‘low value’ leases will need to disclose the precise details of the leases involved.
Simplification
There is a useful simplification to do with the use of discount rates. IFRS 16 requires the use of an ‘incremental borrowing rate’ (IBR), and this is where the rate implicit in the lease can’t be determined.
FRS 102 allows for the IBR too, but as an ‘easier’ alternative permits the use of an ‘obtainable borrowing rate’ (OBR) which is a much less complicated alternative. In cases where neither of these are available, FRS 102 allows for a gilt rate, but this is expected to be a rare occurrence.
Comparatives
The standard allows for the modified retrospective approach with regard to comparatives, meaning there is no need to restate comparatives.
Planning Ahead
Companies need to prepare in advance for the advent of the new FRS 102 leasing requirements by taking the following steps:
- Gather data on existing operating lease arrangements;
- Explore the implications of the potential discount rates that could be used;
- Start performing an initial impact assessment;
- Gauge what impact the leasing changes will have on their:
- Financial ratios;
- Primary statements;
- Balance sheet valuations; and
- Tax liabilities, not ignoring deferred tax.
See our webinar entitled ‘The Main Changes in Irish GAAP’ on the latest changes to FRS 102 here.
For more on the whole ISQM process for audit firms, please see our ISQM 1 Toolkit on our website here.
Please go to our website to see our:
- Anti-Money Laundering Policies Controls and Procedures Manual (March 2022) — View the table of contents
- AML Webinar (December 2023) available here, which accompanies the AML Manual. It explains the latest legal AML reporting position for accountancy firms and includes a quiz. Upon completion you receive a CPD certificate for attendance in your inbox.
- Letters of engagement and similar templates—Please visit our website here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items bought together.
- ISQM TOOLKIT, or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by email at john@jmcc.ie.
- We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.
by John McCarthy Consulting Ltd. | Jul 15, 2024 | Blog, News
In March this year the Financial Reporting Council announced some important changes to FRS 102.
These changes are effective for accounting periods commencing 1 January 2026, with earlier adoption allowed. There are also supplier finance arrangements which come into effect for accounting periods starting on 1 January 2025, but these are not common in SMEs, and so they will not be discussed in this blog.
Revenue Recognition Changes
The 5 Step model is being introduced into FRS 102 and is based on IFRS 16 and provides a structured approach, with appropriate simplifications in FRS 102. Revenue accounting changes were also announced to FRS 105, but this article focuses on FRS 102.
The basic scenario is to recognise revenue when promises are made regarding when the control of the goods and services is transferred to the customer, rather than when the risks and rewards are transferred.
Clients will need to:
- Review the contracts that they have with their customers to identify each promise and understand what they’ve promised to do.
- Determine a transaction price for each transaction then allocate the transaction price to each promise made under the contract.
- Recognise the revenue as and when the client satisfies each of the promises under the contract.
Likely Impact
The impact will vary depending on the company’s accounting structure, size, and complexity of their business as well as the industry that the client operates in.
For example, clients in the retail or hospitality industries usually have more straightforward contracts with simple promises e.g. the sale of consumables/services, and there may be minimal changes.
In other sectors such as software, technology or communications there might be more significant impact as contracts in these sectors tend to be more complex, involving various deliverables or long-term arrangements and, in some cases, they can have multiple promises.
A simplification in FRS 102 allows companies to combine similar contracts using a portfolio approach as opposed to recognising contracts on a contract-by-contract basis.
Likely Changes
The most likely impacts will be in areas like:
- Key performance indicators like EBITDA;
- Sales targets;
- Incentives or bonus structures that are linked to revenue, which may then have a knock-on effect on
- Negotiations with customers;
- Pricing strategies;
- Debt covenants; and
- Interest cover.
It will be necessary to consider the wider implications of this standard sooner rather than later. A detailed review (including a detailed review of sales contracts and revenue streams) on accounting policies, contract structures, and operations will be necessary.
See our webinar entitled ‘The Main Changes in Irish GAAP’ on the latest changes to FRS 102 here.
For more on the whole ISQM process for audit firms, please see our ISQM 1 Toolkit on our website here.
Please go to our website to see our:
- Anti-Money Laundering Policies Controls and Procedures Manual (March 2022) — View the table of contents
- AML Webinar (December 2023) available here, which accompanies the AML Manual. It explains the latest legal AML reporting position for accountancy firms and includes a quiz. Upon completion you receive a CPD certificate for attendance in your inbox.
- Letters of engagement and similar templates—Please visit our website here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items bought together.
- ISQM TOOLKIT, or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by email at john@jmcc.ie.
- We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.
