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In September 2024, the FRC released the latest version of Financial Reporting Standard 102 (FRS 102). FRS 102 is the accounting standard that governs most Credit Union financial statements. The new standard applies for financial statements beginning on or after 1 January 2016. So for most Credit Unions the first set of accounts that will be effected will be the financial statements for the year ended 30 September 2017.

There had been concern that the bad debt rules from IFRS9 would be introduced into the new version of FRS 102. This has not occurred in the September 2024 release but is a possibility for future versions of FRS 102.

The new standard makes a number of changes to the accounting rules including those on revenue recognition and on calculating fair value. One of the most significant changes, however, is regarding the accounting treatment for operating leases by the lessee.

Operating Leases and the impact on Capital

Currently when you have a lease under an operating lease, the lease payments are shown as an expense in the Revenue Account. The leased asset is not currently shown in the accounts nor is the remaining creditor.

Under the new version of the standard, an asset will be shown for the leased assets and a corresponding creditor. In the Revenue Account you will have expenses for depreciation on the new asset and interest on the operating lease creditor instead of the lease charge.

This will be of significance to credit unions who have significant level of operating leases. It will increase their level of assets but will not impact capital directly (though the change from lease payments to depreciation/interest will effect the timing of expenses). This will mean, that under the new accounting standard the capital ratio will decrease, if you have significant level of assets on leases.

There is exemptions from this treatment for short term leases (lasting less than 12 months) and some low value leases. We will cover the accounting treatment of leases in more detail in a future blog.

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