Bruce Cowie MA FCA

• Overview of the regulations
• FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland
• FRS 101 The Reduced Disclosure Framework

• The standards
– FRS 100, 101 published 22 November 2012
– FRS 102 published 14 March 2013
• Function of the new standards
– FRS 100: Application of reporting requirements
– FRS 101: Reduced disclosure framework
– FRS 102: The financial reporting standard applicable in the UK and Republic of Ireland

“To enable users of accounts to receive high quality, understandable financial reporting proportionate to the size and complexity of the entity and the users’ information needs.”
FRS 100

• No extension of mandatory usage of IFRS
– Still just consolidated accounts of listed/AIM
• Small companies will continue to use FRSSE
– Unless choose not to.....
• New UK GAAP has two main elements
– FRS 102: “The Financial Reporting Standard applicable in the UK and Republic of Ireland”
• Will predominantly be adopted by non-small groups and companies which are unlisted and currently use UK GAAP
– FRS 101: “Reduced disclosure framework”
– Aimed at individual companies in an IFRS group - one whose group accounts follow IFRS

• This is not just a financial reporting issue
• There will be consequential effects on:
– Taxation
– Borrowing covenants and other similar arrangements
– Systems and data collection
– Performance indicators
– Performance related pay
• Leaving it until 2015 will be too late
– It is essential to perform an early impact assessment

• Based on IFRS for SMEs
• Replaces all FRSs, SSAPs, UITFs
• Original proposals only deviated from IFRS for SMEs where required to comply with company law
• Final standards contain more modifications
• Note that FRS 102 financial statements are subject to accounting requirements of CA 2006, therefore significantly:
– UK Company law formats and presentations to be applied

• Mandatory adoption of new UK GAAP (if not small or full
IFRS) for years commencing on/after 1-1-15
• Early adoption is permitted, but:
– Earliest point: years ending on/after 31-12-12
– Unlikely to be popular due to practical impacts

• Fundamentally retrospective application
– Subject to numerous exemptions/exceptions
• First FRS 102 financial statements contain reconciliations to previous GAAP
– Equity at date of transition and at date of last old GAAP balance sheet
– Profit of loss for last old GAAP accounting period

• At this stage an impact assessment is the priority
– Particularly in respect of the retrospective adjustment at
1-1-14 (or subsequent)
• The following slides look at some of the key recognition and measurement effects
– Not intended to be a comprehensive summary
– Presentation and disclosure effects less important at this stage

• Key accounting policy choice allowed:
– Apply rules contained in Sections 11 and 12 of FRS 102; or
– Apply recognition and measurement provisions of IAS
39 (with disclosures from Sections 11 & 12)
• FRS 102 sections
– Section 11: Basic Financial Instruments
– Section 12: Other Financial Instruments Issues

• Detailed definition given
• Examples include the following
– Cash
– Demand and fixed term deposits when the entity is the depositor
(eg bank accounts)
– Commercial paper and commercial bills held
– Accounts, notes and loans receivable and payable
– Bonds and similar debt instruments
– Investments in non-convertible preference shares and nonputtable ordinary and preference shares
– Commitments to receive a loan if the commitment cannot be settled net in cash

• Basic: all at cost/amortised cost
• Exception:
– Investments in non-convertible and non-puttable preference shares and non-puttable ordinary shares that are publicly traded or whose fair value can otherwise be measured reliably
– Measured at FVTPL

• Key change is accounting for lending: amortised cost
– Initial recorded amount + interest at effective rate – cash received
– Depends on effective yield
• Effective yield?
– ‘the rate the exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument’
– Include all contractual terms of instrument (eg prepayment, call or similar options)

• Lending: impairments (NB also trade receivables)
– Trigger for impairment calculation
• ‘Objective evidence’ is received that full recovery of loan value is unlikely
• May occur for individual loans or a group of loans
– Key principle of calculation
• The “incurred loss model”: no losses recognised from expected future events
– Consequence: no “general provisions”

• Scope
– All other financial instruments unless covered by a different section (eg leases, business combinations)
• Summary of accounting
– FVTPL, except
– Equities where fair value cannot be reliably measured at cost less impairment
– Simplified hedge accounting specified: see following
– Separation of embedded derivatives from host contract not required
• NB all derivatives on balance sheet at fair value

• Common instances
– Forward contracts
– Interest rate swaps
• Problem
– Under current UK GAAP all are off-balance sheet
– FRS 102: on balance sheet at fair value
– Value changes through profit or loss unless hedge accounting adopted
• Hedge accounting avoids volatilities in profit
– Criteria simpler than under IFRS

• Functional/local currency
– FRS 102 requires all foreign currency transactions to be translated into functional currency
– Functional currency broadly equivalent to local currency
(SSAP 20) but detailed guidance as to identification is given
• Translation rules
– FRS 102: all transactions to be recorded at spot rate (average as approx.) with gains/losses reported through profit or loss
– SSAP 20 gives key exception for transactions covered by matching forward contract

• Business combinations
– More intangibles recognised: recognised when arise from contractual/legal rights regardless of transferability
– Contrast FRS 10: only recognised when could be sold separately
• Internally generated
– No distinction between R&D and other intangibles
– Capitalisation optional
– More recognition possible:
• FRS 10: readily ascertainable market value
• FRS 102: satisfy criteria to ensure future economic benefits

• Intangibles
– Cost or valuation model (requires active market) available
– All must be amortised
• Life must not exceed period of any related contractual/legal rights
• If can’t reliably estimate life, use 5 years
– No provisions re “indefinite life”
• Goodwill
– Amortisation as above, but
– Negative goodwill as per UK GAAP (negative asset and subsequent release to profit or loss)

• Basic accounting treatment
– FRS 102:
• If fair value measurable reliably without undue cost/effort then fair value through profit or loss
• Otherwise cost
– SSAP 19: Stated annually at OMV through STRGL
• Properties let to and occupied by group companies
– FRS 102: investment properties in separate financial statements (not consolidated) (as per IFRS)
– SSAP 19: not investment properties in separate or consolidated financial statements

• Standard applies to arrangements which are not leases, but which convey rights to use an asset (eg outsourcing contracts) when:
– Fulfilment of the arrangement is dependent on use of a specified asset or assets; and
– The arrangement conveys to the purchaser the right to control the use of the asset
• See following example...

Dom ltd enters into a arrangement to outsource its IT equipment.
The contract lasts for 4 years and comprises two components. The supplier IT-R-US contracts for:
• The supply and maintenance of 200 workstations conforming to a specified minimum standard.
• The supply and maintenance of a server. This server is specifically configured to Dom’s unique requirements.
• The arrangement permits the supplier to substitute existing equipment for equipment of at least an equivalent specification at any time, as long as there is no significant disruption to IT services.
What are the implications of the above arrangement for Dom ltd?

• Segmentation of contracts:
– FRS 102: “when necessary to reflect the substance of the transaction”
– Old UK: “components operate independently”: separate good/service company can provide or which is separately provided by third parties
• Grant income: choice given
– Match with expenditure to which intended to contribute, or
– Recognise as income when performance criteria satisfied

• Tangible fixed assets: componentisation
• Operating lease incentives: spread over lease term
• Defined benefit pensions: financing components of p/l charge
• Service concession arrangements (PFI etc)
• Deferred tax: provision on revaluation gains, fair value adjustments
• Fair values on business combinations
• Equity accounting amounts for associates and joint ventures

• Problem addressed
– Individual companies in a group where consolidated financial statements prepared under IFRS
– For efficiency, would like to use EU adopted IFRS in all individual financial statements, BUT
– Many groups have chosen to remain with UK GAAP in statutory accounts: partly because full IFRS involves burdensome disclosure requirements
• Solution
– FRS 101 allows entities to use recognition and
measurement provisions from EU adopted IFRS with a reduced disclosure regime

• Reduced disclosures will apply to “qualifying entities” applying recognition and measurement principles of EUadopted IFRS
• Qualifying entity
– Member of a group that prepares publicly available financial statements, which give a true and fair view, in which that member is consolidated
– NB includes ultimate parent company and subsidiaries

• Disclosure exemptions relate to the following areas:
– Share based payments
– Business combinations
– Related parties
– Financial instruments & fair values
– Cash flow statements
– Discontinued operations
– Comparatives (eg PPE)
– Effects of new IFRSs not yet in force
– Contractual commitments re PPE and intangibles
– Impairments
– Sundry IAS 1 requirements
• Financial institutions
– Not eligible for exemption from financial instruments (IFRS 7) and fair value (IFRS 13) disclosures

• Reduced disclosures prevent use of statutory exemption from CA 2006 requirements applicable to IFRS companies
• Therefore, if adopt FRS 101:
―Recognition and measurement rules: IFRS
– Companies Act 2006 formats!!

Situation 1: currently IFRS consolidated accounts: statutory accounts of subsidiaries/parent UK GAAP
• Where parent and subsidiaries adopt FRS 101 in statutory accounts
– Will benefit from reduced disclosures, but
– Will require substantial accounting changes, therefore will consider tax and other implications before early adoption
– Eg: systems, performance related pay, debt covenants
• Decision therefore not straightforward
• Impacts on accounting will be remaining differences between current UK GAAP and EU adopted IFRS

Situation 2: currently IFRS consolidated accounts: statutory accounts of subsidiaries/parent IFRS
• Parent and subsidiaries adopt FRS 101 in statutory accounts
– Benefit from reduced disclosure
– No accounting implications
• Note that FRS 101 uses IFRS recognition and measurement principles, but it is not IFRS: it is new UK GAAP
• Parent and subsidiaries therefore switch to new UK GAAP and opt for FRS 101
• Practical effect is IFRS with reduced disclosures, BUT CA 2006 formats

• Adoption of FRS 101
– Mandatory adoption of new UK GAAP (if not small or full
IFRS) for years commencing on/after 1-1-15
– Early adoption permitted, and likely to be widespread

Bruce Cowie MA FCA