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Suitable for internal and external use
Technical
Bulletin
FRS 102 – The Financial Reporting Standard
applicable in the UK and Republic of Ireland
Overview - Introduction and purpose of the bulletin
In our previous Technical Bulletin no. 154 we gave an overview of the change
from old UK GAAP to FRS 102, particularly looking at processes and procedures
and highlighting the decisions and potential actions that should be taken in
advance in order to minimise the impact of unexpected and avoidable
consequences.
This Bulletin aims to give a more detailed overview of the key changes in
accounting rules compared to those under the old UK GAAP. Whilst this does not
purport to cover every change, it should give readers a good idea of the main
issues that may result in significant changes to the accounts.
The Bulletin does not cover service concession arrangements and financial
institutions. Those affected should read the relevant parts of section 34 on
specialised activities for further details.
The Appendix to this Bulletin gives a brief bullet point summary of the key
changes chapter by chapter, which it is hoped will be a useful source of reference.
For further advice
please contact:
Jenny Reed
+44 (0)20 7216 4666
j.reed@uhy-uk.com
or
Colin Wright
+44 (0)20 7216 4604
c.wright@uhy-uk.com
www.uhy-uk.com
FRS 102
TR 171/16
January 2016
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INTRODUCTION
AND EFFECTIVE
DATE
On 9 July 2009 the International Accounting Standards Board (IASB)
published the International Financial Reporting Standard for Small and
Medium-sized Entities (IFRS for SMEs), and the ASB proposed that this
should replace UK GAAP. The ASB issued an initial consultation document
on 11 August 2009 proposing what became known as the three tier system.
Several consultations and amendments later, the IFRS for SMEs became the
Financial Reporting Standard for Medium-sized Entities (FRSME) and then
finally morphed into FRS 102, the first version of which was published back
in March 2013. Since then, we have seen a number of amendments and two
new versions of the Standard. Selecting the appropriate version is
important, as there are some key differences between the versions and not
all entities can adopt the later versions early.
The original March 2013 version has been superseded by the August 2014
version, which will be the one used by most first time adopters along with
certain July 2015 and other interim amendments. This is the version on
which this Bulletin is based and to which all references are made unless
stated otherwise.
This Bulletin is primarily interested in the key changes in FRS 102 compared
to the old UK GAAP, looking at the application to medium and large
companies only (small companies are covered in Technical Bulletin 169-15).
References to “the Regulations” are to SI 2008/410 for companies and SI
2008/629 for charities.
EARLY
ADOPTION
The August 2014 version of FRS 102 may be adopted early as far back as
periods ending on or after 31 December 2012. Unincorporated charities may
not adopt FRS 102 early as their accounts preparation is governed by the
charity Regulations which still require them to prepare accounts under the
old 2005 SORP.
It is possible to adopt the September 2015 version of FRS 102 early, but only
by also early adopting SI 2015/980 at the same time. This version of FRS 102
can only be early adopted as far back as periods commencing on or after 1
January 2015. Doing so will permit the new, higher small company
thresholds to be applied early for the purpose of accounts preparation (and
hence eligibility to apply section 1A) but this cannot be applied early for
audit threshold purposes. See Technical Bulletin TR 168/15 for further
details.
TERMINOLOGY One of the most immediately obvious changes on reading FRS 102 is the
change in terminology; traditional UK GAAP terminology has generally
been replaced by its international equivalent. Hence stock is now known as
inventory, debtors as receivables and fixed assets as property, plant and
equipment (PPE).
However, paragraphs 4.2, 5.5 and 5.7 state that the statement of assets and
performance statement must be prepared in accordance with the formats in
the company Regulations. Since these have not been updated for the
terminology changes, our view is that these must still be complied with,
and thus the ‘old’ terminology must still be used in preparing statutory
accounts. Paragraph 3.22 permits the use of other titles for the financial
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statements as long as they are not misleading. Hence, for example, the
statement of financial position can alternatively be called a balance sheet
but either way, the line item wording must stay as per the Regulations.
The term ‘public benefit entity’ (PBE) has also been introduced. The
consultation stage included a separate draft standard known as the FRSPBE
containing specific accounting rules for public benefit entities. These were
subsequently incorporated into FRS 102, the relevant paragraphs being
prefixed by PBE for identification purposes.
A PBE is an entity whose primary objective is to provide goods or services
for the general public, community or social benefit where any equity is
provided with a view to supporting the entity’s primary objectives rather
than with a view to providing a financial return to equity providers,
shareholders or members. Thus PBEs encompass more than just charities,
and hence may also include housing associations, cooperatives, community
interest companies, clubs, societies etc. PBEs are required to give an explicit
statement in the accounts that they are a PBE.
The existence of PBE paragraphs within FRS 102 has not, however, negated
the need for SORPs for charities, housing associations and higher and
further education colleges, which have now been duly updated for FRS 102.
Entities will also find the phrase ‘fair value’ used frequently. Whilst this is
not a new concept, many entities that previously accounted under the
historical cost rules may not have come across it before. Fair value is
defined as, “the amount for which an asset could be exchanged, a liability
settled, or an equity instrument granted could be exchanged, between
knowledgeable, willing parties in an arm’s length transaction”.
An extension of this is ‘fair value through profit or loss’. Under the old UK
GAAP, entities opting to revalue assets accounted for the revaluation
movements in the Statement of Total recognised Gains and Losses (STRGL).
In some cases, under FRS 102 such movements are accounted for through
the P&L. As discussed further below, this has significant implications for
the determination of distributable reserves under company law.
CONCEPTS AND
PERVASIVE
PRINCIPLES
Most existing UK GAAP users will be familiar with many of the
fundamental accounting concepts and principles that underpinned the old
UK accounting standards. These concepts and principles were previously
set out in a separate publication, the Statement of Principles for Financial
Reporting.
Under the new UK GAAP, concepts and pervasive principles are included
within the Standard itself in Section 2. Many are unchanged, but their
importance is such that it is strongly recommended that this section is read
in full.
Their importance arises from the fact that FRS 102 is a relatively short,
accessible standard that does not include specific rules for every accounting
eventuality. The Standard is principles based, and users are expected to
apply the principles in Section 2 when FRS 102 does not give specific rules
for the accounting for a particular matter (see accounting policies section
below).
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STATEMENT OF
COMPREHENSIVE
INCOME (SOCI)
FRS 102 contains a choice for presentation of performance. Entities may
continue to give two primary statements much as before, now called an
Income Statement (P&L) and a Statement of Comprehensive Income
(STRGL). Alternatively, a combined single Statement of (total)
Comprehensive Income may be given. The two statement approach is likely
to be the more popular option, as it has remained even for listed companies
in the UK following EU-adopted IFRS. Switching between the two is a
change in accounting policy and will have presentation and disclosure
implications.
Discontinued operations must now be presented in columnar format only,
for every line item. Thus the option to present limited information in the
format set out in P&L Example 1 to FRS 3 has been removed.
The definition of a discontinued operation has also changed significantly
compared to that in paragraph 4 of FRS 3. Any operations classified as
discontinued in the comparative period should be reassessed under the
new criteria and may need to be reclassified as continuing.
STATEMENT OF
FINANCIAL
POSITION
The statement of financial position is unlikely to look significantly different,
especially if the option to retain the traditional title of ‘balance sheet’ is
taken. The only other key presentational change is that the specific
requirement to disclose the net pension asset/liability on the face of the
balance sheet has been removed. However, there is a general principle in
paragraph 4.3 for an entity to present additional line items, headings and
sub-totals when such presentation is relevant to an understanding of the
entity’s financial position.
One other area that may cause issues within groups is section 4.7, which
states that a creditor must be classified as falling due within one year unless
the entity has an unconditional right to defer settlement for at least 12
months from the year end. It is not uncommon for intercompany trading
balances and loans to remain unsettled for long periods (often years) with
no formal agreement in place. Without a formal agreement or other
documentation of terms, such loans are likely to be classified as being
repayable on demand and measured at cost.
It is common for auditors to request a “letter of support” from the lending
group company (usually the parent company) confirming that such
facilities will not be withdrawn for 12 months from the date the financial
statements are approved. Whilst such letters support use of the going
concern principle, they do not affect the classification of intercompany
loans.
Any reclassification of such liabilities from long term to short term creditors
may affect key ratios and borrowing covenants. For groups wanting to
avoid this outcome for existing loans, it is too late if they did not formalise
terms before the transition date (which has long since passed), as these
cannot be backdated. It is, however, worth bearing this in mind for any
future loans.
Groups may like to consider making additional disclosures explaining the
nature of any informal group financing arrangements, in order to assist
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users of the financial statements to understand the true liquidity position.
CASH FLOW
STATEMENT
The only exemption in the August 2014 version of FRS 102 from presenting
a cash flow statement is for group members qualifying for and applying the
reduced disclosure regime in Section 1 (see below). Thus all other entities
applying this version of FRS 102 must prepare a cash flow statement. Small
entities can only obtain exemption from presenting a cash flow statement
by adopting the September 2015 version of FRS 102 early and applying the
reduced disclosure regime in Section 1A therein, (see Bulletin 169-15).
Readers may recall that the original version of FRS 1 required reconciliation
to cash and cash equivalents, and this was only amended to a very strict
definition of cash back in 1996 when the category of ‘liquid resources’ was
introduced. FRS 102 has reverted to a cash and cash equivalents
reconciliation.
The FRS 102 definition of cash is slightly more relaxed than that in FRS 1 in
that there is no explicit mention of the ‘24 hour rule’, but it still requires cash
deposits to be available on demand. The new definition of cash equivalents
is remarkably similar to that in the old FRS 1 except that there is no
reference to the somewhat arbitrary three months’ maturity.
The new style cash flow statement is in some ways simpler than its
predecessor in that there are only three categories of cash flow on the face of
the statement compared to FRS 1’s eight, namely:
Operating activities
Investing activities
Financing activities
The FRS also gives guidance as to how to classify cash flows under the new
headings. However, there is a choice, in that only:
Dividends and interest paid may be classified as either operating or
as financing cash flows.
Interest and dividends received may be classified as either operating
or as investing cash flows.
Whichever classification is selected, it must be applied consistently from
year to year.
OTHER PRIMARY
STATEMENTS
The requirement to produce a note of historical cost profits and losses has
been removed entirely.
A statement of changes in equity (similar, but not exactly the same as the
reconciliation of movements in shareholders’ funds) must now be
presented as a primary statement and with full comparatives.
However, where the only changes to equity arise from profit or loss,
payment of dividends, corrections of prior period errors and changes in
accounting policy, this information may be tagged on to the bottom of the
P&L to form a single statement of income and retained earnings. This is
likely to be the case for many private companies.
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NOTES TO THE
ACCOUNTS
Paragraph 8.4 is very prescriptive in setting out the precise order that the
notes should appear in, with the accounting policies being presented
immediately after the new mandatory statement of full compliance with
FRS 102. This is followed by the notes supporting the primary statements,
strictly in the order in which those primary statements and items appear,
followed by any other disclosure notes.
Some note requirements are “subjective”, where the level of detail of
disclosure needed will require interpretation in accordance with the spirit
of FRS 102, e.g. where the Standard refers to, “information that enables
users of financial statements to evaluate…” without being prescriptive as to
what that information is.
Accounting policies As noted above, accounting policies must now be included in the notes.
This will require some rearrangement of the financial statements for those
entities that previously disclosed accounting policies as a separate section of
the financial statements.
FRS 18 required disclosure of significant estimation techniques, but FRS 102
goes further in also requiring disclosure of critical judgments and sources of
estimation uncertainty, including any key assumptions made.
There is a significant change in the treatment of prior period errors. Under
FRS 3 these were usually corrected in the current period, only being
adjusted for in the prior period if considered to be ‘fundamental’. This
required significant judgment and often resulted in disagreement between
directors and auditors. Under FRS 102 prior period errors are accounted for
as prior period adjustments if ‘material’, a more objective measure.
Where the Standard does not specifically address the accounting for a
particular transaction, other event or condition, an entity’s management
must use its judgement in developing and applying an appropriate
accounting policy. In doing so, management is directed to refer to and
consider the applicability of the following sources in descending order:
a) the requirements and guidance in an FRS or FRC Abstract dealing
with similar and related issues;
b) where an entity’s financial statements are within the scope of a
Statement of Recommended Practice (SORP) the requirements and
guidance in that SORP dealing with similar and related issues; and
c) the concepts and principles in Section 2 (see above).
Revenue The accounting rules for revenue are largely the same as those in
Application Note G to FRS 5 and UITF 40. The appendix to Section 23 gives
a number of practical examples of revenue accounting treatment which are
based on those in IAS 18, but this will not cover every situation. Accounting
for revenue is based strongly on the key principles set out in Section 23.
Entities should read this section in detail, applying it to their own revenue
streams and circumstances and not relying on the examples.
The main difference relates to presentation and disclosure. The notes to the
accounts will need to provide an analysis of revenue by type (sale of goods,
rendering of services, interest, royalties etc) as specified in 23.30.
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Government grants SSAP 4 required application of an accruals model to government grants,
whereby revenue grants were deferred and matched against the relevance
expenditure as incurred. FRS 102 permits a choice of either an accruals
model or a new performance model, whereby revenue grants are
recognised when any performance-related conditions have been met. The
new charities SORP makes clear that the accruals model is still not available
to charities.
It is no longer possible to deduct capital grants from the carrying value of
the related fixed asset. Since this was not permitted by the Companies Act,
this change will make no difference to the vast majority of entities.
There are also some additional disclosures needed, namely details of:
Unfulfilled conditions and other contingencies related to grants
recognised as income; and
Other forms of government assistance that have directly benefitted
the entity e.g. technical or marketing advice, the provision of
guarantees and loans at zero or low interest rates.
Share based
payment
Section 26 of FRS 102 is largely based on FRS 20, and hence there are only a
few changes to the accounting for share based payment.
The option to measure equity instruments at their intrinsic value in the rare
case that an entity is unable to make a reliable estimate is no longer
permitted. This may still arise with share options in an unlisted entity, in
which case reference should be made to the general recognition principles
in Section 2.
For share based payment plans in groups, FRS 102 provides a simpler
alternative to the standard accounting treatment, whereby the group
members may recognise and measure the related expense on the basis of a
‘reasonable allocation’ of the expense for the group as a whole. Groups
taking this option must disclose this fact and the basis for the allocation.
There are also generally fewer disclosure requirements relating to share
based payment in FRS 102 than there were in FRS 20.
Other employee
benefits
Section 28 of FRS 102 covers all employee benefits other than share based
payment (see above). This section is very comprehensive, and includes
matters not explicitly covered by UK GAAP previously e.g. ‘short-term
compensated absences’. This is the source of the highly publicised ‘holiday
pay accrual’.
For entities whose holiday year coincides with their accounting year, the
value of holiday accrued but not yet taken may not be material, but should
still be calculated to demonstrate this. The figure will be zero for such an
entity which does not permit employees to carry holiday entitlement
forward.
For entities whose holiday year and accounting year differ, this could end
up being either an accrual or a prepayment, and could material for some
entities. This will be a prior period adjustment, and so figures for the two
previous years will also be needed to adjust the comparatives.
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The same principles apply to all other short term compensated absences e.g.
sick pay.
In respect of termination payments, in the relatively rare case that these fall
due more than twelve months after the period end, discounting is required.
The other three key changes relate to the treatment of defined benefit
pension schemes, the latter two of which are very significant if applicable:
A pension asset or liability can no longer be presented net of the
related deferred tax balance.
Under FRS 17, where the members of a group were unable to
identify their share of the underlying assets and liabilities, the
scheme was accounted for at entity level as a defined contribution
scheme, and only accounted for as a defined benefit scheme in the
group accounts. Under FRS 102, if there is a contractual agreement
or stated policy for charging scheme costs to individual entities, the
net defined benefit cost must be thus allocated. Otherwise, the
group entity that is legally responsible for the scheme must
recognise the cost of the whole plan, other members of the group
continuing to recognise a cost equal to their scheme contribution.
Many entities are members of multi-employer or state defined
benefit pension schemes, and being unable to identify their share of
the underlying net assets and liabilities, account for such schemes as
defined contribution schemes under FRS 17. Under FRS 102, such
entities must recognise on the balance sheet the discounted net
present value of any agreed deficit contributions. The impact on the
balance sheets of affected entities could be very material indeed.
Borrowing costs Borrowing costs may still optionally be capitalised in respect of PPE and/or
inventories. However, this policy choice may now be made on an asset class
basis rather than the blanket approach required by the old UK GAAP.
Foreign currency
translation and
hyper inflation
FRS 23 and 24 formed part of the ‘package’ of financial instrument
Standards which entities either adopted completely under the old UK
GAAP or not at all. As a result, most entities transitioning to FRS 102 will
have been previously applying SSAP 20 and UITF 9.
The first point to note is a terminology change. ‘Local currency’ under SSAP
20 becomes ‘functional currency’ under FRS 102, which also contains more
guidance than SSAP 20 on determining an entity’s functional currency.
The first key change is to the rules for translating foreign currency
transactions. It is no longer permissible to use an agreed contracted rate or
forward contract rate. An average rate may still be used, but whereas SSAP
20 merely stated that an average rate for a period may be used if the rates do
not fluctuate significantly, FRS 102 goes on gives examples of a week or
month as the period in question. Whilst these are merely examples, it is
suggestive that selecting a year as the period (which many companies have
done in the past) may not be appropriate. Similarly, at the period end the
closing rate must be used and not a contracted rate or forward contract rate.
The second key change is the introduction of a presentational currency. This
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was never mentioned in SSAP 20, but was included in FRS 23 (and IFRS) as
an option. Entities applying FRS 102 may now select a presentational
currency of their choice, which need not be the same as their functional
currency.
For entities whose functional currency is that of a hyperinflationary
economy, there is no longer the option to use a stable currency as an
alternative functional currency (as permitted by UITF 9). Entities that have
previously adopted the package of Standards including FRS 24 will
therefore see little change.
Income tax Somewhat confusingly, ‘income tax’ in the context of FRS 102 includes all
domestic and foreign taxes that are based on taxable profit. For most entities
this primarily means corporation tax and deferred tax, and the main
changes in this area all relate to deferred tax.
The timing difference approach to deferred tax largely remains, but there
are some additional recognition requirements that will, in certain
circumstances, give rise to new deferred tax balances, particularly on:
Revaluation gains and losses on non-monetary assets e.g. on
revalued PPE and investment properties; and
Differences between the fair value of the net assets recognised in a
business combination and the values thereto for tax purposes.
Property investment companies will be particularly hard hit by these new
requirements, which may affect key ratios and banking covenants.
Finally, FRS 19 permitted the discounting of deferred tax balances, whereas
FRS 102 does not.
Intangible assets
and goodwill
The useful economic life (UEL) of intangibles and goodwill is one aspect of
FRS 102 that has caught the eye of many commentators. The two key
changes are:
a) Intangible assets and goodwill can no longer have an indefinite
useful economic life (UEL) and must be amortised. This is one area
where FRS 102 diverges further from IFRS than the old UK GAAP,
since FRS 10 and IAS 38 both permit an indefinite UEL.
b) The FRS 10 rebuttable presumption that the UEL of goodwill or an
intangible does not exceed twenty years unless otherwise
demonstrated is not included in FRS 102. Instead, where an entity is
unable to make a reliable estimate of UEL, the life cannot exceed five
years.
This last point has proved highly controversial. As a result, the ‘five year
rule’ was subsequently changed to ten years in the September 2015 version
of FRS 102, which applies to periods commencing on or after 1 January
2016. Affected entities wanting to avoid this apparent inconsistency in the
rules should consider adopting the September 2015 version early as noted
above.
Although not what FRS 10 required, some entities may previously have
used a UEL of twenty years when they were unable to make a reliable
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estimate, in which case this may need to be shortened on transition to FRS
102. This is a change of estimate and not a change of accounting policy, so
should be accounted for prospectively and not as a prior period adjustment.
FRS 10’s mandatory review of UELs at the end of each reporting period has
been replaced by review only when there are indicators of a change.
The effect of the removal of an indefinite UEL and the aforementioned
rebuttable presumption is that impairment reviews are only now required
where there are indications of impairment, i.e. no automatic reviews when
the UEL exceeds a certain length (previously twenty years) or at the end of
the first full year after acquisition.
Furthermore, although impairment charges must first still be allocated to
goodwill, intangible assets are no longer prioritised over other assets within
a cash generating unit (CGU).
Property, plant and
equipment (PPE)
For entities that revalue asset classes, the rules regarding valuations have, at
first glance, been significantly relaxed. FRS 15 included detailed guidance
on the type and frequency of valuations that would satisfy the overall
requirement for the carrying value to be the current value. FRS 102 simply
states that revaluations should be made with sufficient regularity to ensure
that carrying value does not materially differ from fair value at the period
end. In practice, therefore, this should not make much difference, since a
valuation will always be required if it is suspected that there has been a
material change in value during the period.
The basis of valuation has also changed. FRS 15 required non-specialist
properties to be valued on the existing use basis, with disclosure of the
value on an open market value where this is materially different. FRS 102
requires fair value (equivalent to open market value) to be used.
Investment
property
The definition of an investment property no longer excludes property let to
another group company as long as it is held for rental earnings and/or
capital appreciation. This may result in some properties being reclassified at
the date of transition in the individual financial statements of the lessor,
whilst continuing to be shown as PPE in the consolidated accounts.
Mixed use property (e.g. where an entity rents out part of its own
operational building) should ideally be split between investment property
and PPE. However, where the fair value of each part cannot be measured
reliably without undue cost or effort, the entire property should be
accounted for as PPE. This issue was never explicitly addressed by SSAP 19,
although in practice, entities may have adopted the FRS 102 approach
previously. Charities should note that this represents a change in the rules,
since the 2005 SORP required such properties to be classified according to
their primary use unless each part was clearly distinguishable.
The main accounting change is that movements in the fair value of
investment property are now shown in the P&L (FVTPL). There is no
requirement to transfer such gains and losses to a non-distributable
revaluation reserve, although entities may choose to do so and this is
recommended. Those that choose not to will need to keep a separate record
of distributable reserves since unrealised, non-distributable profits will then
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end up in the P&L reserve and determining the legality of dividends will
otherwise become impossible.
Where the fair value of an investment property cannot be obtained without
undue cost or effort, it must be classified and accounted for as PPE,
although should the situation change in the future, such property would
need to be reclassified again.
The SSAP 19 requirement to depreciate investment property held on a short
lease (in order to avoid the situation whereby the rentals are taken to
income but the lease is amortised against the revaluation reserve) has gone
as this anomaly no longer arises when accounting at FVTPL.
Heritage assets No significant changes.
Business
combinations
Most business combinations will continue to be accounted for as
acquisitions, with acquisition accounting now called the “purchase
method” of accounting. Merger accounting may only be used under FRS
102 when:
a) a business combination meets the definition of being a ‘group
reconstruction’; or
b) a PBE combination is in substance a merger (dealt with separately in
section 34).
A group reconstruction is defined in the glossary as either the transfer of
ownership of a subsidiary within a group or to another entity or group
under common ownership, adding a new parent company or combining
two entities into a group that were previously under common ownership.
Crucially, there must be no change in the ultimate ownership.
Although the company law criteria for merger accounting have recently
been amended, these changes do not apply until 2016 without early
adoption. Entities applying the August 2014 version of FRS 102 will
therefore need to look carefully at business combinations to ensure they
qualify for merger accounting under both FRS 102 and company law.
The criteria for recognition of an intangible asset in a business combination
have been softened such that it no longer needs to be capable of being
separately disposed of. As a result, more intangibles may be identified
separately from goodwill than was previously the case.
Finally, deferred tax must now be recognised on fair value adjustments
made to assets or liabilities acquired in a business combination.
Inventories,
biological assets
and extractive
industries
Net realisable value is now termed estimated selling price less costs to
complete and sell. Other than this there are no significant changes
regarding non-specialised stocks.
Under the old UK GAAP the accounting for agricultural stocks (livestock,
growing crops and harvested crops) was primarily covered by HMRC’s
Helpsheet IR232 (formerly and better known as BEN 19) and in most cases
required such stocks to be carried at the lower of cost and net realisable
value (NRV). Such matters are explicitly covered by FRS 102 in Section 34
on specialised activities. Entities now have a choice between the cost and
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fair value (FVTPL) models on a class by class basis. However, if the fair
value model is chosen, it is not permitted to subsequently revert to the cost
model.
Entities operating in extractive industries (oil, gas, mining etc) accounting
under old UK GAAP will have been following the Oil and Gas SORP. This
SORP is not being retained under the new UK GAAP, and instead
extractive industries are covered by Section 34 of FRS 102. This states that
such entities should apply IFRS 6 with a couple of minor modifications:
a) In applying IFRS 6, references made to other IFRSs therein should be
taken to be references to the relevant section or paragraph in FRS
102.
b) When applying the impairment rules in paragraph 21 of IFRS 6, a
cash-generating unit (CGU) or group of CGUs shall be no larger
than an operating segment, and hence the reference in IFRS 8
Operating Segments should be ignored.
Unusually, there is a relevant transitional paragraph at 34.11C (i.e. not in
Section 35 with the others) whereby the impracticality of applying
particular requirements of paragraph 18 of IFRS 6 (impairment testing and
disclosure of any resulting impairment) to previous comparatives must be
disclosed.
Financial
instruments
Under the old UK GAAP entities could optionally apply the ‘package’ of
financial instrument-related FRSs (i.e. the IFRS rules). FRS 102 contains an
option to account under IAS 39 and IFRS 9. However for the majority of
entities applying UK GAAP, sections 11 and 12 bring about some of the
most fundamental accounting changes in FRS 102.
The first stage is to identify financial instruments and then to decide
whether they are ‘basic’ or ‘other’. Basic instruments are precisely that, the
simpler instruments that are commonly found in many entities such as cash
and deposits, straightforward loans, accounts receivable and payable,
bonds, non-convertible preference shares and non-puttable shares etc.
Examples of instruments that will not qualify as basic include convertible
debt and derivatives such as forward contracts, options and interest rate
swaps. Section 11 contains several pages of criteria and examples to assist in
this assessment.
Most basic instruments other than financing transactions are initially
measured at transaction price including transaction costs, and thereafter at
amortised cost using the effective interest method, and the Standard
includes a worked example at 11.20. A financing transaction may take place
in connection with the sale of goods or services, for example, if payment is
deferred beyond normal business terms or is financed at a rate of interest
that is not a market rate. Financing transactions are accounted for at present
value discounted at market rate. This gives rise to two issues:
a) How to determine a market rate of interest; and
b) How to account for the measurement difference that arises when a
market interest rate is used.
There is no official guidance on how to determine a market rate of interest,
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but factors to consider are the purpose of the loan, the relationship between
the transacting parties, other external borrowings and the borrower’s
gearing, the existence of any available security, the loan maturity,
repayment profile, interest basis and currency.
How the measurement difference is accounted for depends on who is
lending to whom and the terms of the loan. In the situation of a donor
lending cheaply to a charity, the measurement difference would be
accounted for in the SOFA as a “donation”.
Financing transactions are a particular issue for groups with intercompany
loans, which are typically at below market rate, and often interest-free.
Here, the measurement difference is not always written off to the P&L. For
example, for an intercompany loan with a fixed term and no repayment
demand features:
Loan from parent to subsidiary – the parent is effectively subsidising
the subsidiary with a cheap loan, akin to a recapitalisation. Thus in
the parent’s accounts, the measurement difference is debited to cost
of investment, and recognised in the subsidiary’s books as a capital
contribution.
Loan from subsidiary to parent – the subsidiary is now transferring
value to the parent via the cheap loan, akin to declaring a dividend.
Thus in the parent’s accounts, the measurement difference is
credited to the P&L as income from the subsidiary, and recognised
in the subsidiary’s books as a distribution to the parent.
This particular issue can also arise when a loan is made to another entity
under common ownership at the behest of the owner. In this situation the
distribution is to the owner, who is then deemed to be recapitalising the
loan recipient entity.
There are two key questions arising from this accounting treatment:
Is the ‘distribution’ considered a distribution for company law
purposes and, if so, are there sufficient distributable reserves? It is
likely to be a distribution, although most commentators suggest that
legal advice should be sought on this point should it arise.
What are the tax implications? There is clearly a higher finance
charge in the P&L, but crediting capital can also have tax
consequences. The advice of a UHY tax specialist is therefore highly
recommended!
Investments in shares that qualify as basic instruments are accounted for at
FVTPL unless fair value cannot be measured reliably in which case they are
measured at cost less impairment. This effectively removes the option to
account for investments in listed shares at cost less impairment.
Other (non-basic) financial instruments are generally accounted for at
FVTPL, again unless fair value cannot be measured reliably. Accounting for
the annual movement in fair value through the P&L may result in
significant earnings volatility for some entities. Hence all derivatives will be
included in the balance sheet, compared to the current treatment of
disclosure only. Valuing such instruments can be difficult, especially when
14. 14 of 24
needed at the previous balance sheet date and at the date of transition.
Auditors are unable to prepare material valuations for use in financial
statements that they audit, so external specialist advice may be needed.
As a result of the above accounting changes many more disclosures will be
required by entities that have not previously adopted FRS 29.
This topic is too large to do full justice to in this Bulletin, and many entities
do not have complex financial instruments. Directors who think their
companies will be significantly affected by these issues are strongly
recommended to have urgent discussions with their advisors. The ICAEW
has also produced a number of factsheets on specific aspects of financial
instrument accounting.
Provisions and
contingencies
No significant changes.
Liabilities and
equity
Readers may recall that some years ago, the financial statements were
required to disclose details of the rights and restrictions (including rights to
dividends and repayment of capital) relating to each class of shares. This
disclosure has been resurrected in paragraph 4.12.
The implications of accounting at FVTPL on the determination of
distributable reserves are covered above.
There are no changes to the classification of liabilities and equity compared
to FRS 25, although most of the detailed guidance material from the latter
has not been included in FRS 102.
There is a new requirement to disclose the fair value of non-cash assets
distributed to shareholders in some circumstances, but this is not expected
to affect many entities.
Leases The old GAAP basic principles of accounting for operating and finance
leases remain largely unchanged, but the classification of leases requires
more judgment under FRS 102. This is due in part to the change in
definition of a finance lease. The general principle remains that a lease is a
finance lease if it transfers all substantially the risks and rewards incidental
to ownership. The old 90% rule and rebuttable presumption in SSAP 21
have been removed, and are replaced by five situations in paragraph 20.5
which would normally lead to a finance lease classification, and a further
three indicators in paragraph 20.6 which could lead to the same conclusion.
Whilst a straight line basis generally applies to operating leases, there is no
requirement to spread increases that are purely inflationary over the life of
the lease; these may be accounted for as incurred.
Under UITF 28, operating lease incentives are spread over the shorter of the
lease term and the period ending on a date from which it is expected the
prevailing market rent will be payable (often the period up to the first rent
review). Under FRS 102 these must be spread over the full lease term.
For lessors, the option to use the net cash investment approach has been
removed, and thus the net investment approach must now be used.
15. 15 of 24
Related parties The definition of a related party is consistent with that in the latest version
of FRS 8. However, there are some new disclosures:
Remuneration of key management personnel (in aggregate);
Separate disclosure for each type of related party (the categories are
set out in section 33.10); and
Additional disclosures in respect of outstanding balances (terms and
conditions, guarantees etc).
Although the concept of key management is not new, it is possible that
many entities will not have needed to make any such disclosures before
now. Entities should give some thought as to who qualifies as key
management, noting that the glossary definition specifically includes any
director.
Interestingly, there is no longer an explicit requirement to disclose the name
of related parties, although the nature of the relationship must be given. The
name of an entity’s immediate and ultimate parent must still be disclosed.
Related party transactions may only be disclosed as being on an arm’s
length basis if such terms can be substantiated, which can be difficult.
Events after the end
of the reporting
period
Section 32 of the Standard is broadly in line with the requirements of FRS 21
so there are no significant changes. The only change of note is that whilst
dividends declared after the period end are still not recognised as a liability,
the amount of such a dividend may be shown as a separate component of
retained earnings.
REDUCED
DISCLOSURE
REGIME
There is a reduced disclosure regime in section 1 of FRS 102 that mirrors the
FRS 101 regime for IFRS users. The regime may be applied by any member
of a group included in publicly available consolidated financial statements.
Hence the exemptions apply to subsidiaries, intermediate parents and
ultimate parents in their individual financial statements, but not in
consolidated financial statements, whether for the ultimate parent company
or for any sub-group, even if prepared voluntarily. There are three
conditions that must be complied with:
1) The shareholders must first be notified in writing. Objections can be
raised by:
a) the immediate parent company; or
b) a shareholder or shareholders holding in aggregate 5% or
more of the entity’s total allotted shares; or
c) a shareholder or shareholders holding in aggregate more
than 50% of the entity’s allotted shares not held by the
immediate parent.
2) FRS 102 must otherwise be applied.
3) The notes must give a brief narrative summary of the disclosure
exemptions adopted and disclose the name of the parent in whose
consolidated financial statements it is included, and from where
those financial statements may be obtained.
16. 16 of 24
The main disclosure exemptions available are:
Reconciliation of the number of shares outstanding at the beginning
and at the end of the period;
Cash flow statement;
Financial instrument disclosures* †
Share-based payment disclosures (subject to certain conditions)*;
Total compensation paid to key management personnel.
* Provided that equivalent disclosures are included in the consolidated
financial statements of the group in which the entity is consolidated
†
Exemption not available to financial institutions
For those now considering the disclosure of related party transactions
within groups, this exemption (for wholly owned members) is included in
section 33.1A rather than section 1.
CONSOLIDATED
ACCOUNTS
The rules for producing consolidated accounts have not changed
significantly. However, FRS 102 has introduced a new concession whereby
subsidiaries held as part of an investment portfolio must be measured at
FVTPL rather than being consolidated. This will be welcome news to
venture capitalists and other investing companies.
Equity accounting is still required for associates but the somewhat arbitrary
three month limit on the gap between non-coterminous year ends has
disappeared.
A liability need not be recognised for losses in excess of the value of the
investment in an associate unless the investor has an obligation to make
payments on behalf of the associate.
Equity accounting is also required for joint ventures, with the
disappearance of gross equity accounting.
SPECIALIST
ENTITIES
Some of the accounting issues pertaining to specialist entities such as
pension schemes and PBEs are addressed within the Standard itself in
Section 34 and its appendices. As noted earlier, the more niche topics such
as financial institutions, extractive industries and service concession
arrangements are not covered by this Bulletin. Agricultural stocks and
heritage assets are covered earlier in this Bulletin; the other topics in section
34 are looked at below.
Retirement benefit plans (in most cases, pension schemes) are required to
apply paragraphs 34.34 to 34.48 in addition to the rest of the Standard.
These paragraphs give either alternative requirements to those given
elsewhere in the Standard (e.g. disapplying paragraph 3.17 and instead
listing the contents of a set of pension scheme accounts) or add additional
disclosures relevant to such entities. These paragraphs do not negate the
need for the pension SORP which has been updated for FRS 102 and is
available from the Pensions Research Accountants Group (PRAG).
As mentioned earlier, there are a number of paragraphs prefixed by PBE
which apply only to PBEs and, in certain cases, entities within PBE groups.
17. 17 of 24
With the exception of the statement required by paragraph 3.3A as noted
above and a cross-reference paragraph at the start of certain Sections, these
are all included in Section 34. There are three topics covered:
Incoming resources from non-exchange transactions 34.64-74
These are defined in the glossary as ‘lop-sided’ transactions, whereby one
party receives something of value and the other party receives something of
either lesser or no value e.g. a charitable donation. The relevant paragraphs
are supplemented by Appendix B which goes into the topic in more detail.
These paragraphs caused significant debate during the development of FRS
102 as there was concern that charity shops would need to recognise second
hand goods donated for resale at fair value. However the final version of
FRS 102 states in PBE 34.70 that where this is not practicable (the cost
benefit may be taken into account under PBE 34.69), the income shall be
included in the period when, in this case, the goods are sold. This is
specifically confirmed in the Appendix at PBE 34B.4, and thus for most
charity shops, there will be no change in accounting.
The recognition rules for non-exchange transaction revenue refer back to
the general income recognition criteria in FRS 102. These require that it be
“probable” that economic benefits associated with the transaction will flow
to the entity. This is a much lower burden than “virtually certain”, the
phrasing used in the 2005 SORP, which has been updated to reflect this
change. As a result, it is possible that in some cases income will be
recognised by PBEs earlier than it would have been previously.
Having said that, legacies are specifically addressed by Appendix B to
Section 34 and the wording is such that in practice the accounting for
legacies will not significantly change. The only new provision is that entities
that are in receipt of numerous immaterial legacies may adopt a portfolio
approach to income recognition where individual identification and
consideration would be burdensome.
PBE combinations 34.75-86
Combinations which are in substance a gift are accounted for by acquisition
accounting under Section 19 (see above). Combinations meeting the criteria
of a merger may apply merger accounting, the mechanism of which is then
explained and the disclosure requirements given. Merger criteria are
considered above.
Concessionary loans 34.87-97
By definition, these are loans at below market rate that are not repayable on
demand. Section 34 gives the option to recognise such loans at the initial
transaction cost and thereafter at cost less any impairment, adjusted for any
accrued interest. This is significantly different to the accounting that would
otherwise be required under Section 10 (see above).
Concessionary loans should be separately disclosed either on the face of the
statement of financial position or in the notes. Individual loans may be
aggregated unless doing so obscures significant information. Disclosure is
also needed of the terms under which such loans have been made and any
loan commitments not taken up at the period end.
18. 18 of 24
Funding commitments 34.57-63
The rules on recognition of funding commitments are based on the same
principles as those for the recognition of any other liability, and are unlikely
to result in any change to current accounting practice either for PBEs or
commercial entities. There are, however, some additional disclosure
requirements re such commitments required by 34.62.
TRANSITIONAL
RULES
There are a large number of transitional provisions and concessions
available to entities on first time adoption of FRS 102. The majority of these
are given in Section 35, although there are some which are noted in the
main body of the Standard. The transitional provisions are not covered in
detail in this Bulletin.
ACTION If they have not done so already, entities transitioning to FRS 102 should
discuss the implications of the new UK GAAP with their advisers as a
matter of urgency, and consider which (if any) of the many transitional
provisions and concessions to adopt.
SOURCES FRS 102 (August 2014 and September 2015)
Extant UK GAAP
Charities SORPs 2005 and 2015
Companies Act 2006
SI 2008/410
SI 2015/980
UHY partners and staff may access all source information via Bloomsbury
Professional Online.
Both old and new accounting standards may be obtained from the FRC at
https://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-reporting/S
tandards-in-Issue.aspx The new Charities SORP may be obtained from the
SORP microsite at http://www.charitysorp.org/ Legislation may be
obtained from the government website at http://www.legislation.gov.uk/
19. 19 of 24
Appendix – Summary of key changes in FRS 102 compared to old UK GAAP by chapter
Chapter Topic Key changes
1 Scope Reduced disclosure regime for the individual accounts
of members of a group included in publicly available
consolidated financial statements
Paragraphs prefixed by PBE only applied by PBEs or,
in some circumstances, entities in a PBE group
2 Concepts and pervasive
principles
No significant changes
3 Financial statement
presentation
Statement of changes in equity to be presented as a
primary statement rather than included in the notes
STRGL replaced by Statement of Comprehensive
Income
PBEs must explicitly state they are a PBE
4 Statement of financial position
(balance sheet)
Pension liabilities no longer need to be presented
separately on the face of the balance sheet
Creditors must be classified as <1 year unless there is
has an unconditional right to defer settlement for >12
months from the balance sheet date
5 Statement of comprehensive
income and income statement
Option to present as one combined or two separate
statements
Discontinued operations must be shown in columnar
format for every line item
Amended definition of discontinued operations
Note of historical cost profits and losses no longer
required
6 Statement of changes in equity
and statement of income and
retained earnings
Comparatives now required
Option to combine with the P&L where the additional
items are only dividends and prior period adjustments
7 Statement of cash flows No small company exemption (unless adopting the
September 2015 version early and applying section 1A)
Reconciliation is to cash and cash equivalents
Removal of the 24 hour rule from the definition of cash
Definition of cash equivalents does not include the
three months’ maturity reference from the old FRS 1
Only three cash flow classifications, with choice of how
to classify interest and dividends received and paid
8 Notes to the financial
statements
Strict mandatory ordering of notes
Disclosure of critical judgments and key sources of
estimation uncertainty
20. 20 of 24
9 Consolidated and separate
financial statements
Subsidiaries held in an investment portfolio not
consolidated but measured at FVTPL
10 Accounting policies, estimates
and errors
Prior period errors are dealt with by prior period
adjustment when material rather than fundamental
11 Basic financial instruments Accounted for at amortised cost using effective interest
rate with option to use IAS 39 or IFRS 9 instead
Financing transactions accounted for at present value
discounted at market rate
Investments in equity instruments accounted for at
FVTPL unless this cannot be reliably measured
More disclosures required (less if FRS 29 already
adopted)
12 Other financial instruments Accounted for at FVTPL with option to use IAS 39 or
IFRS 9 instead
Restricted hedge accounting criteria
13 Inventories Net realisable value now termed estimated selling
price less costs to complete and sell
14 Investments in associates No three month limit on the gap between
non-coterminous year ends
Liability need not be recognised for losses in excess of
the investment in associate unless the investor has an
obligation to make payments on the associate’s behalf
15 Investments in joint ventures Gross equity accounting no longer required
Fewer presentational requirements
16 Investment property Fair value gains and losses to go through the P&L with
no requirement to maintain a revaluation reserve
Reversion to cost accounting where fair value is not
available without undue cost or effort
No exception for properties used by another group
member
Mixed use property to be split between investment
property and PPE where possible, otherwise all
accounted for as PPE
No requirement to depreciate investment properties
on short operating leases
17 Property, plant & equipment Rules on revaluations relaxed
Revalued property valued at fair value rather than
existing use value
18 Intangible assets other than
goodwill
Infinite UEL no longer permitted
Rebuttable presumption of UEL <20 years removed,
and replaced with a maximum of 5 years (10 years in
21. 21 of 24
September 2015 version) where a reliable estimate
cannot be made
UEL need only be reviewed if indicators of a change
19 Business combinations and
goodwill
Merger accounting only permitted when specific
criteria are met
Removal of requirement for intangibles to be capable
of being separately disposed of
Infinite UEL no longer permitted
Rebuttable presumption of UEL <20 years removed,
and replaced with a maximum of 5 years (10 years in
September 2015 version) where a reliable estimate
cannot be made
UEL need only be reviewed if indicators of a change
Deferred tax to be recognised on fair value
adjustments with a corresponding adjustment to
goodwill
20 Leases Removal of the 90% rule and rebuttable presumption
for determining lease classification, replaced by eight
indicators
Lease incentives spread over full lease term rather than
to the first rent review
Operating leases can now be increased by inflation
without adjustment back to a “pure” straight line
approach
21 Provisions and contingencies No major changes
22 Liabilities and equity Removal of detailed application guidance
Requirement to disclose non-cash distributions in
certain cases
23 Revenue Analysis of revenue by category to be disclosed in the
notes
24 Government grants Option to follow the performance model instead of the
accruals model
Option to deduct capital grants from asset value
removed (this was prohibited by the Companies Act
already)
Some additional disclosures required
25 Borrowing costs May choose to capitalise on a class-by-class basis
26 Share-based payment Option to use intrinsic value when fair value of equity
instruments cannot be reliably measured no longer
permitted
New ‘reasonable allocation basis’ available to split the
22. 22 of 24
cost of group schemes between group members
Fewer disclosures required
27 Impairment of assets No mandatory requirement for impairment reviews
(including first year review of goodwill) unless
indicators of impairment exist
Intangible assets no longer need to be impaired before
other assets in a CGU
28 Employee benefits Introduction of holiday pay accruals
Discounting required for termination payments due >1
year
For multi-employer DB schemes, must recognise in the
accounts of either individual members or the group
member responsible for the scheme
NPV of any agreed deficit funding recognised on the
balance sheet for entities accounting for DB schemes as
DC schemes
Pension asset/liability cannot be shown net of related
deferred tax
Fewer disclosures required re retirement benefits
29 Income tax Timing difference ‘plus’ approach to deferred tax
resulting in the provision of deferred tax on:
revalued assets
difference between fair values and tax values
for assets acquired in business combinations
Discounting no longer permitted
30 Foreign currency translation Local currency now termed functional currency
Presentational currency concept introduced
Transactions must be translated at spot rate or average
rate; contracted rate or forward contract rate no longer
permitted
31 Hyperinflation No longer permitted to use a stable currency as an
alternative functional currency
32 Events after the end of the
reporting period
Dividends proposed post year end may be presented
as a separate component of retained earnings
33 Related party disclosures New disclosure of aggregate key management
personnel remuneration
Separate disclosure of each type of related party
Extra disclosures re outstanding balances required
No explicit requirement to disclose the name of related
parties
23. 23 of 24
Group transaction disclosure exemption no longer
dependent on the public availability of consolidated
financial statements
34 Specialised activities Option to use fair value for biological assets
Extractive industries to apply IFRS 6
PBEs to recognise income when “probable” economic
benefits will flow to the entity, rather than “virtually
certain” (under 2005 charities SORP)
