If your company (or group of companies) is medium-sized or large then the chances are you will be affected by this standard.
Whether you're the owner of a growing business of this nature, its Finance Director or a member of the wider finance team, you will need to understand the details of these changes and how they will lead to variations in the way your accounts are presented as well as the intricacies of transitioning over to such reporting requirements.
Essentially, Financial Reporting Standard 102 (FRS 102) was the Financial Reporting Council’s attempt to:
Simplify reporting standards in the UK and Ireland by condensing all the current FRSs, Statements of Standard Accounting Practice (“SSAPs”) and Urgent Issues Task Force Abstracts (“UITFs”) into one, much smaller document
Ensure that there is greater consistency with International Financial Reporting Standards (“IFRSs”)
Simplistically, all companies in the UK and Ireland that are medium-sized or large and that are neither required (nor have elected) to apply the IFRSs have to adhere to FRS 102.
Currently an entity is classed as medium-sized if it breaches at least two of the following criteria:
The new standard applied to those entities that had a financial reporting period starting on or after 1 January 2015.
You will need to be thinking about the variations in the treatment of certain balances and transactions under FRS 102 when compared to what would have been required under the reporting standards that your company had been adhering to in the past (the previous UK Generally Accepted Accounting Standards, “UK GAAP”).
Comparative balances at 31 December 2014 will need to be considered in terms of the additional tests that might need to be carried out to demonstrate that they adhere to FRS 102 in the following period (whether they are tests of control or substantive-based procedures).
Although the new standard is much shorter than previous UK GAAP, there are many more accounting policy choices within FRS 102, some of which provide the opportunity to strengthen the balance sheet but, in other cases, may give rise to earnings volatility.
With suppliers, banks and other finance providers all interested in your accounts, it is important to understand and consider the possible impacts on banking covenants and credit ratings (for example) sooner rather than later in order to ensure there are no difficult conversations to be had with those third parties later down the line.
The impact of these changes can also seen within the transitional disclosures that will be required to be shown in the accounts. This is to enable users to understand the effects of the changes on the entity’s financial performance, financial position and its cash flow statement.
The table below lists the main areas of change and includes some brief details.
As mentioned above, it is vital that the effects of these changes are properly thought through, particularly in respect of their impact on your business’ results (and subsequently on bank covenants or other similar agreements).
Conversations need to be had with any relevant third party users of the accounts to ensure that the changes brought about by FRS 102 don't have repercussions on your wider business relationships.
There are, of course, many other areas of potential impact as a result of this new standard and your accountant will be well placed to ensure that all matters relevant to your business are fully understood and explained.
Summary of changes brought about by FRS 102 |
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Investment properties |
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UK GAAP requires investment properties to be revalued each year at open market value (considered to be equivalent to fair value). FRS 102 requires revaluation each year at fair value with changes in fair value taken to the income statement. There is obviously the possibility of increased costs that may need to be incurred in order to do this. The definition of investment property will change under FRS 102 to include properties leased to other members of the same group in the individual accounts of the lessor but not in the consolidated accounts - previously under UK GAAP the definition did not include properties leased to members of the same group. Again, this could lead to increased costs of valuations (as well as leading to further adjustments on consolidation that wouldn’t have been required before). However, FRS 102 does allow for the value of previously revalued property to be “frozen” at the date of transition - this would then cut out the need for subsequent valuations (and their subsequent costs) in the future. |
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Employee benefits |
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There is no specific requirement to account for holiday pay under current UK GAAP. However, the relevant accrual or prepayment will be required under FRS 102. Are your systems set up in order to accurately and efficiently capture the required information? |
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Goodwill (and other intangible assets) |
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The presumption up until now has been that goodwill had a maximum useful life of 20 years but, in some cases, this could be indefinite. Under FRS 102, all goodwill and intangible assets are deemed to have a finite useful life and this is assumed to be five years in instances where management can’t make a reliable assessment. Once you have carried out your revised assessment of the useful life of your intangible assets and/or goodwill, is this going to result in a material adjustment to your results for the period? |
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Deferred tax |
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Under FRS 102, you will also need to account for deferred tax movements in respect of the following (where previously this was not required):
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Leases and their classification |
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FRS 102 classifies leases into finance leases and operating leases based on whether the lessee or the lessor holds the risks and rewards of ownership. Whilst this is the same principle as before, UK GAAP also includes a presumption that, where the present value of the minimum lease payments is 90% or more of the fair value of the asset, then the lease is a finance lease. FRS 102 does not include this ‘90% test’ so the classification of some leases may change. Will this affect your net asset position and your results for the year? |
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Lease incentives |
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Under current UK GAAP, the value of a lease incentive, such as a rent-free period, is spread over the period to the first rent review (the point at which the rent is reset to market rates). Under FRS 102 lease incentives are spread over the full lease term, which may be a materially longer time period. Again, the effect on bank covenants could be significant. |
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Investments in shares |
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Under current UK GAAP, investments held in listed shares may be measured at cost or fair value. FRS 102 requires the use of fair value for investments in shares which are publicly traded or where the fair value can be measured reliably (with the movements in this fair value being recognised in the income statement. |
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Foreign exchange forward contracts |
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Under UK GAAP, where matching forward contracts are in place for a transaction, the contracted rate can be used for translation of the matched transaction. Under FRS 102 a foreign exchange forward contract will be recognised on the balance sheet as a financial instrument at fair value and the associated debtor or creditor will be retranslated at the year-end rate. |
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Stock valuations |
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Previously, the “last in, first out” approach was permitted as a stock valuation method. Under FRS 102 that method has been prohibited. As mentioned above, there are many other areas impacted by FRS 102, including defined benefit pension schemes, revenue, finance costs, development costs, government grants, advertising material, business combinations and many more. |
There may be scope to push back the requirement to use FRS 102 by a year depending on the specific circumstances of your business and its underlying systems - we would, of course, recommend speaking to an accountant to explore your options in this regard and, in any case, they would be best placed to assist you with the transition process as well as advising on the wider impact on your organisation.
The content of this post is up to date and relevant as at 09/04/2015.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.
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