The New UK Accounting Standard FRS 102 The deadline is fast approaching The new standard, which applies for accounting periods beginning on or after 1 January 2015, replaces all the present UK accounting standards. A number of SORPs, including for charities and limited liability partnerships, are also being revised. The two key dates are: • the balance sheet date of the first set of accounts that need to be prepared under the new standard; and • your ‘date of transition’ to the new standard i.e. the date at which your accounts need to be retrospectively restated to comply with the new standard. This is the first day of the earliest comparative period presented in the first set of accounts prepared under FRS 102. For example, if you have a December year end, then the first set of accounts under the new standard is for December 2015 and the date of transition is 1 January 2014 (assuming one year of comparative figures is presented). If you have a November year end, then conversion is almost a year further off, with the first set of accounts under FRS 102 being the November 2016 accounts and the date of transition being 1 December 2014. It is possible to adopt early, but we would generally advise you take as much time as possible to prepare for the transition, as there are some major changes you need to be aware of. Do I need to convert? If you have previously presented your accounts under UK GAAP, you will apply the new standard unless you prepare your accounts under IFRS, or you are able to adopt the FRSSE. It is very likely the FRSSE will be amended or replaced in the not too distant future as a result of recent EU legislation, but at the moment FRSSE companies are able to continue with their present accounting policies.
Reconciliations In the first set of accounts prepared under the new standard, you will be required to prepare reconciliations from current UK GAAP to the new standard for both the Balance Sheet at the ‘date of transition’ and the Balance Sheet for the last set of accounts prepared under current UK GAAP, together with the Profit and Loss Account for the same period. Accounting changes There are some significant accounting differences between FRS 102 and current UK GAAP which, depending on the nature of your business, could significantly affect the figures presented in your accounts. You will need to consider potential effects on banking covenants, profit related bonus schemes or dividend policy. You will also need to consider the Corporation Tax effects. The table following shows major, moderate or minor changes in the accounting compared to current UK GAAP. Please note that this is not a comprehensive list of all changes. More differences affecting your financial statements may become evident with further analysis. Are there any transitional exemptions? There are a number of transitional exemptions including the:• exemption from restating business combinations which took place before the date of transition; and • ability to use a valuation of property, plant and equipment at the date of transition as a ‘deemed cost’. Key to table
Major impact What about specialised activities? There are some specific requirements in the standard relating to ‘specialised activities’ which includes public benefit entities, pension schemes, financial institutions, extractive activities (e.g. oil and gas) and agriculture. This paper does not consider these entities although apart from specific provisions of FRS 102 relating to these entities much of the standard will still be relevant.
Moderate impact
Minor impact How different will my accounts look? Format changes There are changes to the way accounts are presented; whilst your Balance Sheet and Profit and Loss Account will look much the same the cash flow statement will look very different. The statement of total recognised gains and losses is replaced by a ‘statement of comprehensive income’ which can be combined with the Profit and Loss Account, and a new ‘Statement of Changes in Equity’ is required to be prepared.
Financial statement area
Key changes from current UK GAAP
Profit and Loss Account and Statement of Comprehensive Income Format
Revenue recognition
Foreign currency translation
• The Statement of Comprehensive Income (which replaces the Statement of Total Recognised Gains and Losses) can be combined with the Profit and Loss Account. • Discontinued operations must be analysed down to post tax profit or loss. • The terminology used in the standard is different although does not have to be used in the financial statements.
• No significant changes.
• Use of the closing rate to translate a foreign operation is not permitted. • Use of a contracted rate is not permitted. • The concept is different – a functional currency needs to be identified, which will not always be sterling.
Current tax
• No significant changes. (There are major changes to deferred tax – see below)
Share-based payment
• No significant changes.
Balance sheet Format
Goodwill and intangible assets
Property, plant and equipment
Investment properties
Investments in shares in other entities
• No significant changes although the terminology used in the standard is different. The terminology used in the standard (e.g. inventory, receivables) does not have to be used in the financial statements.
• Goodwill and intangible assets have a presumed useful economic life of five years, unless a reliable estimate of a longer life can be made. • Indefinite life intangibles (including goodwill) are not permitted. • More intangible assets will be recognised separately on a business combination when they can be reliably measured, for instance brands, trade marks and customer lists. These will need to be amortised separately from goodwill. • Software will often be capitalised as an intangible asset rather than a tangible asset, depending on the degree of integration with related hardware.
• Where property, plant or equipment is held at valuation, revaluation losses are recognised in the revaluation reserve only to the extent that they can be offset against a previous surplus arising on the same asset. Anything in excess of this is recognised in profit or loss. • Revaluation gains are recognised in the revaluation reserve except to the extent of any pre-existing loss on the same asset recognised in profit or loss.
• Investment properties are measured at fair value, unless fair value cannot be obtained without undue cost or effort (which is not defined). • Changes in fair value are recognised in profit or loss. • It may be a good idea to make a reserve transfer of the gains and losses from retained earnings to the revaluation reserve, so it is clear they are not part of distributable profits.
• An investment in another entity’s equity shares must be measured at fair value, unless it is an unlisted investment whose fair value cannot be reliably measured. – in which case it is measured at cost less impairment. • This means all listed investments will now be measured at fair value
Financial statement area
Key changes from current UK GAAP
Stocks and long term contracts
• No significant changes, other than terminology.
Trade and other debtors
Cash at bank and in hand
Trade and other creditors
Derivatives
Borrowing costs
Government grants
Leases
Deferred tax
Provisions, contingent liabilities and contingent assets
• For most debtors the only differences will be terminology. • However, long term debtor balances at a zero or below market rate of interest will need to be discounted to ‘amortised cost’ using a market rate of interest with the discount unwound over the term of the loan (which may need to be estimated). This will particularly apply to long term intercompany balances, but may also apply to other loans provided at a below market interest rate - for instance from related parties.
• No significant changes.
• Changes in terminology. • The same issues apply to intercompany creditor balances as to debtor balances. • Bank loans (and any other financial instrument) need to be analysed between ‘basic’ and ‘other’ (i.e. complex) financial instruments. ‘Basic’ financial instruments are measured at amortised cost, ‘other’ at fair value. Loan terms will need to be carefully reviewed to determine how they should be classified (and therefore measured).
• Derivatives (e.g. forward contracts, interest rate swaps) need to be brought on Balance Sheet at fair value with changes in value shown in profit or loss. This will lead to significant volatility in profit or loss compared to current UK GAAP as such instruments have largely been ‘off Balance Sheet’. • A simplified form of hedge accounting may be applied and companies will need to determine whether it is beneficial to do so.
• No significant changes.
• No significant changes.
• There is no ‘90% test’ for classification of leases as operating or finance leases – they are classified based on the risks and rewards of ownership. • Lease incentives are spread over the period of the lease to the first break clause, rather than over the period up to the first rent review.
• Generally, more items require provision under FRS 102 than current UK GAAP. • Deferred tax is provided on all property revaluations, regardless of whether there is a binding commitment to sell. • Deferred tax is provided on fair value adjustments arising on a business combination. This will have a knock on effect on goodwill for combinations arising after the date of transition and on opening reserves at the date of transition for previous combinations. • Discounting of deferred tax balances is not permitted.
• No significant changes.
Financial statement area Employee benefits
Key changes from current UK GAAP
• Scope is broader than current UK GAAP. • Group retirement benefit plan deficits need to be brought onto the Balance Sheet of at least one group company – that which is legally responsible for the plan – if there is no agreement to allocate between group companies. • Companies will need to accrue for any material carry-forward holiday entitlement at the year end. Full retrospective restatement is required at the date of transition. This will particularly affect companies where the holiday year end is different from the financial year.
Other primary statements Cash flow statements
Statement of changes in equity
• Significant changes to format, although the fundamental concepts are the same. • No exemption for small companies that decide to adopt FRS 102 rather than the FRSSE. (There are exemptions for subsidiaries and certain specialised entities such as pension schemes). • The definition of cash equivalent is less restrictive than under current UK GAAP and includes certain short term (not just on demand) deposits.
• A statement of changes in equity needs to be presented as a primary statement. The statement reconciles each component of equity. • Where changes to equity are very limited, a simplified statement can be prepared in some circumstances.
Group accounts and related issues Business combinations and consolidation
Associates and joint ventures
• Merger accounting is not permitted except for group reconstructions and certain public benefit entity combinations. • Some differences in determining whether control exists. The fair value of contingent liabilities is included in the fair value of net assets acquired, when this can be reliably measured. • More intangible assets will be recognised separately from goodwill. • Deferred tax is recognised on fair value adjustments. • Fair value adjustments need to be made within one year of the acquisition, not the year end following it. • Minority interest is presented within equity and changes in minority interest that do not result in a loss of control are also shown in equity. No goodwill is recognised on increases in stake.
• The equity method is used to account for both associates and joint ventures – the gross equity method will no longer exist. • Various categories of joint arrangements with different accounting implications for each. • Potential as well as actual voting rights are taken into account in determining whether significant influence exists. • If the associate or joint venture is loss making, losses are only allocated to the investor to the extent it has an obligation to make payments to the investee.
Disclosure issues Accounting policies and other notes to the accounts
• A specific statement of compliance with FRS 102 is required. • Significant judgements made in preparing the financial statements need to be disclosed. • Prior year adjustment is required for all material errors, not just those that are ‘fundamental’
Related party disclosures
• No major changes, although disclosure is required of ‘key management compensation’.
Post balance sheet events
• No significant changes.
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