How the FRS102 changes affect the professional services sector

In a post-pandemic world, employee numbers are beginning to align with office space requirements again, with many firms encouraging or insisting on a minimum number of ‘in-office’ days each week. In conjunction with this, for many professional firms, including law and accountancy firms, operating lease commitments for office space are significant. Therefore, with the upcoming changes in FRS102, care needs to be taken when assessing each of the audit threshold criteria to confirm whether your firm is still likely to be exempt from audit going forward.

Company size changes

Employees are one of the three metrics used to establish company size and the threshold of 50 will not be changing in the new company size thresholds that are effective for periods commencing 6 April 2025. Companies are ineligible to be classed as a small company and therefore ineligible for audit exemption, if 2 of the 3 following criteria are breached for two consecutive years:

• Revenue of more than £15m (increasing from £10.2m)
• Gross assets of more than £7.5m (increasing from £5.1m)
• More than 50 employees

These increases in revenue and gross assets will take some firms out of the requirement for statutory audit and delay the time frame for growing firms to meet the audit criteria.

Further awareness of the changes in financial reporting standards is also required, however, with the introduction of the FRS102 Periodic Review 2024.

FRS102 Periodic Review

The FRC delayed the introduction of the FRS102 Periodic Review 2024 until periods commencing 1 January 2026, and if the changes are introduced as expected then now is the time to start preparing. The two key changes in the standard relate to income recognition and operating leases, closer aligning the standard with International Financial Reporting Standards.

Therefore, for growing professional firms who are above, or soon will be above, 50 employees, the requirement for future audit needs advanced consideration. Professional firms often have a high amount of lockup on the balance sheet, so when combined with cash and fixed assets, gross assets could well be the metric that breaches the threshold before turnover; therefore, it is one that professional firms need to be mindful of.

The impact of the above-noted changes could further increase the gross assets on the balance sheet, with firms being required to capitalise the net present value of operating leases into right-of-use assets and lease liabilities. This capitalisation will increase gross assets, meaning that businesses may well exceed even the new audit threshold quicker than anticipated. As an example, if a company is paying £500k pa in rent with a 4-year lease and discount rate of 6%, it would likely need to capitalise around £1.7m to £1.8m of asset and liability at the start of the lease, depending on whether payments are in arrears or advance.

Other impacts of the change are an increase in EBITDA (as operating leases are split between interest and depreciation as opposed to rental or other admin costs) and an increase in liabilities. Such adjustments may have an impact on covenants and, again, will require some foresight and early discussion with bank relationship managers.

 If you need assistance or would like to discuss how best to prepare for the changes and how they will likely impact you, please do not hesitate to contact us using the form below.