How will changes to FRS 102 impact healthcare businesses?

In March 2024, the Financial Reporting Council (FRC) published the final version of the Periodic Review 2024, which makes substantial amendments to FRS 102. This article, focussing on the healthcare sector, continues our series looking at the impact of these changes on key industries.

The changes to FRS 102 are mandatory for accounting periods starting on or after 1 January 2026, and are expected to result in material changes for many businesses in the healthcare industry. This article outlines the key changes and their commercial implications.

For tailored guidance for healthcare businesses, visit our Bridging the GAAP essential guide to IFRS, UK GAAP and narrative reporting developments.

1. Revenue recognition

One of the most notable changes is the introduction of a new five-step model for revenue recognition, aligning FRS 102 closely with IFRS 15. General information can be found here. Some key considerations for healthcare businesses are as follows:

• Patient service contracts: Healthcare providers often have complex contracts involving multiple services such as consultations, treatments, and follow-up care. For example, a contract for a surgical procedure might include pre-operative consultations, the surgery itself, and post-operative care. Under the new model, an entity’s management will need to determine whether each of these services is considered a separate performance obligation. As revenue is recognised when or as a performance obligation is delivered, determining what the performance obligations are can have a material impact on an entity’s revenue recognition.
• Bundled services: Healthcare providers offering bundled services (e.g., a package of treatments) will need to allocate the transaction price to each service based on its standalone selling price. This could lead to changes in the timing and amount of revenue recognised compared to current practices.
• Third-party payers: Contracts with insurance companies and other third-party payers will need careful evaluation, in particular, to determine whether the ‘customer’ is considered to be the patient or the insurance company. These contracts are also more likely to include variable consideration, such as performance bonuses or penalties, which must be estimated and allocated to the performance obligations.
• System and process changes: The initial application of IFRS 15 required significant changes to accounting systems and processes. Healthcare providers should anticipate the need for similar efforts for FRS 102, including staff training and updates to financial reporting systems.

2. Lease accounting

The amendments also align FRS 102 with IFRS 16, requiring almost all leases to be recognised on the balance sheet. Healthcare entities will need to recognise a right-of-use (ROU) asset and a corresponding lease liability for their leases. This change will affect the financial statements of healthcare providers with significant lease arrangements, such as those for medical equipment, property leases, and other long-term assets.

Specific impacts on healthcare providers:

Many healthcare providers lease expensive medical equipment, as well as having long term property leases for hospitals, clinics and other facilities.

Recognising these leases on the balance sheet will increase both assets and liabilities, as well as increasing EBITDA, potentially affecting key financial ratios and covenants.

3. Impact on Key Performance Indicators (KPIs)

The changes to revenue recognition and lease accounting will have significant implications for key performance indicators (KPIs) such as EBITDA, net debt, interest cover and other financial metrics.

Given the potential impact on these financial metrics, it is crucial for healthcare providers to engage in early discussions with lenders and other stakeholders. Understanding and communicating the changes to your entity’s metrics will help you to manage expectations with key stakeholders internally and externally, as well as identifying where there may be a need to renegotiate the terms of impacted covenants.

How we can help

We have a dedicated team of accounting and financial reporting experts, experienced in both UK GAAP and IFRS. We have been helping our clients understand the impact of transitions to IFRS 15 and 16 (on which FRS 102’s changes to revenue and leasing are based) since these standards were issued in 2014 and 2016 respectively.

We can help you understand the impact of the revised standards on your management information, financial statements, and business operations, providing practical guidance on how to implement them effectively and efficiently.

We can also help you plan your communications with your stakeholders and ensure that your financial statements are clear, transparent and compliant with the new requirements.

If you require any support or would like to discuss financial reporting for your healthcare business in more detail, please contact Jonathan Collins or Suneel Gupta.