Financial Reporting Standard (FRS 102)

19 February 2014 •

A new Financial Reporting Standard (FRS 102) will see the most fundamental change to UK accounting in 20 years when it comes into force for accounting periods beginning 1 January 2015 onwards. 

These new accounting rules will replace all existing UK accounting standards, with the exception of the Financial Reporting Standard for Smaller Entities (FRSSE) which is available only for small entities.  Whilst FRS 102 is not yet mandatory, early adoption is permitted and we have been working with our clients to ensure that their accounts will comply with the new legislation.

Below is a guide outlining the main features of FRS 102 along with the key areas of potential impact/change.

THE NEW UK ACCOUNTING STANDARD FOR LARGER ENTITIES

The introduction of FRS 102: The FRS Applicable in the UK and the Republic of Ireland

FRS 102 amends and streamlines current UK accounting standards into a single standard applicable to entities that do not qualify to use the FRSSE and that are not required to adopt European Union adopted International Financial Reporting Standards (IFRS). FRS 102 may, however, be used by small entities that qualify to use the FRSSE if they wish.

For most businesses, and in most areas of the accounts, the changes introduced will not be significant but for some businesses they will be. This means that certain decisions will need to be made and in some cases information will need to be collected well in advance of actual implementation.

When will FRS 102 have to be applied?

FRS 102 must be adopted for periods beginning 1 January 2015 onwards. 

A complication for those affected is that there will be some changes in accounting policies (how the figures in your accounts are established) which will lead to ‘prior period adjustments’. This means that accounts for the previous year, and certain figures for the year before that, will have to be recalculated and restated in the first year of adoption. When, for example, the accounts for the year ended 31 December 2015 are being prepared, certain figures will need to be recalculated as far back as 31 December 2013. This means that we would need to consider what information might be needed as at 31 December 2013 - which is quite soon!

Can the new FRS 102 be adopted early?

Yes, early adoption of FRS 102 is permitted for earlier accounting periods.  For some entities in certain sectors this may be beneficial but will probably not be worthwhile for most. If adopted early it may be necessary to collect certain information as at 31 December 2013.

Will FRS 102 affect tax payable?

In some cases, the application of the new standard and any subsequent prior period adjustments may have an impact on taxable profits, which could mean either additional tax becoming payable or less tax being payable. 

Other important considerations include the impact of changes on the calculation of loan covenants and on profit-related bonuses.

What key changes will FRS 102 make?

FRS 102 is a long and technically complex accounting standard, comprising 35 sections but the following list gives an indication of some of the areas where changes to accounting treatment will, or may, be expected. Inevitably there are numerous other areas which may impact on individual entities and we would be happy to discuss these with you.

Key changes introduced by FRS 102

Presentation of accounts

• The new standard introduces additional options for the names of parts of the financial statements and changes the way that certain items are disclosed.
• Many entities, however, will not see a great deal of change in the way that their accounts are presented other than, for example, the use of the term ‘inventories’ rather than ‘stocks’.

Revalued property, plant and equipment

• An estimate on the balance sheet of any tax payable in the event of a property eventually being sold for its revalued amount will need to be recognised as a provision for deferred tax. This is currently not generally required and would reduce the net assets on the balance sheet.
• Rules on the prescribed frequency of revaluations have been relaxed.
• Care will be needed here if there is any banking covenant or loan restriction related to any of the figures in the accounts.

Investment properties

• Rather than surpluses or deficits on revaluation being taken to reserves as they are at present, they will be presented as part of the profit or loss for the period. They will not, however, be ‘realised profits or losses’ and they will not be available for the payment of dividends!
• There are a number of other detailed differences from the present accounting for investment properties which may mean more (or fewer) properties may qualify as investment properties.
• As noted above as regards other revalued property, a provision for the tax payable if the property were to be sold (deferred tax) will be required, again reducing the net assets on the balance sheet.
• Care will be needed where the assessment of the entity’s performance is based upon the presented profit and loss account, which will show movements in the value of investment properties. Consideration of the methods employed in calculating loan covenants and profit-related bonuses will be needed.

Goodwill and other intangible assets

• Unless an entity is able to reliably estimate the life of an intangible fixed asset, five years will be the maximum. This compares to 20 years in the existing standards.
• Reducing the amortisation period of goodwill and other intangibles from 20 years to five years could have a very significant impact on reported profits and on the net assets, though if tax relief is available this could reduce tax payable, and again a reduction in the net assets on the balance sheet could cause problems with lending covenants.
• The new standard also increases the likelihood of recognising more different types of intangible asset on an acquisition than under current accounting standards.

 
Recognition of loans, interest rate or foreign currency swaps or options

• These items are examples of types of ‘financial instrument’ that will often require accounting for in a different manner from current UK standards.
• Changes to the accounting treatment in this area may impact on the profits or losses presented in a given period and the amounts initially and subsequently recognised on the balance sheet.

Revenue recognition

• A number of practical examples of measuring turnover for the period are included in FRS 102. It is possible that in some cases turnover and therefore profit, and also tax, may be different as a result of adopting the new standard.

Holiday pay accruals

• Where untaken holiday pay is owing at the end of the period, it may be necessary to provide for the accrued value in the year-end accounts.

Related parties

• A welcome change from current accounting standards for many, is that FRS 102 does not require the publication of the names of any related parties with whom the entity has transactions.
• Related parties includes directors, significant shareholders and relevant family members, though HMRC may still request such information separately.

Some of the other (many) areas of change

• Investments in listed company shares will be revalued each year and gains or losses will be taken to the profit and loss account.
• Some leases may be accounted for differently and any lease incentives offered by a lessor may be spread over a different period.
• The treatment in the accounts of government grants may sometimes be different.