Date of publication: June 2016
FRS102: Changes to UK accounting standards
For periods commencing on or after 1 January 2015 non-small UK companies will not be permitted to prepare their accounts in accordance with Current UK GAAP. Instead non-small entities which apply Current UK GAAP will need to transition from Current UK GAAP to one of the alternatives.
- EU endorsed IFRS/IAS: those accounts prepared in accordance with International Accounting Standards within the meaning of s395 of the Companies Act. Hereafter ‘IAS’.
- New UK GAAP: FRS 100, FRS 101 and FRS 102. Entities applying New UK GAAP will, within the framework of FRS 100, apply one of FRS 101 or FRS 102. FRS 101 is effectively the recognition and measurement requirements of IAS subject to some adjustments to ensure alignment with UK Companies Act and also reduced disclosure requirements. FRS 102 is a new suite of accounting requirements which are closely aligned to, but are not the same as, IFRS.
Please note that small companies can continue to prepare accounts under the FRSSE however this has also changed and is being withdrawn from 31st December 2015. Small firms may therefore want to consider adopting the new UK accounting standards.
Small companies will also have the option of using FRS102 Section 1A – a reduced disclosure framework for small companies.
Transition to one of IAS, FRS 101 or FRS 102 will impact on the accounts in two key ways:
- Assets and liabilities at the accounting transition date will be identified, recognised and measured in line with the requirements of the new standards; and
- Thereafter profits and losses will be recognised in accordance with the new standards. These may differ from those profits and losses that would have been reported had Current UK GAAP been retained.
The New UK GAAP - FRS 100, FRS 101 and FRS 102
What are they?
FRS 100 sets out rules and guidance on how to select the appropriate accounting framework for a particular entity or group
FRS 101 introduces a new reduced disclosure framework enabling companies to apply the recognition and measurement bases of IFRSs while being exempt from having to make a number of disclosures required by full IFRSs.
FRS 102 is the “main” standard which replaces current UK GAAP. It is based on IFRS for SMEs which is a simplified version of full IFRSs but is restricted in scope. FRS102 incorporates a number of changes to the IFRS for SMEs in order to widen the scope, ensure the standard complies with UK company law requirements and reintroduce a number of options available under IFRSs and existing UK GAAP. FRS 102 also includes a set of disclosure exemptions.
FRS102 will be the likely choice for those companies unable to use the FRSSE. There are some key changes to be aware of as these may impact on the presentation and performance of the company shown in the financial statements. It is important that you are planning for these changes and understand the impact that they will have on your financial statements.
- Intangible Assets & Goodwill – Current UK GAAP sets the default period of 20 years for amortising Goodwill. Under New UK GAAP the useful life must be justified and if it cannot be then the useful life shall not exceed 10 years.
- Intangible Assets – under FRS102 more intangibles, e.g. patents, licences, customer lists and so forth, will be recognised on business combinations separate from Goodwill. Historically under FRS10 intangible assets had to be capable of being separately disposed of or settled, whereas under FRS102 they need to be separately identifiable in the measureable, which is a wider recognition criteria for intangible assets. Given the changes to the tax treatment of goodwill this may result in revisiting the allocations on historic transactions.
- Investment Properties – currently UK GAAP requires investment properties to be revalued each year to open market value with changes going for the STRGL. FRS102 requires a revaluation each year to “fair” value (equivalent to open market value) with value changes taken to the profit and loss account. Under FRS102 the cost less depreciation method will only be used if fair value cannot be measured reliably without undue cost or effort.
- Financial Instruments – FRS 102 classifies financial instruments into ‘basic’ and ‘other’. Basic financial instruments include items such as trade receivables and payables. They are measured mostly at amortised cost with certain types being measured at cost or fair value. However most receivables and payables classified as current assets or liabilities will be measured at the undiscounted amount of cash expected to be paid or received. Other financial instruments such as foreign exchange forward contracts and loans with complex terms will be measured at fair value with movements recognised in the profit and loss account. Many of these instruments would not have been recognised on the balance sheet under current UK GAAP but simply disclosed.
- Investments held in listed shares - currently they may be measured at cost or fair value, whereas under FRS102 they must be measured at fair value with movements recognised in the profit & loss.
- Employee benefits – FRS102 refers specifically to short term employee benefits, which includes paid annual leave and paid sick leave. Such benefits must therefore be recognised as an accrual or prepayment as appropriate. Under current UK GAAP this is not specifically mentioned and therefore often ignored.
- Lease Accounting – currently the value of the Lease incentive (i.e. rent free period) is spread over the period to the 1st rent review whereas under FRS102 lease incentives are spread over the Lease Term, which may be significantly longer. However, this is only compulsory for leases that commence after the date of transition to FRS102. This may have a significant impact for a particular company and therefore influence when they choose to adopt.
- Deferred Tax – FRS102 is based on the same approach as UK GAAP, but also requires deferred tax to be recognised on items such as revaluation of property, a change that may make a calculation of deferred tax more complex and give rise to deferred tax in more situations.
This note does not contain a full statement of the law and it does not constitute legal advice. Please seek legal advice if you have any questions about the information set out above.