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In association with
contents n
accountancy frs 102 guide 2014
editor’s letter
making the frs
102 transition
FRS 102
contents
3 Ten things you
need to know
Helen Lloyd FCA gives an
overview of the essentials for
smooth adoption
8 Intercompany loans
1
10 Bank debt
Sara
White
sara.white@
wolterskluwer.co.uk
Follow us on Twitter
@accountancylive
12 Forward contracts
12 Deferred contracts
1
15 Business combinations
17 Associates and joint ventures
19 Deferred tax
1
21 Investment properties
To keep up to date with
the latest developments
in new UK GAAP, go
online to subscribe to
Accountancy magazine
at accountancylive.
com/subscribe or call
020 8247 1000
23 Financial statements
26 Sources of new policies
1
28 Impairment reviews
1
30 Five steps to transition
An action plan to make sure
you are ready for the new
accounting rules. By Andrew
Editorial
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W
elcome to our exclusive
guide to FRS 102, The
Financial Reporting Standard
applicable in the UK and Republic
of Ireland, also known as new UK
GAAP. The FRS will be effective from
1 January 2015, with early adoption
available for accounting periods ending
on or after 31 December 2012.
In this guide you will find an
overview of the ten key issues to
consider when planning your move
to the new UK GAAP, written by our
accounting expert, Helen Lloyd FCA.
This includes ten chapters focusing
on the key issues to consider from the
new format for financial statements,
how to report loans and derivatives
and the new approach to deferred tax
under the revised rules.
In addition, there is a detailed
five‑step refresher article about the
key steps to consider when making
the transition, written by Andrew
Davies ACA, lead accounting expert
at EY. This section includes useful tips
and advice on preparing an impact
assessment, reviewing disclosures,
how to prepare a skeleton set of
financials and populate the opening
balance sheet.
As FRS 102 evolves, we will
continue to cover the topic in detail in
Accountancy magazine every month
and online at www.accountancylive.
com. To keep up to date with all new
developments, why not sign up to
receive our free newsletter, sent three
times a week to registered readers, at
www.accountancylive.com/newsletter
2
n new uk gaap
accounting
frs 102 guide 2014 accountancy
ten things you
need to know
Helen Lloyd FCA casts an expert eye
over the key differentiators in the UK’s
brand new accounting standard
M
arch 2013 saw a ground-breaking
event for UK financial reporting
with the release of FRS 102, The
Financial Reporting Standard
applicable in the UK and Republic
of Ireland. This new standard replaces current UK
accounting standards, for periods beginning from
1 January 2015, and so has very broad relevance.
The process of introducing FRS 102 has been
a long and sometimes painful one, with repeated
consultations by the Financial Reporting Council
(FRC) and, on occasion, some bitter debate. It
was, however, agreed by most that some change
was inevitable, as the body of UK standards
had become an awkward hybrid of Statements
of Standard Accounting Practice (SSAPs),
which were usually relatively succinct; Financial
Reporting Standards (FRS), developed later and
3
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accountancy frs 102 guide 2014
accounting
new uk gaap n
ten things you
need to know
Accounting for
intercompany loans
Loans to and from other group companies
are financial instruments and are in the scope
of sections 11 and 12. They will usually be
classified as basic and will therefore need to be
held at amortised cost, with a finance charge
recognised each period (as for any loan). This
will be a change in practice for companies with
non-interest bearing debt which have previously
just recorded the debt at face value on the
balance sheet and left it there until settlement.
It will be necessary to use a market interest rate
for similar debt to discount the initial carrying
amount accordingly to present value, then use
the effective rate to accrue interest charges, over
the life of the loan, so that at the end of its life its
value equals the repayment amount.
with more expansive content, UITF Abstracts
which covered finer application details, and the
later set of standards based on International
Financial Reporting Standards (IFRS).
Although the former Accounting Standards
Board (ASB), now reorganised as the Accounting
Council, did not approve standards for use in the
UK unless they were broadly consistent with the
framework set out in the statement of principles,
the tone and style of the later standards, and
their emphases, did not sit entirely comfortably
with the standards that were already in place.
So, the time was right for a clearing out
of all existing standards and guidance, and
replacement with the new suite of standards,
FRS 100 (determining which reporting
framework applies to which entities), FRS 101
(setting out a reduced disclosure framework for
qualifying entities choosing IFRS recognition
and measurement principles) and FRS 102,
the new standard containing the detailed
requirements that were previously in the body of
SSAPs and FRSs.
This article sets out 10 key features of
FRS 102 which are likely to lead to significant
changes for preparers.
Unusual terms in bank debt
Accounting for bank loans received
was usually straightforward under
UK GAAP. Now, though, preparers
will need to review their loan
documentation carefully to establish
whether there are any terms that mean
the loan would fail to be a ‘basic
financial instrument’ (meaning that
it would need to be recorded at fair
value). Terms that could give problems
include changes in interest rates triggered by a
movement in a share index, variable rates that
incorporate a cap or collar, and some options to
settle in an alternative currency.
Forward contracts
Companies that have a practice of
using forward currency contracts
to manage their exposure relating
to planned sales or purchases, for
instance of stock or fixed assets,
may, under old UK GAAP, have used
a type of ‘synthetic accounting’
where transactions and the related
outstanding balances were accounted
for using the contracted rate rather than the
spot rate. This is not permitted under FRS 102.
Instead the original transaction will be recorded
at the transaction date rate, with outstanding
balances then retranslated at the year-end
4
rate, and forward contracts accounted for
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4
n new uk gaap
accounting
frs 102 guide 2014 accountancy
ten things you need to know
separately by being held at fair value, with
changes in profit. Hedge accounting is available
as an alternative, although many would find its
application too onerous.
Business combinations
Old UK GAAP ‘acquisitions’ are rebranded
as ‘business combinations’ under FRS 102,
and while the broad accounting principles
are the same, there are some differences
in detail. When determining the fair
value of assets and liabilities acquired,
an acquirer may need to bring on to the balance
sheet items such as contingent liabilities which
had not previously been included. Also in making
adjustments after initial accounting, the cost of
the investment may be adjusted indefinitely but
the values of assets and liabilities acquired can
only be adjusted in the 12-month period following
the acquisition (unlike in FRS 7, Fair Values in
Acquisition Accounting, where adjustments can
be made in two post-acquisition balance sheets,
giving a theoretical period in some cases of
almost two years).
No guidance is given on reverse acquisitions;
group reconstructions are addressed briefly with
a summary of merger accounting, although there
is no detailed application guidance.
Accounting for associates
and joint ventures
An investor in an associate must use
equity accounting in its group accounts,
if it is a parent company. If it is not a
parent (and therefore does not prepare
group accounts) it has a choice
between cost and fair value, though
there is also an overriding requirement
that if an investment in an associate is
just part of an investment portfolio, it must be
held at fair value with changes in profit. Other
entities choosing fair value measurement have
the option of showing movements in profit or in
other comprehensive income (OCI), following the
guidance in section 17 for revaluing property,
plant and equipment.
The FRS 102 accounting for joint ventures
uses the IAS 31, Interests in Joint Ventures,
model (not the new IFRS 11, Joint Arrangements,
model) and defines jointly controlled operations,
jointly controlled assets and jointly controlled
entities: preparers will need to establish how
their existing structures fit into this
5
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accountancy frs 102 guide 2014
accounting
new uk gaap n
ten things you need to know
model. Jointly controlled entities (those that
use a separate legal structure in which all the
venturers have an interest and share control)
must be accounted for in group accounts using
the equity method (there is no allowance for the
gross equity method that was available in FRS 9,
Associates and Joint Ventures).
Deferred tax
The section in FRS 102 that covers
current and deferred tax has been
drafted based on the timing differences
approach that was used in FRS 19,
Deferred Tax, so much of it will be
familiar. It has been modified, though, to
a ‘timing differences plus’ approach, so
great care will be needed in its detailed
application. For instance, FRS 102 requires
that deferred tax is provided when assets are
revalued (under FRS 19, no deferred tax was
recognised on revaluation gains unless there was
a binding commitment to sell). Unlike under FRS
19, discounting is not permitted.
Investment properties
Again the definitions for investment
properties are very similar to those in
old UK GAAP, although FRS 102 includes
properties let to other group companies in
its definition, unlike SSAP 19, Accounting
for Investment Properties, which scopes them
out. The required basis of valuation in FRS 102
is ‘fair value’ rather than the SSAP 19 ‘open
market value’, and movements each period are
recognised in profit, rather than directly in equity.
Financial statements
presentation
The FRC has struggled with reconciling
the original presentation requirements
that were included in the IFRS for SMEs
with the requirements from Company
law. The approach finally chosen
has been to incorporate references
to the basic primary statement formats in the
legislation, while retaining other content from
the IFRS for SMEs. So, entities will produce
one primary statement showing profits and
losses, and one showing OCI, or may choose to
combine these (unlike under FRS 3, Reporting
Financial Performance, where the statement
of total recognised gains and losses (STRGL)
was always distinct from the profit and loss
account). It will also be acceptable, in some
circumstances, to include other changes in
equity, giving one long ‘statement of income and
retained earnings’ which will remove the need for
a separate statement of changes in equity.
Sources of new policies
Because FRS 102 is (relatively)
concise, it contains general outlines
and principles rather than detailed
guidance. Entities needing an
accounting policy for a transaction
outside this guidance must look first
to the remainder of FRS 102, then
to any relevant SORP (Statement of
Recommended Practice), then to the
higher level guidance in section 2, and ‘may
also consider’ requirements and guidance in full
EU-adopted IFRS. This means that care will be
needed on transition so that all current policies
are assessed and there is an understanding
of where these policies have come from, and
whether they are consistent with FRS 102 or
with full IFRS. A policy that was developed
based on UK GAAP, but contradicts IFRS, may
not be acceptable under FRS 102.
Impairment losses
and their reversal
The calculation of
impairment losses on
non-financial assets
is based on a different
way of grouping them,
and may give different
results from FRS 11,
Impairment of Fixed
Assets and Goodwill. For
instance, on an acquisition, goodwill is allocated
between cash-generating units based on
which parts of the whole entity it is expected to
benefit, instead of simply being assessed based
on the business that it came in with. Also unlike
under FRS 11, impairment losses are reversed if
the reasons for the impairment have ceased to
apply, even if the asset is goodwill.
Helen Lloyd FCA
Audit and accounting writer,
Wolters Kluwer
www.cch.co.uk
www.accountancylive.com
6
Setting the Standard
on UK GAAP
It seems that the only constant in business today is the rate at
which we are required to change…
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GAAP is a comprehensive guide to interpreting and implementing the new UK accounting standards,
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Award-winning accountant Steve Collings is the author of Interpretation and Application of UK GAAP
which provides practical insight into preparation of accounts at all levels.
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Application of UK GAAP
Ernst & Young
Steven Collings
• ISBN: 9781119038177
• 1200 pages
• February 2015
• £80.00, €96.00, $130.00
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Sample
Chapters
accounting
newuk
ukgaap
gaap
n new
frs 102 guide 2014 accountancy
FRS 102: part 1
intercompany loans
Helen Lloyd
considers the
accounting
treatment for
intercompany
loans under
the new
UK GAAP
8
F
ollowing on from the article on the new
UK GAAP (Getting to grips with the
new UK GAAP, May 2013), this piece
is the first in a series exploring in more
detail each of the 10 areas where FRS
102, the Financial Reporting Standard applicable
in the UK and Ireland, has significant differences
from current UK GAAP. The first issue is the
accounting for intercompany loans.
It is very common for groups to manage
their finances by setting up loans between the
parent and its subsidiaries, or directly between
subsidiaries. This allows cash to be used where
it is needed and may well be cheaper than using
external finance if the subsidiary receiving the loan
is perceived as risky so that the rate it
could borrow at externally would be high.
Often, though, the loans are not on strictly
commercial terms: perhaps they
bear low or zero interest, or have
less formality in their repayment
arrangements, and it is these noncommercial aspects of intragroup
loans that may have accounting
consequences under FRS 102.
The requirements
Intercompany loans, like all
financial assets and liabilities, are
in the scope of either section 11
or section 12 of FRS 102. Most
are likely to be ‘basic financial
instruments’ in section 11, being
debt instruments with a fixed or
straightforward variable return,
and no other complexities that
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would take them outside the definition.
Loans to and from subsidiaries that are
repayable on demand are explicitly listed in
section 11 as being likely to fall within its scope.
These basic instruments are initially measured
at ‘the present value of the future payments
discounted at a market rate of interest for a similar
debt instrument’. After this initial recognition, they
are measured at amortised cost using the effective
interest method, which means an interest charge
is recognised systematically over the life of the
loan, giving a constant rate of return.
The mechanics
When a company adopts FRS 102 for the first
time it must assess all of its accounting
policies and ensure that the assets and
liabilities on its transition date
balance sheet are measured in
accordance with the standard
(except where there are specific
exemptions). Generally the
amortised cost method will be
familiar to preparers, although
the results may be more
troubling when, as in these cases,
an interest charge is recognised
despite the absence of cashflows.
In the case of zero-coupon loans
which have previously been held,
unadjusted, at their face value, the
balances will need to be revisited
to recreate the accounting from
their inception in order to give
an amortised cost figure at the
transition date (see figure 1).
accountancy frs 102 guide 2014
accounting
new uk gaap n
Example: interest free loan on five-year fixed term
Challengeco, a subsidiary company, adopts FRS 102 for its
December 2015 accounts and, therefore, has a 1 January 2014
transition date.
At the beginning of 2012 it took out a £1m interest free loan from
its parent company, with a five-year fixed term. Assuming it can
determine that a market rate of interest at the time would have
been 12%, it can go back to the inception date and establish what
the accounting would have been from the outset.
The difficulties
The biggest challenge for a recipient of a
zero-coupon loan attempting to meet these
requirements will be establishing a ‘market
rate of interest’ to use in discounting the
future cashflows. It may be that a subsidiary
is borrowing from elsewhere within its group
precisely because it cannot easily access external
finance, or not at a reasonable rate.
In this case, if the only finance it could obtain
would be at an unfeasibly high cost, the imputed
interest charge on the accounting will also be
high, which may not be a palatable result. The
parent’s borrowing rate would often not be a
good proxy if the group is generally lower risk
than this individual company, even though it does
more accurately reflect the cost to the group of
financing the subsidiary.
Large companies may already have found
that the lender in an intercompany arrangement
has had its taxable profits increased by imputed
interest income, because of transfer pricing rules.
Another consideration is the effect of a
parental guarantee. A subsidiary which could not
obtain finance on its own merits may have access
to more options, at a cheaper rate, if its parent
guarantees the loan. This should probably be
taken into account in determining a market rate,
since it reflects the reduction in risk associated
with parental involvement.
The exemptions
In its work developing the standard, the Financial
Reporting Council (FRC) noted that these
requirements could cause havoc for dormant
companies with long-standing, unsettled
intercompany balances: they would all
need to begin recognising interest
Opening value
Interest at 12%
Closing value
2012
567,427
68,091
635,518
2013
635,518
76,262
711,780
2014
711,780
85,414
797,194
2015
797,194
95,663
892,857
2016
892,857
107,143
1,000,000
The 2013 closing value of £711,780 is used as the carrying value
in the transition date balance sheet, and the accounting continues
from there.
and thus would lose their dormant status.
As a result a special measure was brought
in allowing dormant companies not to re-measure
any of their assets or liabilities on transition,
until the balances change or new transactions
take place.
Section 12
makes it
clear that the
fair value of
an amount
repayable on
demand is not
less than the
face value
The alternatives
UK companies adopting International Financial
Reporting Standards (IFRS) for the first time in
recent years are familiar with the problem of
having to introduce more complex accounting for
what was previously a straightforward item.
One response often seen in practice is to
ensure that all intercompany loans include a term
stating that they are repayable on demand, since
section 12 makes it clear that the fair value of an
amount repayable on demand is not less than
the face value and this appears to apply equally
to the present value of these amounts. Choosing
to include this term, though, does mean that the
receiving entity must show the whole loan amount
as a current liability, which could damage the
appearance of its balance sheet (and thus reduce
the likelihood of its being able to raise external
finance in the future).
If a loan does not specify any terms, the
default would normally be to assume it is
repayable on demand, since the borrower has no
enforceable right to avoid repaying the money.
Groups that have in the past relied on informal
arrangements and verbal agreements may wish,
then, to introduce more formal documentation
before their transition date to ensure their
intentions are reflected in the contractual terms
and in the accounting.
Helen Lloyd FCA
Audit and accounting writer,
Wolters Kluwer
www.cch.co.uk
www.accountancylive.com
9
accounting
new uk gaap
n new
frs 102 guide 2014 accountancy
FRS 102: part 2
bank debt
Helen Lloyd considers the
treatment of unusual terms in
bank debt and external loans
10
M
any private companies will need
external financing at some point
in their life cycles, because of
the limited availability of private
equity finance. The focus during
the arrangement of a bank loan will probably
be on the timing of cashflows and the ultimate
cost of borrowing, with a working assumption
that nothing out of the ordinary will arise. This
can mean that borrowers sign up to loans with
some surprising details, which could have
accounting consequences under FRS 102, The
Financial Reporting Standard Applicable in the
UK and Ireland, that would not have been even
considered under current UK GAAP.
The requirements
Under section 11 of FRS 102, financial liabilities
(such as bank loans) are assessed for whether
they qualify as ‘basic’ (there is no name for those
that do not qualify, though here we will refer to
them as ‘non-basic’). The conditions to qualify
make reference to:
QQ How returns to the holder are calculated.
These may be a fixed amount (for instance
where eventual repayment is of the principal
plus a premium), a fixed rate, a variable rate
based on a single index (for instance the Bank
of England base rate), or a combination of
fixed and variable rates (for instance base plus
2 points, but not base minus 2 points);
QQ Protection for the holder from losing its
principal;
QQ Prepayment options, and whether they are
restricted to those based on deterioration in
credit risk or on changes in regulations; and
QQ Conditional returns.
The consequences
Loan liabilities classified as basic are measured
initially at proceeds, and then in the balance
sheet at amortised cost. This will be a familiar
process from FRS 4, Capital Instruments, and FRS
25, Financial Instruments: Presentation. Those
liabilities which are not basic, even by virtue of
trivial-seeming clauses which breach the basic
conditions, are measured at fair value, re-measured
each reporting date, with changes in profit.
Some common ‘unusual terms’
A variable rate loan with an interest rate cap or
collar would fail the definition of basic because
the return to the holder is not straightforwardly
fixed, variable or a combination. This applies
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accountancy frs 102 guide 2014
accounting
new uk gaap n
bank debt
even though it contains a repayment provision
contingent on future events.
Other problematic conditions
It is worth pausing to consider other kinds of
terms in bank loans that would stop an instrument
from being classified as basic. Events that might
be specified as triggering early repayment of a
loan include a sale or flotation of the borrower,
a change in the nature of its business, or a
change in the scale of its operations. All of
these are contingent on future events so if they
are specified as repayment triggers in the loan
agreement, they will render it non-basic and force
fair value accounting.
What about embedded derivatives?
Readers familiar with IAS 39, Financial
Instruments: Recognition and Measurement,
may identify some of the above clauses as giving
rise to embedded derivatives, which under IAS
39 would (if they met all of the conditions) be
pulled out at the beginning of the loan and then
accounted for separately at fair value through
profit or loss, thus leaving the loan itself (the ‘host
contract’) to be measured at amortised cost. This
option is not available under FRS 102 which, in
line with IFRS 9, does not use the concept of an
embedded derivative. Instead, some features
which might previously have given rise to an
embedded derivative instead ‘pollute’ the whole
host, so that it is all measured at fair value.
even where the cap has little or no commercial
substance, for instance if a borrower took out a
variable rate loan now, with a 2 year life, and an
interest rate cap at 30%.
A loan where the issuer has early repayment
options or where the lender could demand early
repayment needs to be examined very carefully.
The wording in section 11 is tortuous but can be
untangled to say that a loan can include early
repayment provisions and still qualify as basic if
the right to invoke the provisions is not based on
contingent future events.
So, a loan where either party has the right
from the outset to terminate at any time would
still qualify as basic; one where the borrower
could choose to repay early if interest rates
rose above a certain level would not be basic.
The only situations where contingencies are
acceptable (that is, would not lead to immediate
disqualification from being basic) are where they
are there to protect the bank from changes in the
issuer’s credit risk, or are based on breaches of
loan covenants.
Looking at the second example, a loan that
includes a condition that the bank can demand
repayment immediately if interest cover falls
below a certain level, will still qualify as basic
A loan that
includes a
condition
that the bank
can demand
payment
immediately...
still qualifies
as basic
Avoiding problems
To ensure this part of the standard is properly
applied, preparers will need to carefully review
all of their loan agreements. If problems are
identified before the date of transition (which will
be 1 January 2014 for calendar year companies)
then it may be possible to arrange for agreements
to be rewritten to remove or reword any clauses
that have unintended financial reporting
consequences. Since the assessment of whether
or not instruments are basic is performed as at the
transition date, with no requirements to go back in
time and account for the effects of renegotiations,
this would be a simple and effective way of
ensuring ‘easier’ accounting. Of course, this may
not always be possible or, even, preferable – some
complex conditions in loans are carefully phrased
to manage the lender’s risk and returns, so the
lender may be unwilling to change them.
For those, though, that are merely a result of
the use of non-tailored agreements, this could be
a helpful way of easing the reporting burden with
no change to the underlying economic position.
Helen Lloyd FCA
Audit and accounting writer,
Wolters Kluwer
www.cch.co.uk
www.accountancylive.com
11
accounting
new UK
uk gaap
GAAP
n new
frs 102 guide 2014 accountancy
FRS 102: part 3
forward
contracts
12
Helen
Lloyd FCA
considers
the treatment
of forward
contracts
and risk
management
instruments
T
his article is the third in a series
exploring in more detail each of the
10 areas where we have highlighted
that FRS 102, The Financial Reporting
Standard Applicable in the UK and
Ireland, has significant differences from current UK
GAAP. The next issue to look at is the accounting
for instruments used to manage risk, such as
forward contracts and interest rate swaps.
Risk management
For companies that regularly buy fixed assets or
stock priced in foreign currencies, or that make
sales overseas, there is an exposure to fluctuations
in exchange rates, particularly where there is a
significant time lag between when the price is
agreed and when the items are paid for. Those in
this position may choose to manage their risk by
taking out forward contracts to buy or sell amounts
of currency broadly equivalent to the amounts
expected to be paid or received (or perhaps to
cover a proportion of the exposure).
Similarly, companies exposed to interest rate
fluctuations because they have borrowed money at
variable rates may seek to stabilise their cashflows
by taking out an interest rate swap, exchanging the
variable rate for a fixed rate.
Current UK GAAP accounting
Current UK GAAP does not, in general, require any
recognition in the primary statements of contracts
such as forwards or swaps. There are, however, a
couple of circumstances where a type of synthetic
accounting is available, so that the effect of the
contract can be taken into account.
For a floating to fixed interest rate swap taken
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out to mitigate risk on a floating rate loan, the
two instruments are treated together, thereby
accounting for the loan as if it were at a fixed
rate. For foreign currency transactions where a
matching forward contract is entered into at the
transaction date, the original transaction may be
translated at the contracted rate rather than, as
would otherwise be required, at the spot rate.
FRS 102 approach
As we have seen elsewhere in this series, FRS
102, with its IFRS-based [International Financial
Reporting Standards] approach, starts in a very
different place for financial instruments.
Arrangements such as forward contracts and
interest rate swaps are financial instruments, and
would be in the scope of section 12, since they
would not meet the definition of ‘basic’. This means
that as a default, they would be held on the balance
sheet and re-measured to fair value each reporting
date, with changes reported within profit (see box).
Commercial decisions
For many, the application of the FRS 102
requirements will result in a baffling outcome. It
can seem counterintuitive to recognise volatility in
profit relating to a forward contract or a swap,
when the end result (in terms of the value of the
actual cashflows) is known at the outset.
There are two available avenues to explore
for those concerned by this. The simplest way
to address accounting consequences that could
confuse users is through disclosure, with a detailed
description of the accounting policy and an
explanation of the reported movements (effectively
saying ‘the charge to profit this year is because
accountancy frs 102 guide 2014
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new uk gaapaap
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forward contracts
Example: current UK GAAP vs FRS 102
In December 2015, Company Q
commits to purchasing a piece
of plant for $450k, with delivery
expected in December 2016
and settlement in March 2017
(it is a bespoke piece, hence
the long lead time). To cover
its exposure to exchange rate
fluctuations, at the same time
as Q commits to the purchase
it takes out a forward contract
at $1.5:£1, to purchase $450k
for £300k in March 2017.
exchange rates have not moved as we expected;
we do, however, benefit from certainty about the
amount of cashflows, and made this a priority’).
Alternatively, some entities will choose to use
the hedge accounting provisions of section 12,
although the Financial Reporting Council (FRC)
has indicated that it intends to replace these
sections with an Exposure Draft expected later
this year. The current version would allow, in
some circumstances, for the changes in value of
the forward contract to be recognised initially in
other comprehensive income, rather than profit,
and only released to profit when the transaction
completes, which means the accounting is better
aligned to the economic outcome. There are
conditions to be met, though, and this option
would require some preparatory work.
Be prepared
There are no exemptions from reporting
instruments such as swaps and forwards at fair
value, so calendar-year entities with open positions
at the end of 2013 will need to value these items
as at their 1 January 2014 transition date. Those
that plan to hedge account will need to have
documentation in place by the transition date,
but may need to delay preparing this until there is
better sight of the detail and timing of the changes
to the hedging part of the standard.
Helen Lloyd FCA
Audit and accounting writer,
Wolters Kluwer
www.cch.co.uk
If the accounting were under
current UK GAAP, then in its
December 2015 accounts Q
might disclose the purchase
contract and the currency
contract, but there would be
no accounting consequences.
In its December 2016
accounts, the $450k liability
(because the machine has
been delivered) would be
recorded at £300k, using the
contracted rate.
Under FRS 102, the forward
contract is initially and
subsequently recorded at fair
value. This will usually initially
be zero, and might well still be
very low by December 2015
(though its value would need
to be properly assessed for
materiality purposes).
At December 2016, however,
the value would depend
on what has happened to
exchange rates, and what is
expected to happen before
March 2017. If, for instance,
the rate has moved to $1:£1
(and is not expected to change
radically), a contract to buy at
$1.5 is valuable, so would be
an asset in the balance sheet,
and a gain would be reported
in 2016; if the pound’s value
has risen to $2 then Q is tied
to a bad deal, in that it will
be paying more than the spot
rate, so there will be a liability
in the balance sheet, and a
loss in 2016.
The $450k year-end liability
is, under this accounting,
translated at the year-end
spot rate. When it is settled
in March 2017, there will be
a gain or loss on settlement
both of the creditor and of the
forward contract.
Current UK
FRS 102 –
Current UK
GAAP –
£ strengthens
GAAP –
£ strengthens
[$1.5-$1.5£ weakens
$2-$2.1]
FRS 102 –
£ weakens
[$1.5-$1.5$1-$0.9]
December
2015 – forward
contract value
-
-
-
-
2016 – (charge)/
credit to profit
-
£75k gain
-
£150k loss
December
2016 – forward
contract value
-
£75k asset
-
£150k
liability
December 2016
– creditor value
£300k
£225k
£300k
£225k
2017 – charge/
credit to profit
-
£11k gain
-
£50k loss
March 2017 –
initial carrying
value of asset
£300k
£225k
£300k
£450k
Note: the fair values attributed to the forward contract are simplified for the
purposes of the illustration, taking no account of the time value of money
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FRS 102: part 4
business
combinations
Helen Lloyd
FCA reviews
accounting
for business
combinations
in part four
of our series
on the new
UK GAAP
15
T
he next significant changes to
UK GAAP brought in by FRS 102,
The Financial Reporting Standard
applicable in the UK and Republic of
Ireland, relate to the accounting for
business combinations.
Acquisitions v business combinations
The language in FRS 102 is a little different from
that in current UK GAAP. Section 19 is about
‘business combinations’ (rather than FRS 7, Fair
Values in Acquisition Accounting), which includes
any bringing together of two or more businesses
into one entity. One of the first requirements is
to identify which of the combining businesses is
the acquirer, meaning that no separate guidance
is given for ‘reverse acquisitions’ because these
are simply dealt with by identifying the legal
acquiree as the accounting acquirer. The crucial
part is that the familiar fair value exercise on the
acquisition balance sheet is performed, as in
FRS 7, but the accounting acquirer’s asset and
liabilities are not revalued.
Group reconstructions (within a fairly narrow
definition) are also covered, with merger
accounting permitted, but the standard does not
seem to allow for the possibility of true mergers.
Realistically, these are rare, and UK GAAP
preparers have always found it hard to meet the
many conditions that were imposed by FRS 6,
www.accountancylive.com
Acquisitions and Mergers, and company law.
But the exclusion here means that in every case
where two unrelated entities are brought together,
one will have to be identified as the acquirer,
even if they are very similar in size, the boards will
be brought together, all holders will retain their
proportion of voting rights, and so on.
Valuing acquisition balance sheet
FRS 102 does not bring in many changes in
respect of valuing the acquisition balance sheet:
the broad principle of reporting acquired assets
and liabilities at their fair value continues to apply.
There are, though, some nuances of application
to watch out for. Deferred tax, for instance, will
in some cases need to be provided in respect
of valuation uplifts: under FRS 102, but not
under current UK GAAP, this would include
revaluations of fixed assets. So a company
buying a business now which has fixed assets
with a book value of £150,000 but a fair value
of £550,000 would recognise the higher value
in the acquisition balance sheet, but would not
provide deferred tax unless there was already a
binding commitment in place to sell the asset.
Applying FRS 102 to the same transaction,
a deferred tax liability would be recognised
based on the revaluation uplift regardless of the
acquiring company’s future intentions, with the
other side of the entry in goodwill – this gives
accountancy frs 102 guide 2014
accounting
new uk gaap n
Treatment of post-acquisition adjustments
This example shows the changes
in treatment of post-acquisition
adjustments when moving from
current UK GAAP to FRS 102.
A company purchases a
subsidiary on 15 January 20X1. It
pays cash consideration of £1m;
a further £200,000 will be payable
if the acquiree meets certain
challenging performance targets
in the two years to 31 December
20X2. The fair value of the net
assets acquired is £600,000. This
includes a provision of £100,000
for a court case against the
subsidiary, in progress at the
acquisition date.
By 31 December 20X1, when the
first post-acquisition accounts are
being drawn up, there is a strong
expectation that the performance
targets will be met so that the
additional cash consideration
will be paid. There has been no
progress on the court case.
On 31 March 20X2, the court
case is resolved, with the liability
being settled at £180k (ie, £80k
more than had been estimated).
Under both GAAPs, the revised
total cost including the contingent
element will be reflected in
goodwill at the year end. Only
under current UK GAAP, though,
will the updated provision be
adjusted through goodwill, since
the change arises before the
second post-acquisition balance
sheet (but outside the 12 month
period allowed by FRS 102).
Current UK GAAP
FRS 102
Goodwill initially recognised
£400,000
£400,000
Goodwill revised as at 31 Dec 20X1
£600,000
£600,000
Goodwill revised as at 31 Dec 20X2
£680,000
£600,000
Note: this example ignores amortisation of goodwill
a substantial numerical difference in the initial
carrying amount of goodwill (and hence also in
the annual amortisation charge).
Subsequent adjustments
The rules in current UK GAAP relating to changes
to the initial accounting for an acquisition are
relatively straightforward. Adjustments to the fair
value of assets and liabilities acquired may be
made up to the second balance sheet following
the acquisition: so if a company acquired a
subsidiary in January 2011, it would make a
provisional estimate of fair values at that point,
but then could revisit these in its December 2011
accounts, and then again in its December 2012
accounts. At each point, any adjustments would
be made through goodwill (that is, with no effect
on profit). If the cost of the acquisition includes
contingent elements, the preparer estimates a
value for this contingent amount, and then adjusts
this value for as many accounting periods as
necessary until the actual cost is finalised.
Under FRS 102, there is a strict 12-month limit
for adjustments to the fair values of assets and
liabilities acquired: after that point, it would only
be acceptable to adjust the initial accounting in
the case of a material error. Where the purchase
consideration is contingent on future events, an
estimate is included only if it is probable there will
be an outflow and this can be measured reliably.
Goodwill is only
recognised
relating to
the single
transaction
when an entity
gains control
of another
Piecemeal acquisitions, part-disposals
A further consequence of the FRS 102 definition
of a business combination is that goodwill is
only recognised relating to the single transaction
when an entity gains control of another. So, if
a company acquires 60% of a subsidiary and
then, later, another 30%, no additional goodwill
is calculated on this second tranche, regardless
of the pricing, any changes in fair value, etc.
Similarly, if an investor held a 40% stake already
and increased this to 55%, then at the point
when control passes one simple calculation is
performed based on the purchase price and the
fair value of assets and liabilities at that date. If
the stake then increases further, no entries are
made to goodwill.
This is a more straightforward approach
than the convoluted calculations sometimes
required by UK GAAP, though some will argue it
presents a less nuanced picture. There is also a
corollary for disposals: where a parent reduces
its shareholding in a subsidiary without losing
control, no gain or loss is recognised, because
it is treated as a transaction with shareholders
and therefore any consideration received is
recognised against equity.
Helen Lloyd FCA
Audit and accounting writer, ,
Wolters Kluwer
www.cch.co.uk
www.accountancylive.com
16
16
accounting
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n new
frs 102 guide 2014 accountancy
FRS 102: part 5
associates/JVs
17
In part five of
our series on
the new UK
GAAP, Helen
Lloyd FCA
considers
accounting
for associates
and joint
ventures (JVs)
S
ome of the most challenging areas of
new UK GAAP are those where FRS
102, The Financial Reporting Standard
applicable in the UK and Republic of
Ireland, uses familiar terms with new
meanings, or where the accounting is broadly
similar to the known version, but with subtle
differences: wholesale changes can often be
easier to spot and process.
This month’s topic – the accounting for
associates and joint ventures – contains both
of these potential traps, so clear thinking will
be needed on transition to ensure that the path
followed is faithful to FRS 102.
Definitions
The definition of an associate is similar enough
to that in FRS 9, Associates and Joint Ventures,
to be unlikely to give rise to many practical
differences. For joint ventures, on the other
hand, FRS 102 brings in a new perspective,
with its language being based on that of
IAS 31, Interests in Joint Ventures, the nowsuperseded international standard (IFRS 11,
Joint Arrangements, applies in Europe for periods
beginning on or after 1 January 2014).
Under FRS 102, a joint venture exists when
there is joint control, defined as ‘the contractually
agreed sharing of control over an economic
activity’ – note that as in FRS 9, this sharing must
be contractual, rather than being achieved, for
instance, simply by virtue of there being a number
of investors each happening to own the same
percentage of the company.
A joint venture is then classified as being of
one of three types: a jointly controlled operation,
jointly controlled asset, or jointly controlled entity.
www.accountancylive.com
The definitions are, as would be expected, based
on the names – the key distinction between a
jointly controlled operation and jointly controlled
entity is that in a jointly controlled entity there
is a separate legal entity in which the shared
operations take place. An arrangement that
had been, under FRS 9, classified as a JANE
(joint arrangement that is not an entity) would
usually be a jointly controlled operation or jointly
controlled asset under FRS 102.
Equity accounting
As shown in the table, equity accounting must
be applied to investments in associates and
jointly controlled entities in group accounts.
The basic principles are the same as those in
FRS 9 – an investment is initially recognised at
the transaction price, and then adjusted each
period for the investor’s share of profit or loss,
other comprehensive income, and equity of the
associate or jointly controlled entity.
A small difference arises from current UK
GAAP with respect to losses made by investees.
Under current UK GAAP, the default position is
that the investor continues to recognise their
share of losses even after the investment value
falls below zero (presenting the credit balance as
a liability) The only justification for not recognising
this ongoing share would be if there was evidence
that the investor had irrevocably withdrawn
from the relationship such that the investment
effectively no longer qualifies as an associate.
In FRS 102, the opposite default applies: an
investor stops recognising its share of losses
when the investment value reaches zero unless
it has a legal or constructive obligation to make
payments on the associate’s behalf. Investors in
accountancy frs 102 guide 2014
accounting
new uk gaap n
Accounting policy choices for associates and jvs
Reporting entity
Investment
Accounting
Parent –
Associate
consolidated
financial statements
Equity method (unless part of an investment
portfolio – FVTPL) – s14
Jointly
Parent –
controlled
consolidated
financial statements entity
Equity method
Parent –
Jointly
consolidated
controlled
financial statements asset
Recognise venturer’s share of jointly
controlled assets and liabilities, own
liabilities, income from sale or use of its share
of output, share of expenses, own expenses
Jointly
Parent –
controlled
consolidated
financial statements operation
Recognise assets that venturer controls and
liabilities incurred, with expenses incurred
and share of income
Parent – separate
Subsidiary, Cost less impairment; fair value with changes
financial statements associate or in Other Comprehensive Income (OCI); or fair
any type of value with changes in profit (s14/15)
joint venture
Non-parent –
individual financial
statements
Associate
or joint
venture
Cost model; fair value with changes in OCI;
or fair value with changes in profit (s14/15)
associates/JVs
jointly controlled entities that were, under FRS
9, classified as joint ventures and therefore dealt
with using gross equity accounting will need to
adjust their policies, as this is not permitted under
FRS 102. While this makes no difference to the
net reported numbers, it alters the complexion of
the balance sheet, and may affect lending based
on ratios, return on assets, and so on.
Fair value accounting
Fair value accounting for investments in
associates and joint ventures is available as an
accounting option in several situations, shown
in the table, with the complication that there
are two forms: use of the ‘fair value model’ and
measurement ‘at fair value with changes in fair
value recognised in profit or loss’.
The option to recognise investments at fair
value with changes in profit explains itself, and
reflects the option in law to hold certain financial
instruments at fair value. The fair value model,
on the other hand, is new to UK preparers, and
allows re-measurement each period end to fair
value, with changes reported directly in other
comprehensive income (OCI) rather than through
profit. In practice, it will be possible to choose the
fair value model and yet still record investments at
cost, since there is an impracticability exemption.
hold at fair value through profit and loss
(FVTPL) impairments may arise on equity
accounted investments.
The fair value
model is new to
UK preparers
and allows
re-measurement
each period end
to fair value,
with changes
reported directly
in OCI
The cost model
The cost model, applied to investments in
associates or jointly controlled entities, is
uncomplicated: investments are measured at
cost less impairment. It is important to note that
impairment is not relevant only to the cost model:
while value changes are all recognised naturally
using the fair value model or the option to
Joint ventures except jointly controlled entities
These other ventures are the only ones excluded
from the earlier discussion. Although they are
new terms, the accounting is not exotic. In short,
investors in joint ventures that are not contained
in a legally distinct entity recognise in their
accounts only balances relating to which they
have direct rights or obligations. This contrasts
with the situation of an investor that operates
through a shareholding in a limited company, for
instance, where the owner’s liability is restricted
to the capital he put in and his only asset is the
ultimate right to receive a share of profits from the
investee. Investors in jointly controlled assets and
operations are not protected by incorporation, so
they account for their full exposures and benefits.
Summary
One part of transition to FRS 102 will be to review
all investments, first to check their classification
and then to compare their accounting with
these new requirements. There are no transition
exemptions in this area, so investors that use the
cost model and wish to move to the fair value
model will need to ensure they obtain a valuation
as at the transition date.
Helen Lloyd FCA
Audit and accounting writer,
Wolters Kluwer
www.cch.co.uk
www.accountancylive.com
18
accounting
n new uk gaap
frs 102 guide 2014 accountancy
FRS 102: part 6
deferred tax
T
In part six of
our series on
the new UK
GAAP, Helen
Lloyd FCA
considers the
treatment of
deferred tax
19
he section of the new UK GAAP –
FRS 102 – covering deferred tax has
been one of the standard’s most hotly
disputed parts. To put it in context,
the IFRS for SMEs, on which FRS
102 is based, took the bold step of basing its tax
section on a new model that the International
Accounting Standards Board (IASB) was putting
forward to replace IAS 12, Income Taxes. This
model had some conceptual problems as well as
certain requirements which could not practically
be applied, and by the time the Financial
Reporting Council (FRC) came to work on FRS
102, these problems had become apparent and
the IASB’s project to revise IAS 12 on this basis
had been set aside.
The FRC, left with a void, originally proposed
using a reduced version of the international
requirements from IAS 12, but this did not receive
much support when the proposal was set out
in an exposure draft. So, in the final version
of the standard, section 29 sets out a ‘timing
differences plus’ approach, which is in many
respects very similar to FRS 19, Deferrred Tax,
but has a small number of differences in detail
which could trip the unwary.
Revision of the basics
The basics of the approach should be familiar.
A preparer begins by identifying timing differences
– that is amounts which are recognised in
the statement of comprehensive income in a
different period from when they are included in
the tax computation. Deferred tax is then usually
provided in respect of these timing differences by
looking at the expected timing of the reversal of
the difference and multiplying it by tax rates that
will apply at the time. For permanent differences
(where there are items in total comprehensive
income that will never be chargeable or
deductible for tax purposes, or vice versa), no
deferred tax is provided.
These simple principles become
difficult through the exceptions
or refinements that
are then included in
the standard, or in the
absence of familiar
exceptions from FRS 19.
Revaluation of property,
plant and equipment
Under current UK GAAP,
revaluing a fixed asset
does not usually lead
to a requirement to
provide extra deferred
tax, until there is a binding
commitment to sell the
asset. Under FRS 102,
Example
A property asset with a 20-year life,
an original cost of £200,000 and a
depreciated cost of £150,000 is revalued
to £250,000 when it has 15 years of useful
life remaining. As the asset is land and
buildings, it is not eligible for capital
allowances. The applicable tax rate is
expected to remain at 30% for both
income and capital gains for the whole of
the asset’s life.
The revaluation gain of £100,000 gives
rise to a timing difference because the
accounting gain recognised in other
comprehensive income is not matched with
an immediate increase in taxable profits.
Accordingly a deferred tax liability of
£30,000 (£100,000 at 30%) is recognised,
with the charge going through other
comprehensive income (OCI) to match the
location of the accounting gain.
In subsequent years it seems likely
that, by analogy to International Financial
Reporting Standards (IFRS), this liability
will be gradually diminished as the revalued
asset is depreciated.
Under old UK GAAP, no deferred tax
entries would have been made in respect of
the revaluation unless there was a binding
commitment to sell the asset, so the GAAP
change means a difference in
reported comprehensive
income each year from the
revaluation onwards, as
the deferred tax liability
unwinds under FRS 102.
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accountancy frs 102 guide 2014
accounting
deffered tax
however, there is no special treatment for
revaluations – they are treated as giving rise to
timing differences.
The accounting gain recognised in other
comprehensive income is not matched with an
immediate increase in taxable profits; instead,
the gain will be taxed when the asset’s additional
value is realised. So at the first balance sheet
date after a revaluation, deferred tax would be
based on the full timing difference. In practice,
this means the timing difference provided for will
increase by the amount of the revaluation gain,
regardless of the owner’s intentions for future
use of the property.
Business combinations
Under current UK GAAP, an acquirer of a
subsidiary performs a fair value exercise on
the acquiree’s balance sheet, bringing in the
assets and liabilities at these new values, and
recognising goodwill as the difference between
the purchase consideration and the fair value of
assets acquired. FRS 7, Fair Values in Acquisition
Accounting, tells preparers to recognise deferred
tax on fair value adjustments by applying the
same principles as in FRS 19, meaning that
for fair value uplifts on items such as tangible
fixed assets, no deferred tax will be provided.
FRS 102 has a similar requirement, although it
is phrased in language more reminiscent of IFRS,
requiring preparers to compare ‘the amount that
can be deducted for tax for an asset’ to the value
recognised for that asset, which is not the way a
timing difference is normally calculated. This is a
special case, one where only this single paragraph
is relevant and the treatment cannot quite be
analogised to anything else in the section.
Discounting
FRS 102 does not allow deferred tax assets
and liabilities to be discounted. This has caused
discomfort for some critics, and has in some
cases been held up as an example of the counter-
intuitive nature of accounting for deferred tax at
all: if a deferred tax liability represented an actual
future cash outflow, then it would be discounted
to reflect the expected timing of the outflow, and
so the prohibition of discounting means, to some,
that it is not a true liability. The conceptual debate,
however, does not change the outcome.
Differences from IFRS
This part of FRS 102 is a curious hybrid, with
very few practical differences from UK GAAP
despite the FRC’s commitment to ‘an IFRS-based
solution’. The specific requirements for goodwill,
above, are one example of adapting the UK
principles to require accounting for a temporary
(rather than timing) difference. In some places,
though, it is just not possible to reach the same
accounting using this framework as would be
achieved under IFRS. One example is share
based payments where during a scheme’s life
the tax deduction, or estimated future deduction,
is more than the cumulative accounting charge.
IFRS would require recognition of deferred tax in
this circumstance, but FRS 102 would not allow it.
This might arise where, for instance, options
had a low fair value on issue because the issuer’s
share price was expected to remain steady (and
the exercise price was close to that share price),
but where before the options vested there was an
unexpected surge in the issuing company’s value,
so that a large deduction becomes likely.
Action
While in practice many preparers will find that
they need no transition adjustments for deferred
tax, this is an area where careful review will be
needed to ensure that no necessary adjustments
are missed, and there is an unavoidable effect for
those that revalue assets.
Helen Lloyd FCA
Audit and accounting writer,
Wolters Kluwer
www.cch.co.uk
www.accountancylive.com
new uk gaap n
Note on
the new UK
GAAP series
FRS 102 has only
recently been
released and a body
of commentary has
yet to be built up on
it. As such, there will
always be a range
of interpretations,
particularly given the
brevity of the standard.
Readers are reminded
to refer to the text of
the standard itself
when making their own
judgments, and to bear
in mind the hierarchy
for developing
accounting policies
in section 10 of the
standard:
QQ first look within FRS
102 itself and any
other still extant FRS
or FRC Abstract;
QQ then look to any
relevant SORP;
QQ then apply the
pervasive principles
and key concepts
from section 2;
and
2
0
QQ finally, it is
permissible (but
not required), to look
to the requirements
in guidance in
EU‑adopted IFRS.
Other sources of
guidance, such as
the IFRS for SMEs
and accompanying
documents, as well
as the IASB staff’s
training materials,
may be helpful in
understanding the
thinking behind some
of the standard’s
content, but do not
directly have authority.
It is to be expected
that over the first
few years of FRS 102
application, common
practice will develop
to form a fuller ‘new
UK GAAP’ but until
that point, the words
included in the standard
are the best source
of guidance. These
articles should be
understood to include
the author’s views.
20
accounting
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ukgaap
gaap
n new
frs 102 guide 2014 accountancy
FRS 102: part 7
investment
properties
In part
seven of
our series
on FRS
102, Helen
Lloyd FCA
assesses the
accounting
treatment for
investment
properties
21
T
he accounting for investment properties
is not of such narrow interest as it may
first appear. Many groups that do not
make money directly from holding
properties do still have periods when
some of their properties are not in use; when these
are rented out or held for capital appreciation, they
may qualify as investment properties. Crucially,
the change in definition of an investment property
means that any entity holding properties that are
not owner-occupied needs to review the new
requirements carefully to be sure whether or not
the properties are in the scope of section 16
of FRS 102, The Financial Reporting Standard
applicable in the UK and Republic of Ireland.
An investment property under FRS 102
might be held by an owner, a lessee under a
finance lease or, in some cases, a lessee under
an operating lease. It is held for rentals and/or
capital appreciation, rather than for the holder to
use in its own business or to sell in the ordinary
course of business.
The main contrast with the familiar definition in
SSAP 19, Accounting for investment properties, is
that under FRS 102, properties let to other group
companies are not excluded. The new standard
also includes a specific scope exemption for
properties held solely for the provision of social
benefits: this was inserted with charities in mind,
and should not be interpreted too broadly.
Strict valuation basis
The valuation basis for investment properties
under FRS 102 is not worded the same as that in
current UK GAAP: FRS 102 requires
‘fair value’, whereas SSAP 19
asks for ‘open market value’.
In practice, however, it is likely
that a SSAP 19 valuation could
continue to be used. Interestingly,
though, FRS 102 is more
relaxed: measurement at
fair value is only required if this can be established
‘without undue cost or effort’, and if this is not
possible the property is treated as if it were normal
property, plant and equipment (that is, held at cost
less depreciation). SSAP 19 does not allow for the
possibility of not obtaining a valuation, perhaps
on the assumption that a RICS-qualified [Royal
Institute of Chartered Surveyors] external valuer
can always be appointed, though some small
preparers may now try to argue that this involves
undue cost, and that performing an internal
valuation would involve undue effort.
Movements in fair value
The other significant difference from current UK
GAAP comes with the FRS 102 requirement
to recognise movements in an
investment property’s value directly
in profit, rather than in equity. Under
SSAP 19, an investment property
revaluation was effectively treated
as any other revaluation, so the
movement would have been
reported in the statement of
total recognised gains and
losses (STRGL) and then
kept in a separate component
of equity, the ‘investment
revaluation reserve’. Here,
though, there is no comment
on the treatment in equity of
revaluation gains and losses
after they are recognised in
profit: this reflects the fact that
FRS 102 is based on the IFRS
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Example: investment properties
for SMEs, which steered well clear of any advice
on matters where laws would vary, for instance
in relation to distributable profits. For a UK
company, though, Tech 02/10 is very clear that
revaluation of an investment property does not
give rise to a realised profit, so most preparers
will find it helpful to reclassify these amounts into
a separate reserve to minimise confusion.
The cosmetic effect
Although the movement of fair value gains from the
STRGL to profit is a clear enough change, it will
still leave preparers with an effect on their reported
profits that will need to be explained to users until
they become familiar with the new requirements.
It will also be necessary to check whether there
are more extreme consequences, if items such as
bonus payments or earn-outs are based on a profit
figure: there is still time before the transition date
to consider revisiting these agreements to clarify
whether profit includes this type of gains.
New group issues
The change in scope of the definition of an
investment property means that for some groups,
there will be more work in the preparation
of consolidated accounts. Where one group
company lets to another, under SSAP 19 the
property would not have been classified as an
investment property. Now it will be and must be
treated as such in the company-only accounts
of the property holder. From group's perspective
though, the property is not being let to an outside
entity, so will be classified as normal (owneroccupied) property, plant and equipment.
A consolidation journal will need
to be recognised each reporting
period to derecognise fair value
gains or losses, and replace
these with an appropriate
depreciation charge.
A company purchases a property at the beginning of 20X1 at a cost of
£100,000. It is designated as an investment property, and revalued each year
until it is sold at the end of 20X4. The treatment in each reporting period is
shown below under each of FRS 102 and SSAP 19, with the assumption that
the drop in value in 20X3 is viewed as permanent for the purposes of SSAP 19.
Date
Value £
1/1/20X1
FRS 102 £
SSAP 19 £
100,000
31/12/20X1
110,000 10,000 P&L gain 10,000 STRGL gain
31/12/20X2
105,000
31/12/20X3
31/12/20X4
5,000 P&L loss
5,000 STRGL loss
70,000 35,000 P&L loss
35,000 P&L loss
75,000 (sale price)
Net amounts
recognised in P&L
Net amounts
recognised in STRGL
5,000 P&L gain
5,000 P&L gain
25,000 loss
30,000 loss
5,000 gain
by these changes: the requirement to determine,
for a reduction in an investment property’s value,
whether this reduction is temporary or permanent.
This was a crucial distinction in applying SSAP 19,
as it determined whether the loss was recognised
as usual in STRGL, or as an impairment in profit.
Under FRS 102, all changes in value are reported
in profit, so there is no need, in this context, for
the concept of impairment at all.
Deferred tax
It seems likely that this change in accounting will
also have consequences for deferred tax. Under
current UK GAAP, revaluation gains do not in
general give rise to deferred tax, unless there is a
binding commitment to sell the asset. Looking at
FRS 102, in contrast, deferred tax will be provided
just as it is for other property, plant and equipment
(PPE) revaluations. For profitable companies, this
will reduce the bottom line effect of the accounting
change to being only the figure net of deferred tax.
Helen Lloyd FCA
Audit and accounting writer,
Wolters Kluwer
www.cch.co.uk
Impairment
One challenging aspect of
previous UK GAAP will
be effectively eliminated
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22
accounting
n new uk gaap
frs 102 guide 2014 accountancy
FRS 102: part 8
financial
statements
For the
latest insight
on new UK
GAAP, Helen
Lloyd FCA
considers
presentation
of financial
statements
23
W
hile so far this series
has focused on some
details of recognition and
measurement, one change
brought about by FRS 102,
The Financial Reporting Standard applicable
in the UK and Republic of Ireland, that will
definitely affect all preparers relates to financial
statement presentation.
The challenge that faced the Financial
Reporting Council (FRC) arose where the
International Financial Reporting Standard
(IFRS) for SMEs prescribed a new set of
accounts formats that could not easily be used
in FRS 102 because UK companies need to
comply with the formats in company law.
In an earlier draft of the standard, the
original IFRS for SMEs formats were retained,
accompanied by staff guidance showing
how these formats could be supplemented,
subtotalled and cleverly formatted to achieve
technical compliance with the law, but this
was not a neat solution, and as a result this
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did not prove popular with preparers. So in
its final version, the standard refers directly to
the relevant parts of company law, rather than
prescribing formats (this also means that even if
the company law formats change, the standard
does not need to be updated).
Components of financial statements
While the basic principles behind the primary
statements are consistent with current UK
GAAP, with a main statement that reports
performance and one that reports position, the
FRS 102 details of required primary statements
are slightly different.
Financial statements must include a
statement of comprehensive income (or
pair of statements with the same effect, as
discussed later), a statement of financial
position, a statement of changes in equity, and
a statement of cashflows, as well
as supporting notes.
accountancy frs 102 guide 2014
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financial
statements
Statement of comprehensive income
Unfortunately the requirements for this
statement have retained the somewhat
confusing terminology of IFRS. A statement
of comprehensive income has two sections:
the first shows profit for the year, and uses the
formats that company law sets out for the profit
and loss (P&L) account, and the second shows
other comprehensive income (OCI), being items
of income or expense that are recognised
outside profit. These will be very similar to
items that would previously have been included
in the statement of total recognised gains and
losses (STRGL), with a typical example being
the effects of property revaluations (except
investment properties). This alone would be a
straightforward enough requirement, albeit still
a change for those more used to showing nonprofit items on a separate page.
An alternative option is available, though,
involving presenting two statements: one is
called an income statement, based on the
P&L formats in company law, and the other a
statement of comprehensive income. Although
this shares a name with the single statement
above, in this context it only contains ‘other
comprehensive income’ items – making it more
directly comparable with the STRGL. Naming
issues aside, this option might be pleasing
to those that see non-profit movements as
being of only secondary interest, though many
may find their stakeholders prefer to see total
comprehensive income all on one page for
a fuller picture. The decision to present the
single statement or two statements is an
accounting policy choice, meaning that it
cannot be changed unless this change gives
reliable and more relevant information.
There are a couple of notable differences
between an FRS 102 income statement and
an FRS 3 (Reporting Financial Performance)
P&L. Firstly, FRS 102 does not require a
subtotal for operating profit, though it
effectively acknowledges that many entities
will still choose to show this figure, by
requiring that if the total is there, it does not
include non-operating items.
The other clear visual difference from
FRS 3 is in the presentation of discontinued
operations – FRS 3 requires turnover and
operating profit to be split on the face of the
P&L between continuing and discontinued
operations, with the other line items in between
split in a note.
In contrast, FRS 102 requires a line-by-line
analysis in a column on the face of the income
statement, with a single sum showing the
post-tax gain or loss from discontinued
operations (including any gain or loss on
their disposal). In the original drafting, this
caused presentational problems with
reference to the company law formats,
because it would be wrong to include
such a line within the ‘profit before tax’
statutory total, but including it afterwards
would cause arithmetical problems.
The FRC dealt with this by including
22
a requirement for a ‘total’ column
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24
accounting
n new uk gaap
frs 102 guide 2014 accountancy
Current UK GAAP requirements
matched to broad equivalents in FRS 102
25
Current UK GAAP requirement
Comparable FRS 102 requirement
Profit and loss account
Income statement or ‘top half’
of full statement of
comprehensive income
Statement of total recognised
gains and losses
‘Bottom half’ of full statement of
comprehensive income, or short
statement of comprehensive
income if separate income
statement is also presented
Reconciliation of movements in
shareholders’ funds (as note or
primary statement)
Statement of changes in equity
(as primary statement)
Note of historical cost profits
and losses (as note, only
required where there is a
material difference from
reported profit)
No equivalent requirement
Balance sheet
Statement of financial position
Cashflow statement
Statement of cashflows
too, and by adding an appendix to section 5,
showing a two-column presentation that means
the full totals for each line item are shown, but
the discontinued operations column still adds to
the required total.
Statement of changes in equity
The statement of changes in equity fulfils much
the same role as the FRS 3 reconciliation of
movements in shareholders’ funds, but appears
to be viewed as more important since it must be
presented as a primary statement. FRS 102 also
specifies that it must show movements
‘for each component of equity’ rather
than just a reconciliation from
total opening to closing equity; a
‘component of equity’ is not defined, though it
might reasonably be assumed to mean each of
the line items that the entity has chosen to, or is
legally required to, present separately.
The interesting point on this statement, though,
is the special permission in limited circumstances
to collapse it into the other performance
statements, showing a single ‘statement of
income and retained earnings’, which includes
both profit and changes in equity. This is only
permissible for entities with simple transactions,
with no ‘other comprehensive income’ and the
only non-profit movements being payment of
dividends, correction of prior period errors and
changes in accounting policy. This removes the
need to prepare an extra primary statement with
no additional information in it.
Statement of financial position
The statement of financial position is equivalent
to the balance sheet and, again, looks to the
company law formats; it is even permissible to
call it a balance sheet rather than a statement
of financial position. In general, this should look
very similar to an old UK GAAP balance sheet:
FRS 102 has even transplanted the UITF 8
requirements in respect of debtors due after more
than one year, requiring them to be presented
separately where they are sufficiently material in
the context of total net current assets to make
this presentation necessary.
Helen Lloyd FCA
Audit and accounting writer,
Wolters Kluwer
www.cch.co.uk
www.accountancylive.com
accounting
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ukgaap
gaap
n new
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FRS 102: part 9
sources of
new policies
26
Developing
a policy
based on UK
GAAP but
contradicting
IFRS may
not be
acceptable
under FRS
102, says
Helen Lloyd
T
here is a rarely discussed conceptual
shift in the move to ‘new UK GAAP’
– FRS 102, The Financial Reporting
Standard applicable in the UK and
Republic of Ireland – suddenly, to all
intents and purposes, there is no GAAP.
Since the first statements of standard
accounting practice (SSAP) were issued in
the 1970s, there has been a growing body of
accounting guidance, including the standards
themselves, relevant parts of company law, vast
quantities of commentary by a range of experts
and opinion-holders, and a mass of practice.
Similarly, for those using International
Financial Reporting Standards (IFRS), there are
fewer years of history but because it has such
widespread use, accepted interpretations have
been developed. For FRS 102, though, the slate
is clean, and although commentary publications
are beginning to appear before the mandatory
effective date, it is likely that some years of
application will be needed before consensus is
reached on all of the main issues.
FRS 102 guidance on developing
accounting policies
Section 10 of the standard sets out the sources
to be considered when a new accounting
policy is developed. First, a preparer must look
to all extant Financial Reporting Standards
(FRSs) and Financial Reporting Council (FRC)
abstracts. In the absence of suitable guidance,
management is then required to use judgement
in developing a policy that will give relevant
and reliable information. To assist with this,
they must refer first to FRSs and FRC abstracts
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dealing with similar issues, then to any relevant
SORP [Statement of Recommendend Practice],
followed by a general reference to the key
recognition and measurement concepts and the
pervasive principles in section 2 of the standard.
It is also permissible to look to EU-adopted
IFRS, though this is not required, and there is
certainly no suggestion that IFRS would override
a policy developed using the methods above.
Setting aside preconceptions
The difficulty arises when we look at the
natural tendency to revert to the familiar. It is
exceedingly hard to read only the words in
FRS 102, without each individual bringing to
them his own accumulated knowledge and
experience. This is exacerbated where the
standard uses wording identical or very similar
to either current UK standards or IFRS: if it
includes one familiar paragraph, it is tempting
to assume that the surrounding paragraphs in
the original text are included by implication,
as it were.
This dangerous assumption needs to be
avoided, though: the purest approach is to
assume that if the FRC meant to include a
requirement or explanation, it would be there
in the standard. If it is omitted, this means that
the words that remain must stand, as far as
possible, on their own merits.
If the sources of guidance specified in the
standard do not in themselves give enough help
to a preparer struggling to design a policy, there
is other information and commentary available,
but none of this can at this stage be taken as
having authority. So, existing manuals on UK
accountancy frs 102 guide 2014
accounting
new uk gaap n
sources of
new policies
GAAP and IFRS may help with understanding
the context of a requirement and its normal
interpretations, but are not gospel. Similarly,
the International Accounting Standards Board's
(IASB) staff guidance on the IFRS for SMEs
contains a large volume of narrative behind
its contents (which are mostly picked up in
FRS 102) but it has no precedence over an
alternative interpretation that is based simply
on the words in the standard.
A slightly more helpful supplement to
the standard itself might be the accounting
regulator’s own guidance produced by the
FRC’s Accounting Council – Advice to the FRC
– which is included as an appendix to FRS
102. This explains some of the thinking behind
certain elements of the standard, while not
forming part of the standard, so it can assist
with questions about the precise meaning of
a word or phrase.
There is also some FRC staff guidance
available at www.frc.org.uk, covering
a range of areas across the standard.
Again, this does not have authority, but if
it contradicted other more distant sources,
would have a strong claim for precedence.
Further application difficulties
So far this article has focused on the
development of new accounting policies, for
instance when an entity has a certain type of
transaction for the first time, or perhaps judges
its current policy to be in need of change.
The issue may in fact, though, be more
pressing than this, since section 35 on transition
to FRS 102 requires that the transition date
balance sheet uses FRS 102 in measuring all
its recognised assets and liabilities – that is,
implicitly, the policies in force at that date need
to be FRS 102 compliant. Here an interesting
issue may arise. If a company has a policy based
on old UK GAAP, which addresses an area where
FRS 102 is silent, is it acceptable to continue
applying this policy even if it fails to comply with
something within IFRS? For new transactions, it
would seem hard to justify a new policy based
on another GAAP when IFRS, a GAAP explicitly
named in the standard, says something different.
So, in practice, part of the work to be performed
on transition will be reviewing all current policies
to ensure they explicitly comply with FRS 102,
and, where they do not, examining the reasoning
behind them to ensure that this is acceptable
within the section 10 hierarchy.
Constant vigilance
In summary, even where an IFRS transition
exercise seems straightforward, it may not be.
Preparers wanting to be sure their accounts
are fully compliant need to begin by ensuring
that they understand where their policies come
from, and to be able to justify the use of those
which go further than the words in the standard.
Time invested now will go a long way towards
avoiding obstacles further down the line.
Helen Lloyd FCA
Audit and accounting writer,
Wolters Kluwer
www.cch.co.uk
www.accountancylive.com
example
UK preparers that sell
goods or services
on behalf of other
entities may have found
themselves looking
at Application Note G
of FRS 5, Reporting
the Substance of
Transactions, to help
determine whether they
are acting as agent or
principal.
If they are an
agent, they might be
a ‘disclosed agent’, in
which case they would
show only revenues and
costs incurred on their
own account (ie, not in
their role as agent), or
an ‘undisclosed agent’,
meaning revenues and
costs would be gross of
those amounts.
While this is well
understood in UK GAAP,
there is no comparable
guidance in FRS 102,
and it would be hard
to justify continuing to
account gross for an
undisclosed agency,
based on the precise
definitions in FRS 102.
27
accounting
n new uk gaap
frs 102 guide 2014 accountancy
FRS 102: part 10
impairment
reviews
28
In the final
part of our
series on
new UK
GAAP, Helen
Lloyd FCA
considers
changes to
impairment
U
nder FRS 102, The Financial
Reporting Standard applicable in
the UK and Republic of Ireland, the
approach to impairment of nonfinancial assets is different in several
respects from current UK GAAP. It is based on
International Financial Reporting Standards (IFRS)
and so reproduces most of the differences that
already existed between the two GAAPs.
Here we look first at the basic calculation,
which does not differ much in principle but does
show some differences in naming and in allocation
of assets, then at recognition of impairment
charges, and finally at reversal of impairment
losses: there are GAAP differences in each of
these categories.
When to perform an impairment review
The FRS 102 requirements are simpler than those in
old UK GAAP. FRS 11, Impairment of Fixed Assets
and Goodwill, requires that impairment reviews
are performed whenever there is an indicator of
impairment, and FRS 10, Goodwill and Intangible
Assets, supplements this with an automatic annual
review for goodwill and intangibles with lives over
20 years or indefinite lives.
FRS 102 does not set out any situations where
the default would be to perform an annual review,
although this is at least in part because all assets
must have a finite life attributed to them (sections
17 and 18) and the standard life for goodwill is
much shorter, at only five years (section 19).
Basic calculation of an impairment loss
The core principles of FRS 11 and FRS 102 are
very similar: look at an asset alone, or in a
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group if that is not possible; estimate whether
the asset or group’s value is supportable, by
establishing a ‘recoverable amount’; then
recognise any unsupported amounts as an
impairment charge against profit.
The terminology in FRS 102, being IFRSbased, will be new to some: FRS 102 talks of
‘cash-generating units’ rather than ‘incomegenerating units’, and the recoverable amount in
FRS 102 is reached by looking at the higher of
the value in use and the fair value less costs to
sell (FRS 11 calls this the ‘net realisable value’).
These shifts in terminology do not have
a significant effect, but there is a change in
emphasis in how assets are allocated to units.
When a business combination happens, FRS 102
is very explicit in requiring that the goodwill on the
acquisition is allocated right across the business
to all cash-generating units that are expected to
benefit from the synergies of the combination.
This means that a holistic review is needed,
with an understanding of the effects of the
combination even on superficially unrelated
parts of the group. This contrasts with FRS 11,
which does not appear to acknowledge the
possibility of allocating purchased goodwill
to pre-existing income-generating units, but
instead talks only of distributing it between the
income-generating units identified within the
acquired business.
Allocation of impairment charges to assets
Under FRS 11, when an impairment loss arises
for the assets in an income-generating unit, it is
allocated first to any goodwill in the unit, then to
any intangible assets, and finally pro-rata across
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new uk gaap n
Example: allocation of impairment losses
Group G has suffered from a regulatory change which will make
its business much more costly to run, and as such is required
to perform an impairment review. For one of its FRS 102 cashgenerating units, the total carrying value of the assets allocated
to the unit is £1.6m, but the recoverable amount is calculated to be
only £1m. This means an impairment loss of £600,000 needs
to be recognised.
The impairment writedown by asset class is shown below, and
contrasted with what it would have been under FRS 11.
Asset category
Initial carrying
FRS 102
FRS 11
value (£)
writedown (£) writedown (£)
Goodwill
Other intangible
assets
Tangible
assets
Total
200,000
200,000
200,000
600,000
171,000(6/14
x £400,000)
400,000
800,000
229,000 (8/14
x £400,000)
-
1,600,000
600,000
600,000
impairment losses, meaning that even losses
on goodwill can (and must) be reversed if the
original reasons no longer apply.
the tangible assets. The new FRS 102 approach
is arguably simpler because an impairment
loss is recognised first against goodwill and
then pro-rata against all other assets, without
differentiating between intangible and tangible
assets. This suggests that there is somehow
more confidence in intangible assets under FRS
102: the rush to write them off under FRS 11
might have been read as a gesture of uncertainty
about the ‘reality’ of intangibles, or perhaps
just as recognition that, in practice, the value of
tangible assets is often easier to realise.
Reversal of impairment losses
The rules on reversals of impairment losses
are not straightforward and the version in FRS
102 has provoked some debate. As a reminder,
under FRS 11 impairment charges on tangible
assets are reversed only if the increase in value
is because of a change in economic conditions
or in the expected use of an asset. Those on
intangibles are reversed only if the original
impairment arose because of an external event
whose effects have now been demonstrably
reversed, or if the charge was calculated based
on a readily ascertainable market value which
has now increased.
Under an earlier draft of FRS 102, the IFRSbased guidance required that impairment losses
on tangible and intangible assets are reversed
if, and only if, the reasons for the impairment
loss have ceased to apply, and that impairment
losses on goodwill were never reversed. This
was rejected by many, so the final version of
the standard treats all assets the same, using
the tangible assets condition above for all
Under FRS
102 an
impairment
loss is
recognised
first against
goodwill,
then pro-rata
against all
other assets
Reduction in workload?
FRS 11 contained a sting in the tail, which often
caused problems for those who were aware of
it. It required that where an asset’s or group’s
carrying value had been supported by its value in
use (rather than its net realisable value) then the
forecast cashflows used to calculate that value
in use must be compared to actual cashflows for
each of the five years following the impairment
review, with additional charges then being
recognised if necessary.
While this was an excellent idea, and one that
should have encouraged preparers to be very
careful with the accuracy of their forecasts, in
practice it was onerous to perform. Many will be
grateful that there is no comparable requirement
in FRS 102 – although this should not, of course,
encourage inaccuracy in cashflow forecasting.
Overall, the FRS 102 impairment requirements
may have only minor effects for preparers. The
extra work involved in allocating goodwill across
existing cash-generating units will be challenging
for larger entities but those that are less complex
will find they only have a small number of
cash-generating units, and they may be able to
make a simple assessment. Either the acquired
business is completely new to the entity, in which
case there will be little or no goodwill allocated
elsewhere, or it is very similar to an existing part
of the acquirer, which may mean that all of the
assets acquired (thus including the goodwill) are
allocated to a pre-existing unit anyway.
Helen Lloyd FCA
Audit and accounting writer,
Wolters Kluwer
www.cch.co.uk
www.accountancylive.com
29
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accounting
newuk
ukgaap
gaap
n new
frs 102 guide 2014 accountancy
FRS 102
Five steps
30
With new UK
GAAP set to
come into
force starting
1 Jan 2015,
Andrew
Davies runs
through the
essentials
for a smooth
transition
Y
ou’d be hard pushed to avoid it even
if you tried at the moment. The topic
on so many lips in our profession is
the transition to new UK GAAP – FRS
102, Financial Reporting Standard
applicable for UK & Ireland – effective for
periods beginning on or after 1 January 2015.
Whether you’re dealing with a listed group or a
smaller business, transition to a new accounting
framework is a project, and one that requires
appropriate time, resources and skill.
Determine the implications
on the accounting policies (ie,
measurement differences),
normally through the use of an
impact assessment
How do we make the decision about which
framework to choose and which accounting
policies to apply within that?
Making the overarching decision of which
framework to apply is not a linear process. It may
well be influenced by a high-level objective such
as alignment with International Financial Reporting
Standards’ (IFRS) group policies. Issues that
arise as you work through the detail will inevitably
prompt you to circle back and re-examine that
objective; for example, because of an unexpected
tax or distributable reserves consequence.
The new UK financial reporting regime
contains multiple areas of flexibility, so you
can investigate combinations of accounting
policies that give you a better answer for a
particular issue. Do you want to apply new, more
user friendly, hedging rules? FRS 102 allows
you to access IFRS 9, Financial Instruments
[replacement of IAS 39], earlier than those
entities applying IFRS, so you could do that.
However, flexibility is a double-edged sword
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– the greater the number of permutations, the
more work you need to do to determine the best
outcome for your business.
So analyse your objectives and identify any
areas of sensitivity. What do you want out of
transition to new UK GAAP? Are you looking for:
QQ policies that are closest to group accounting
policies in order to minimise consolidation
adjustments?
QQ the earliest tax deductions?
QQ least change from your current policies in
order to minimise transition effort?
QQ an opportunity to spring clean your books
and records?
QQ People are sensitive to change, and different
stakeholders will have different focus areas.
You might plan to capitalise development
costs under FRS 102 in order to spread the
expense, but how does your wider team feel
about the process and monitoring that goes
alongside that policy?
Where should I concentrate my energy?
As with anything, it is important to focus first on
the areas that you think will result in the most
significant change. This is different for every
business, which is why the impact assessment
is so important. There is already plenty of
comment available online and in industry
publications discussing key areas of change such
as pensions, tax, business combinations and
financial instruments. Doing some research first
will help you to identify the critical areas.
Some decisions are time critical, so make sure
you know what these are. For example, certain
tax elections must be made by 1 January 2015
(or the start of the date of first application, if your
business is a December year end). Common
tax elections made are in relation to separate
tax functional currencies, financial instruments
accountancy frs 102 guide 2014
accounting
new uk gaap n
Action plan
A typical transition
project consists of
five stages:
1 Determine the
implications on the
accounting policies
(ie, measurement
differences), normally
through the use of an
impact assessment
Five steps
(disregard regulations) and goodwill amortisation.
However, at some point you will also have to
cover the detail, and there are some intricacies
that will need to be worked through. For
example, broadly speaking, the measurement of
a plain vanilla term loan follows similar principles
under old and new UK GAAP. However, if you
have off-market interest rates between group
companies, the answers can be quite different,
affecting your entity profit, distributable reserves
and tax position. This is why it is so important to
work through an impact assessment, to ensure
completeness of the GAAP differences identified.
What can go wrong?
The law of unintended consequences… it
is almost certain that somewhere along the
process you will realise that an accounting policy
decision you thought was agreed would cause
significant problems for another colleague that
you had not previously appreciated. Whether
that is a financial impact such as an adverse
tax consequence or a process one because
significant, additional information is needed at
month end, you will need to circle back and work
out the best response. And this takes time.
At this stage, the best way to minimise these
potential issues is to get all relevant colleagues
into a room and discuss the key implications.
Everyone then has the opportunity to flag any
consequences early.
Determine the implications
on the disclosures and the
presentation in the financial
statements by preparing a
disclosure checklist
Will there be new disclosures to include?
It is likely that there will be at least some.
For instance, if you prepare group accounts,
reduced disclosures will not be available to you,
and so for example narrative regarding financial
risk will be new.
A disclosure checklist is a very helpful
tool when first preparing financial statements
under a new GAAP. Use it to identify new
areas and to aid completeness of your review
and preparation; who will write the financial
instruments disclosures, for instance? Does
it exist already in policy documents or is it
something you will need to write from scratch?
Once you have identified the key new
disclosures and how they will be gathered,
think about whether you need to prepare for
any questions that might arise, for example will
your stakeholders understand your position on
liquidity risk? New information can make people
think in a different way or make new connections.
Thinking of the questions you could be asked
and preparing in advance is not only good
planning, but will help identify if there are any
inconsistencies in your presented information
that need to be resolved before the audit.
How can I make sure my disclosures are
materially compliant without going overboard?
Once complete, step back from the disclosure
checklist; it is a tool, not an absolute authority.
Your financial statements may be heavily
weighted to financial information, but that
does not mean they should be crowded with
immaterial numbers. They are an important
mode of communication with your stakeholders
and should convey good quality, relevant and
reliable information.
What does your audience want to know?
What are the important messages you want
to get out? Assess both the materiality of
30
numerical and narrative disclosures; can
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2 Determine the
implications on the
disclosures and the
presentation in the
financial statements,
by preparing a
disclosure checklist
3 Consider any wider
business implications
(tax, distributable
reserves, KPI changes,
IT, structuring, etc)
4 Prepare a skeleton
set of financials, then
populate the opening
balance sheet
5 Prepare the first
set of financials,
with full year and
comparatives, then
finalise the audit
01/01/2015
Effective
date for the
new UK GAAP
– FRS 102, Financial
Reporting Standard
applicable for UK &
Ireland, effective for
periods beginning on
or after 1 January 2015
31
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frs 102 guide 2014 accountancy
FRS 102
Five steps
you positively state why a piece of information
is included?
Within our profession, there is increasing
emphasis on quality over quantity of disclosure.
The Financial Reporting Council’s ‘cutting the
clutter’ initiative is a good example of this. This
does not imply that you can take a red pen to
half the notes; something like a defined benefit
pension scheme contains a huge amount of
judgment and assumptions in preparation of
the numbers, so whether or not that is
numerically material to your balance sheet, it
is likely that the judgments involved and their
implications for the future will be material to a
reader. However, if you were to include every
last required disclosure without question, that
would probably result in some immaterial
information taking up space and distracting from
the key messages.
Talk early with your auditors about
disclosures that you believe are immaterial to
avoid surprises at the end of the audit process.
32
I have heard about ‘reduced disclosures’,
what does that mean?
During the drafting of the new regime, the FRC
responded to comments that certain entities
should be permitted to omit some disclosures
in the interests of cost versus benefit.
Qualifying entities, which are those entities
preparing individual accounts and whose
results are also included in a set of publicly
available consolidated accounts, have two
possible routes to ‘reduced disclosure’:
QQ FRS 101, Reduced Disclosure Framework:
IFRS measurement with certain disclosures
omitted; or
QQ Disclosure exemptions embedded within
FRS 102: FRS 102 measurement with certain
disclosures omitted.
Consider any wider business
implications (tax, distributable
reserves, key performance
indicator (KPI) changes, IT,
structuring, etc)
Many covenants
are based on
current GAAP
and changing
the shape of
the income
statement or
balance sheet
could certainly
impact covenant
compliance
The disclosure exemptions are applied only in
the individual accounts of the qualifying entity;
this includes parent company accounts. But
certain criteria have to be met to qualify.
The exemptions are similar within both
standards and include items like the cashflow
statement and share-based payment
disclosure. Again, preparation is required in
order to take advantage of this flexibility:
QQ Some exemptions are available only
if equivalent disclosures exist in the
consolidated accounts that the qualifying
entity is part of; and
QQ Shareholders must be notified of your
intention to apply reduced disclosures. Not
all your shareholders will be well-versed in
accounting requirements; do you know how
they might react to this request?
It’s just accounting though, isn’t it?
The application of new UK GAAP is a huge
change. EU listed groups made the important
first step towards international convergence in
2005, but that, while significant, did not impact
most entities in the UK, nor did it affect any
tax or reserves positions, which are based on
individual accounts.
The adoption of new UK GAAP affects a wide
population and does have ramifications for your
business outside of the pure finance team. Here
is some food for thought:
Tax
More and more, tax follows accounting. So if
you have a different profit before tax in your
single entity accounts under the new regime,
you are likely to have a different tax charge
as a consequence. Where are the risks and
opportunities? It is not just ongoing profits and
losses that you need to think about; transition
adjustments may also be taxable or deductible.
For instance, a lease incentive for a lessee might
have been spread over a shorter period under old
UK GAAP, so, on transition you may be debiting
reserves and re-spreading your credit over a
longer period – this could be tax advantageous.
Deferred tax implications arise from a different
accounting model, but also when certain firsttime adoption differences are posted.
Transition is a cross-functional project, and
your tax team is a key contributor to achieving
those optimum decisions on framework, policies
and the application of transitional exemptions.
Distributable reserves
There are some big ticket items here and you need
to pick these up in your initial impact assessment.
For example, if a group has a defined benefit (DB)
pension plan that has been recognised only on
consolidation under FRS 17, Retirement Benefits,
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new uk gaap n
FRS 102
Five steps
it will have to come onto at least one entity’s
balance sheet, which could significantly reduce
reserves available for distribution.
There will be other, subtler effects as well.
Derivatives are coming on balance sheet;
movements in respect of these generally create
realised profits and losses, so there will be
increased volatility in your reserves.
For a December 2015 adopter, transition
adjustments must be taken account in the
payment of dividends from 1 January 2015. Does
your company secretary appreciate that the 2014
UK GAAP accounts alone might not support
the payment of dividends made in 2015? If you
do identify a dividend block, there are remedies
available for some scenarios, but they will entail
additional work. For example, you might be able
to reduce capital or reorganise your group to
recognise previously unrecognised value.
KPI changes
What measures do you use consistently
in your management information? EBITDA
(earnings before interest, taxes, depreciation
and amortisation) could be affected by certain
changes to policy, such as the recognition of
derivatives or the fact that investment property
fair value movements now hit profit rather than
reserves. This might require you to alter your
management information; will you accept the
changes and amend your targets and criteria for
review, or add a new process by adjusting the
statutory figures for internal reporting purposes?
Covenants on financing arrangements might
also be affected by similar changes. Are your
covenants based on frozen GAAP – if so, you
should be fine. However, many covenants are
based on current GAAP and changing the shape
of the income statement or balance sheet could
certainly impact covenant compliance.
reconcile the new general ledger account? How
are the new processes for impairment reviews,
depreciation methods, asset lives and residual
values going to be incorporated into the year
end close?
There may be greater demands for information,
which must be embedded into processes. You
might need IT to write a new automated report, or
gather timesheet information for staff working on
development projects.
These changes will probably not be on the
radar of staff outside finance, so you will need to
secure their support for your project.
Prepare a skeleton set of
financials, then populate the
opening balance sheet
Prepare the first set of
financials, with full year
and comparatives, then
finalise the audit.
For a December
2015 adopter,
transition
adjustments
must be taken
account in the
payment of
dividends from
1 January 2015
Are there any templates I can use to help me?
Yes, probably. Many accounting firms have
developed their own resources such as model
accounts and templates to track adjustments
from old to new GAAP. Whether you tap
into these or develop your own, they are an
important part of your transition process and will
form key support for your first accounts under
the new UK GAAP.
What about accounts production software?
If you use software for preparing accounts
with iXBRL tagging, you should speak to your
provider for the process to update the inbuilt
taxonomies for FRS 101 and 102.
Will the audit be more work than usual?
For the majority of entities, yes – in the year of
transition. For companies with more year end
processes and disclosures under the new regime,
the audit fee may be higher in future too. Auditors
will need to review your transition process and
evidence to satisfy themselves that you have
considered all relevant accounting differences,
calculated numerical adjustments appropriately
and included all material disclosures. They will
also want to help you get through the process as
painlessly as possible, so early engagement on
key issues is always better than late.
Financial reporting processes and IT
Transition will inevitably involve some changes
to systems and processes. For example, you
now need to value derivatives: how will you
obtain valuations? Do you have the inhouse skill
to assess what the bank has sent you? Who will
Andrew Davies
Partner, UK&I leader, Financial
Accounting Advisory Services,
EY www.uk.ey.com
www.accountancylive.com
33
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