UK: FRS102 The Financial Reporting Standard Applicable In The UK And Ireland

Last Updated: 10 June 2013
Article by Smith & Williamson

Following the exposure drafts issued in 2010 and 2012, The Financial Reporting Council (FRC) has issued the final version of three Financial Reporting Standards (FRSs) which set out the future shape of UK financial reporting. The FRSs are:

  • FRS 100 Application of Financial Reporting Requirements ("FRS 100")
  • FRS 101 Reduced Disclosure Framework ("FRS 101")
  • FRS 102 The Financial Reporting Standard applicable in the UK and Ireland ("FRS 102")

This alert outlines the content of the new financial reporting standard that will be used by all entities not required or choosing to use EU-adopted IFRS or permitted to use the FRSSE and choosing to do so. Details of the other standards can be found in the following alerts:

1 BACKGROUND

The original proposals for a new financial reporting standard to replace UK and Irish GAAP ("GAAP") were based on the IFRS for SMEs with only very minimal changes. Respondents to the ASB's consultation at that time identified a number of concerns and many of these have been addressed in FRS 102. Whilst this has resulted in closer alignment to existing GAAP some significant differences remain.

2 WHERE ARE THE MAIN DIFFERENCES FROM EXISTING GAAP?

In this section we outline the key differences between the new standard and existing GAAP.

Financial statement presentation (Sections 3, 4, 5 and 6)

In addition to setting out what a complete set of financial statements will include, FRS 102 also introduces changes in terminology for the primary statements compared to existing GAAP, being:

  • Statement of financial position
  • Statement of comprehensive income (single statement) or income statement and statement of comprehensive income (two statements)
  • Statement of changes in equity
  • Statement of cash flows.

In certain circumstances a statement of income and retained earnings can replace the income statement/statement of comprehensive income and the statement of changes in equity. A note of historical cost profits and losses is no longer required.

FRS 102 has adopted formats consistent with those contained in the Companies Act and therefore these formats will now apply to all types of entity reporting in compliance with the standard.

However, the Companies Act 2006 sets out the names and formats for these statements, therefore until such time as the Act is amended, existing headings and layouts should continue to be used.

Statement of cash flows (Section 7)

Where they are required (see section 3 below for possible exemptions) cash flow statements are sub-divided into three categories compared to the nine in existing GAAP. The categories are operating, investing and financing activities. The other main differences are that the statement of cash flows will be reconciled to cash and cash equivalents as opposed to just cash and there will no longer be a requirement to provide notes reconciling movements in net debt.

Notes to the financial statements (Section 8)

Entities are now required to disclose the judgements that management have made in applying accounting policies and to provide information about the key assumptions concerning the future and other sources of estimation uncertainty that may materially affect the carrying value of assets and liabilities in the next financial year.

Restatement in respect of errors (Section 10)

Restatement is required where a prior period error is material as opposed to the current requirement that the error be fundamental. This is likely to result in more prior period adjustments being made.

Financial instruments (Sections 11 and 12)

Financial instruments are classified either as basic (Section 11) or other (Section 12). Basic financial instruments will be initially measured at transaction cost and subsequently at amortised cost except for shares whose fair value can be measured reliably (e.g. those that are quoted) which should be measured at fair value with gains and losses included in profit or loss. Where the fair value of shares cannot be measured reliably they should be measured at cost less impairment.

With the exception of equity instruments that are not publically traded and for which fair value cannot be measured reliably, all other financial instruments must be measured at fair value with gains and losses recorded in profit or loss. This will include derivative instruments which are often not accounted for under existing GAAP.

Hedge accounting is permitted so long as strict criteria are met.

Intercompany loans that are not repayable on demand must be initially recognised at fair value (being the present value of the future payments discounted at a market rate of interest for a similar debt instrument). Where the terms of the loan are at below market rate, this will result in a lower carrying amount and recognition of a higher interest cost than under current GAAP.

The FRC has indicated that they intend to amend sections 11 and 12 when the IASB completes IFRS 9 "Financial Instruments" to bring the requirements of FRS 102 relating to impairments and hedging in line with the international standard.

Investment property (Section 16)

Re-measurement to fair value is required where fair value can be measured reliably without undue cost and effort. Changes in fair value are recognised in profit or loss.

Intangible assets excluding goodwill (Section 18)

It is probable that more intangible assets will be recognised as part of business combinations because of the inclusion of a presumption that fair value can be measured with sufficient reliability. This is consistent with EU-endorsed IFRS; however the inclusion in FRS 102 of an exception to the general principle will mean that fewer intangibles will be recognised than under full IFRS. The exception permits non-recognition where the asset arises from legal or other contractual rights and there is no history or evidence of transactions in the same or similar assets and estimating fair value would be dependent upon immeasurable variables.

All intangible assets are assumed to have a finite life and, if it is not possible to estimate the useful life, there is a rebuttable presumption that the life is 5 years. This contrasts with current GAAP where indefinite lives are permitted and the rebuttable presumption as to economic life is 20 years.

Business combinations and goodwill (Section 19)

Merger accounting is not permitted except for the specific circumstances of combinations of businesses under common control (group reorganisations). Guidance on accounting in these circumstances is included within the standard.

Goodwill is required to have a finite life and, in the absence of evidence to the contrary, there is a rebuttable presumption that the life is 5 years. This contrasts with current GAAP where an indefinite life is permitted and the rebuttable presumption as to economic life is 20 years.

Liabilities and equity (Section 22)

In consolidated financial statements, changes in a parent entity's controlling interest in a subsidiary that do not result in a loss of control are accounted for entirely within equity whereas in current GAAP any gains or losses are included in the profit and loss account.

Employee benefits (Section 28)

Unlike existing GAAP which addresses only post-retirement benefits, FRS 102 covers the accounting requirements for all forms of employment benefits including those that are regarded as short-term. Short-term benefits include not only wages and salaries but also compensated leave such as paid holidays. As a consequence entities that may not have previously made specific provision for holiday pay will need to consider doing so.

The accounting for defined benefit pension schemes follows the revised version of IAS 19 "Employment benefits". This could have a significant effect on the profit and loss account of entities with defined benefit pension schemes, as they are required to recognise net interest on the net defined benefit liability rather than the expected return on plan assets and interest on the gross liability under existing GAAP.

Where there is a group defined benefit scheme, in the absence of an agreement as to how the costs of the scheme will be shared amongst group members, the costs of the plan should be included in the financial statements of the entity which has legal responsibility for it. Unlike existing GAAP the plan will therefore be on the balance sheet of an individual entity within the group – often the parent.

Taxation (Section 29)

Accounting for deferred tax is based on a "timing differences plus" approach. Whilst the use of timing differences is consistent with existing GAAP, deferred tax will need to be provided on some differences which are currently ignored. FRS 102 specifically requires that deferred tax be provided on the following:

  • All revaluations of assets (e.g. property, plant and equipment, investment property)
  • Assets where rollover relief is available
  • Fair value adjustments made as part of a business combination

Discounting of deferred tax assets and liabilities will be prohibited.

Foreign currency translation (Section 30)

Where there are matching forward contracts for a transaction, existing GAAP allows the contracted rate to be used to translate the matched transaction. This option does not exist under FRS 102. Instead, the transaction is translated at the spot rate and the forward contract is recognised as a derivative financial instrument in accordance with Section 12. Hedge accounting might be possible if the strict criteria set out in that section are met.

Agriculture (Section 34)

An accounting policy choice is offered for agricultural produce of either cost or fair value. Where the fair value option is taken, changes in fair value are recognised in profit or loss.

3 REDUCED DISCLOSURES

A reduced disclosure framework is available for subsidiaries and ultimate parents that closely mirrors that available for IFRS preparers and which is set out in FRS 101. The exemptions will only be available in single entity financial statements (including intermediate and ultimate parents) and not in any consolidated financial statements being prepared by such entities. To qualify for the exemptions the financial statements of the parent or subsidiary must be included in publically available consolidated financial statements that give a true and fair view. Such entities are referred to in FRS 102 as qualifying entities.

Qualifying entities may take advantage of the disclosure exemptions only if:

  • The entity's shareholders are notified in writing about the exemptions and do not object.
  • The entity's financial statements apply the recognition, measurement and disclosure requirements of FRS 102.
  • The notes to the financial statements disclose details of the exemptions taken and the name of the parent in whose consolidated financial statements the entity is consolidated.
  • The disclosure exemptions are:
  • No requirement to present a statement of cash flows
  • Disclosure requirements of Section 11 "Basic Financial Instruments" and Section 12 "Other Financial Instruments" *
  • Many of the disclosures in Section 26 "Share-based Payment"*
  • Total key management personnel compensation

* Exemption applies only if equivalent disclosure is made in the consolidated financial statements.

Entities can choose which of the exemptions they want to take and there is no requirement to apply all of them.

4 TRANSITION

Section 35 of FRS 102 sets out exemptions that will be available on first time adoption and the specific disclosure requirements that apply in the first set of FRS 102 compliant financial statements.

For the purposes of applying exemptions the date of transition is the beginning of the earliest period for which the entity is presenting comparative information.

The following cannot be changed retrospectively

  • Financial assets and financial liabilities derecognised prior to the date of transition cannot be recognised.
  • Hedge accounting for hedging relationships that no longer exist at the date of transition.
  • Accounting estimates.
  • Discontinued operations
  • Measurement of non-controlling interests.

Exemptions available on first time adoption include:

  • No restatement of past business combinations
  • Where an item of property, plant and equipment, investment property or intangible asset was previously held at valuation, the fair value can be deemed as cost.

The entity can choose which, if any, exemptions to take and these should be applied in subsequent financial statements until the associated assets and liabilities are derecognised or a significant change in circumstances requiring the entity to reassess their appropriateness.

The disclosures that will be required on transition are:

  • A description of how the transition has affected the entity's financial position and performance
  • A description of changes in accounting policies on adoption of FRS 102
  • A reconciliation of equity shown under the previous financial reporting framework to equity determined in accordance with FRS 102
    • At the date of transition
    • At the end of the comparative period presented in the financial statements
  • A reconciliation of the profit or loss determined in accordance with the previous financial reporting framework and the new framework for the comparative period. The application of these rules will not always be straightforward and further consultation may be required.

5 EFFECTIVE DATE

The new standard is mandatory for periods commencing on or after 1 January 2015. Early adoption is permitted for periods ending on or after 31 December 2012. Where an entity is within the scope of a SORP early adoption is permitted providing it does not conflict with the requirements of a current SORP or legal requirements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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