FRS 102 replacing UK GAAP: a summary of the changes

 

For large and medium sized companies with accounting periods beginning on or after 1 January 2015, the current UK GAAP will be replaced by FRS 102. The new UK GAAP will bring UK accounting standards more in line with International Financial Reporting Standards (IFRS).

The impact of these changes will result in significant differences to the format of, and the disclosures included, in a company's financial statements. Additionally, there will be a change to the accounting treatment and measurement of certain assets and liabilities.

 

Key accounting differences

1.     Investments in listed shares

If shares are held which are either publically traded or their fair value can be measured reliably then the investment is required to be recognised at its fair value with any changes in fair value recognised in the profit and loss account (now the ‘Statement of Comprehensive Income’). All other investments are to be recognised at cost less impairment. This treatment differs from previously where there was an option to hold all investments at cost less impairment.

2.     Investment property

Investment properties are still required to be revalued annually to their fair value, but the change in fair value will now be recognised in the profit and loss account, compared to previously in a revaluation reserve on the balance sheet.

A deferred tax liability is now required to be provided on the revaluation, also being recognised in the profit and loss.  Previously this was only required to be disclosed and not provided in the accounts.

3.     Lease incentives

Lease incentives, such as rent free periods, are required to be spread over the term of the lease rather than as currently to the earlier of the date at which the next rent review occurs, a break date or the term of the lease.

4.     Property, plant and equipment

FRS 102 does allow for companies to continue to follow the cost or revaluation method for plant, property and equipment. However, a company can elect to revalue all assets within a class on transition to FRS 102 and then adopt either the cost or revaluation model. This allows a company to do a one off revaluation to strengthen its balance sheet but there may be potential costs if a professional valuation is required.

5.     Financial instruments - debtors and creditors

The treatment of debtors and creditors is largely the same under the new UK GAAP. The main difference arises with loans which incur interest at below the market rate.

These loans will be recognised on the balance sheet after discounting, using a market rate of interest. Subsequently, the market rate of interest will be applied to the loan and the interest payable/receivable recognised in the profit and loss account.

6.     Financial instruments - other

Other more complex financial instruments such as options, forwards and interest rate swaps will now be recognised on the balance sheet at their fair value. Hedge accounting can be adopted but only if the hedging relationship is designated and certain criteria are met.

7.     Holiday pay accruals

Holiday pay accruals are required to be recognised at the balance sheet date in respect of any holiday due to/from employees. These calculations will be more onerous if the company's ‘holiday year’ does not coincide with the accounting year.

8.     Related party transactions

Previously the names of all related parties which had transactions with a company were required to be disclosed in the financial statements. Under FRS 102 only the relationship between the parties and the company are required to be disclosed.

The compensation of key management is required to be disclosed. This may be a wider group than just the directors, and consideration needs to be made on the key management of the company.

9.     Business combinations and goodwill

All business combinations are to be recognised using the purchase method. Merger accounting is no longer permitted except if there is a group reconstruction or for certain combinations involving public benefit entities.

Goodwill and intangibles must be amortised and if a useful life is unable to be estimated then the useful life is assumed to be 5 years.

 

Impact on financial statements

On transition a company will need to restate the opening comparative balance sheet if the adjustments arising from the change in accounting standards are considered to be material. This will require consideration of the adjustments in the comparative year and for the opening reserves position of this period. However, there are some adjustments that are not required to be undertaken retrospectively, and a number which can be elected to not be taken.

The financial statements will have the primary statements renamed in line with IFRS and will require more disclosure than previously.

 

Tax and distributable reserves implications

In the year of transition, any gains or losses recognised in restating the comparative profit and loss account will be recognised as an adjustment in the current year tax computation.

Due to the recognition of certain assets and liabilities at fair value, the profit and loss may be subject to more volatility and this may result in a more volatile corporation tax liability.

Additionally, any impact of the above accounting differences may also affect a company's distributable reserves and will need to be considered before any dividends are recommended.

 

Alternatives

A company can also elect to adopt IFRS instead of FRS 102, but it would be expected that any transition to this will be more difficult and costly.

 

For further information or a discussion on how these changes may affect your company, please contact Lee Facey or Simon de Souza.

 

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