FRS 102 New UK GAAP What is ‘new UK GAAP’
A complete replacement for all existing UK GAAP except the FRSSE The separate body of literature currently referred to as UK GAAP will cease to exist Effective for accounting periods starting on or after 1 January 2015, early adoption permitted 2
FRS 102 New UK GAAP What is ‘new UK GAAP’ Continued
Transition date Year-end 31 December Earliest opening balance sheet Opening restated balance sheet is 31 December 2013.
Run old GAAP/new GAAP in parallel for 2014.
FRS 100 and FRS 101 What are FRS 100 and FRS 101
FRS 100 introduces the new UK GAAP and sets out who can use FRS 101, FRS 102 and the FRSSE.
Also sets out when to use a SORP.
FRS 101 is a reduced disclosure framework for UK subsidiaries of IFRS user groups. Introduces
as Companies Act formats to be used. Generally, not many people will adopt FRS 101.
FRS 102 New UK GAAP Other matters Adopt early?
Can adopt early and it may be
to do so.
If using a SORP (Charity) use the new SORP when finalised.
Updated every three years (reference to IFRS 9 financial instruments when published).
Does not have references to the Companies Act as does the FRSSE.
FRS 102 New UK GAAP Other matters - continued Simplified basic rules
Contains simplified accounting and measurement rules.
Where complexity exists refer directly to IFRSs (EU) when directed.
Refer to other GAAP (auditors now likely to only accept policies set out in IFRSs).
FRS 102 New UK GAAP Options available for companies and groups (small/medium/large) IFRS Yes
Listed, AIM, other EU market, quoted debt instruments Medium and large non listed entities
Yes New GAAP No FRSSE No Yes No
Small Companies and micro-entities Option to use ‘higher levels’
Yes N/a Yes Yes Yes Yes
FRS 102 New UK GAAP Companies Act format and content
IFRSs specific format FRS102 use basic Companies Act formats
Other aspects of companies Act 2006 continue to apply.
FRS 102 New UK GAAP A warning: SMALL GROUPS BECOMING MEDIUM/LARGE Current UK GAAP Under FRS 102 Duplicated effort
FRSSE to full UK GAAP.
Small group to large group.
Historic consolidation data required (three years) FRSSE to FRS 102.
Small group to large group.
Historic consolidation data also required (three years) Consider adopting FRS 102 early.
FRS 102 New UK GAAP What about the Companies Act 2006?
Calculated as determined by Full EU adopted IFRS or FRS 102. Use of FRS 101 reduced disclosures will add complexity.
Specific guidance on distributable profits, impact of fair-value accounting
See ICAEW Tech 02/10 This is a complex area, be aware of the effect of fair-value accounting and hedging arrangements if significant 10
FRS 102 New UK GAAP What about the Companies Act 2006?
Disclosures applicable to both FRS 102 and IFRS
Directors reports content and layout Business review Requirement to prepare financial statements Audit requirements Directors emoluments/transactions 11
FRS 102 Contents of financial statements Primary statements Statement of financial position.
Statement of comprehensive income Statement of changes in equity Statement of cash flows Notes (and some….)
FRS 102 Main changes to look out for Degree of change Effects on:
Can be very little/can be extensive.
• Distributable reserves • bank and other debt covenants • bonus schemes/share schemes/profit share arrangements (look out for impact on LLP profit sharing arrangements) 13
FRS 102 Main changes to look out for: Financial instruments What are they?
Interest rate swaps/caps/collars.
Exchange forwards/options Complex combinations of these/sometimes embedded in other contracts Most will be fair-valued to profit and loss 14
FRS 102 Main changes to look out for: Financial instruments continued Basic financial instruments (choice 1) Such as: Other financial instruments (choice 2)
Amortised cost (This is the NPV of the receivable or payable).
• Trade and other debtors • trade and other creditors • simple bank loans Measure at Fair-value to profit and loss 15
FRS 102 Main changes to look out for: Financial instruments continued Price contract at forward contracted rate?
No longer available.
Available subject to certain conditions i.e. documentation/policy/ accuracy of forecast transactions.
Accounting treatment of hedged items until maturity
Asset/liability accounting and fair-value reserve through Other Comprehensive Income.
FRS 102 Main changes to look out for: Defined benefit pension schemes Income statement Balance sheet
Charge will be calculated on the net liability and not investments/liabilities separately Old UK GAAP option for a Group to show on consolidation only -
Net asset/liability must appear either in the sponsoring entity or allocated to the subsidiaries.
FRS 102 Main changes to look out for: Employee benefits continued Calculated on an accrual/prepayment basis for all entitlements
Look out for holiday pay/sick pay/bonus schemes
Some additional accruals
Collect the necessary information from 1 January 2014!
FRS 102 Main changes to look out for: Investment properties Held at fair-value Cannot determine fair value
Changes in value to profit and loss
fair value can be determined reliably.
Account for as Property, plant & equipment.
‘Split accounting’ for mixed use properties Not ‘own use’ or ‘trading’ 19
FRS 102 Main changes to look out for: Intangible assets – EXTERNALLY ACQUIRED More recognition of these for an acquisition
Brand names Distribution contracts Licence agreements etc.
Basic life unless demonstrated otherwise Reverse impairment
Default 5 years (no longer 20 years) Yes
On balance sheet/release to profit over the periods expected to benefit.
FRS 102 Main changes to look out for: Intangible assets continued – INTERNALLY GENERATED
All research costs written off.
Research phase and development phase.
Development costs Forbidden - internally generated:
Specific project/commercial viability (flow of economic benefits) Brands/ Publishing titles Distribution contracts Goodwill Start-up costs Advertising Training…… 21
FRS 102 Main changes to look out for: Deferred tax Timing differences ‘plus’ What is the plus?
Basically timing differences similar to current UK GAAP All ‘Fair-value adjustments’ require deferred tax effects to be recognised.
• Acquisition fair-values • Revalued fixed assets fixed assets/intangible assets) • Investment properties.
FRS 102 Main changes to look out for: Merger accounting/business combinations Permitted only for: Business combination
Internal group reconstruction.
Some public benefit entity combinations An acquirer must be identified/use the purchase method.
Acquisition costs added to cost of investment 23
FRS 102 Main changes to look out for: Business combinations - continued Goodwill default amortisation period
5 years (was 20)
Minority interests renamed
Continue to adjust the goodwill (no change)
Adjust up to 12 months (shorter than the old ‘to the next balance sheet) 24
FRS 102 Main changes to look out for: Group Investments and loans Investment in subsidiaries
Cost less impairment unless quoted/listed in which case fair-value through profit and loss.
If due on demand hold at cost less impairment (as current UK GAAP)
Internal interest charge/tax implications
If not due on demand hold at
less impairment 25
FRS 102 Main changes to look out for: Leases Rent free periods/other incentives Lease commitments
Release over the expected period of the lease (not just to the first optional break period).
Disclose amount of expected annual payments year-by year 26
FRS 102 Main changes to look out for: Associates – PARENT COMPANY Consolidated financial statements
Must use equity accounting.
investments held as part of an investment portfolio.
Fair-value through profit and loss Proportional consolidation
FRS 102 Main changes to look out for: Associates - NOT A PARENT Choice of:
• • • •
(‘gross equity method’ removed)
Cost less impairment
(subsidiary only not parent)
Fair value accounting
Other Comprehensive Income
Fair value accounting
profit and loss
FRS 102 Main changes to look out for: Joint ventures Joint venture
Three types recognised
• Jointly controlled operation • Jointly controlled asset • Jointly controlled entity (Including LLP)
Only exists where unanimous agreement required for strategic decisions 29
FRS 102 Main changes to look out for: Other accounting issues: Borrowing costs Restatement of errors
Option to capitalise interest into asset under construction retained.
Use of ‘material’ rather than ‘fundamental’ will result in more restatements of opening balance sheets 30
FRS 102 Main changes to look out for: Other accounting issues: Government grants
An accounting choice for
: Performance model – recognise income when all conditions met Accruals model – match to related expenditure
Deduct from cost of asset? No!
FRS 102 Main changes to look out for: Other accounting issues: Exchange movements
Select functional and presentation currencies (new) Exchange differences arising from consolidation NOT re cycled to income statement (maintains current position) 32
FRS 102 Main changes to look out for: Other accounting issues: Discontinued operations
Columnar presentation in income statement preserved Must have been disposed of by the year-end).
Old GAAP – disposal within 3 months of year-end Net profit or loss to be disclosed.
FRS 102 Main changes to look out for: Other accounting issues: Also consider: Fair value accounting Related parties
Emphasis is more on fair values.
Change of basis on which the business is reported on – need to be continuously aware of this.
Concept of ‘key management personnel’ and wider disclosures.
FRS 102 Main changes to look out for: Other accounting issues: Also consider tax issues:
Fair value accounting –
particularly financial instruments
Amortisation of intangibles Alternative accounting treatments permitted 35
FRS 102 Main changes to look out for: Other accounting issues: SORPs
These are to be progressively rewritten to comply with FRS 102.
Charity SORP draft already issued.
Companies Act 2006 is still there!
Capital maintenance/use of reserves/share premium etc.
FRS 102 Main changes to look out for: Other things to think about: Describe the basis of preparation: two types of accounting policy:
Accounting policies to be rewritten.
Significant accounting policies Critical accounting estimates and judgments
Statement of compliance
FRS 102 Main changes to look out for: Other things to think about Some practical issues:
Accounting systems – need to change?
Compilation and sources of fair-value data.
Corporation tax and deferred tax/’iXBRL’ tagging methodology Stakeholder education/owners/key employees/banks 38
FRS 102 Main changes to look out for: Other things to think about Questions