Navigating FRED 82: Considerations for tech companies

The effective date is for periods beginning on or after 1 January 2026 with early adoption permitted, provided all amendments are applied at the same time.

The most significant changes to UK GAAP are changes in the recognition of revenue and leases to align more closely with IFRS 15 and 16.

There is a new model of revenue recognition, based upon the five-step model for revenue recognition under IFRS 15. This change will also impact micro entities reporting under FRS 105 with additional simplifications.

There is a new model of lease accounting, based upon IFRS 16’s on balance sheet model. This removes the differentiation between finance and operating leases and create a ‘right-of-use asset’ on the balance sheet with a corresponding liability, meaning most lessees with operating leases will be impacted. The right-of-use fixed asset will be subject to depreciation and interest based on the liability will be charged to profit and loss, affecting the presentation of financial information.

REVENUE RECOGNITION:

New contracts entered into should clearly state the different individually identifiable obligations (or promises as they are known) as part of the 5-step model. This is to make the transition simpler and recognition of revenue known before the effective date.

The identifiable obligations could be a 12-month software licence with access to updates (1) and a piece of hardware (2). Where these are determined to be a bundle of services provided, would be dependent on whether the hardware is used only for use with the licence or the hardware can be used independently. This will be key to understand the obligations to attach the transaction price and when to recognise the revenue.

ACTION:

Tech companies should reassess how they bundle and unbundle existing services, where they have contracts in place which will span between the old and revised standard.

LEASE ACCOUNTING:

Any new leases being entered into, especially those which are long term should be considered.

Leases will now be accounted for on the balance sheet as a debit to non-current assets with the corresponding credit side being in liabilities, bringing the lease commitment onto the balance sheet. The non-current asset being depreciated, and the liability reduced by the lease payment each month. Interest is calculated and charged monthly on the liability. Instead of recognising a lease expense in the profit or loss, this will now be split into depreciation and interest.

This will have a positive effect on EBITDA as the lease expense is no longer in earnings and gets added back in the interest and depreciation, so an adjusted EBITDA should be considered.

By bringing the leases onto the balance sheet, the current portion of the liability will affect the companies gearing.

ACTION:

Tech companies should reassess how they analyse existing leases, including the lease term and future payments, especially where they straddle the old and revised standard.