UK: Out With The Old And In With The New

Last Updated: 31 July 2013
Article by Nick Randall

Changes to UK GAAP will have a major impact on accounting rules for professional practices, says Nick Randall.

On 14 March 2013 the Financial Reporting Council (FRC) issued FRS102, the financial reporting standard applicable in the UK and Republic of Ireland. This new single standard of around 350 pages will replace the multitude of existing UK GAAP accounting standards for accounting periods beginning on or after 1 January 2015, although companies are allowed to adopt the standard earlier if they wish.

The new standard

The new standard will apply to your firm if you are currently applying UK GAAP – unless you are a small company or group, as defined by the Companies Act 2006, and choose to apply the financial reporting standard for smaller entities (FRSSE). If this is the case, you can continue to apply the FRSSE, at least in the short term.

The terminology used in FRS102 has been aligned to IFRS terminology, with the profit and loss account becoming the income statement, the balance sheet becoming the statement of financial position, debtors becoming receivables, creditors becoming payables. Other titles may be used as long as they are not misleading.

Impact on professional practices

  • Financial instruments – under FRS102 financial instruments are classified as either basic (e.g. cash) or other (e.g. investments in equity). There is generally no change to the way that basic financial instruments are accounted for. However, there are differences if you have financial instruments classified as 'other'. For example, under current UK GAAP, forward contracts are not recognised on the balance sheet and are only disclosed in the financial statements. But under FRS102 they are measured at fair value (market value) and included on the balance sheet with movements recognised in the income statement.
  • Defined benefit pension schemes – there is a different recognition basis affecting the amounts recognised in the income statement.
  • Business combinations – there is no use of merger accounting under FRS102 (except for common control transactions) but, thankfully, no requirement to restate past business combinations. More intangible assets could be recognised, reducing the value of goodwill calculated on acquisition. The useful life of goodwill and intangibles is five years, in the absence of any justification for a longer period.
  • Deferred tax – under FRS102 the approach will be a 'timing differences plus' approach – more transactions will have to be considered for deferred tax, such as re-valuation gains.
  • Investment property – if you own investment property it will have to be re-valued to fair value, unless the fair value cannot be measured reliably without undue cost, with movements in the fair value being included in the income statement.

Think ahead

These differences may well have a significant impact on your reported profits and on profits available for distribution, plus values used when measuring loan covenant compliance. You should not only consider the impact of FRS102 on your business now, but also on any transactions, contracts and agreements that you may enter into in the future.

Although 2015 sounds a long way off, in reality this change will have an impact sooner rather than later due to comparatives being required for the prior year and an opening balance sheet for the comparatives. This means that if you have an April year-end, an opening balance sheet as at 30 April 2014 will be required. Therefore, it is worth thinking about how the transition to FRS102 may affect your business as soon as possible.

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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