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FRS 102: Frequently asked questions

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18th Aug 2014
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With the mandatorily effective date of accounting periods commencing on or after 1 January 2015 fast approaching, Steve Collings considers some of the most common questions asked relating to FRS 102 and the impact it is going to have on client’s figures.

Q. I have been told that there is not much difference between current UK GAAP and FRS 102 so why do we have to check the client’s accounting policies?

A. In the majority of cases there is little difference between current UK GAAP and FRS 102. However, a new financial reporting regime brings with it changes to accounting practices and some changes to the way in which items are recognised and measured in the financial statements. Accounting policies have to be checked at the date of transition (which is the start date of the earliest period reported in the accounts) to ensure they are compliant with FRS 102. So, for example, if your client has an investment property on the balance sheet the accounting for this is markedly different under Section 16 Investment Property than under SSAP 19 Accounting for Investment Properties in that no revaluation reserve is recognised for such properties. Similarly if your client has any derivative financial instruments, these are required to be brought onto the balance sheet and accounted for in accordance with Section 12 Other Financial Instruments Issues which is not the case in current GAAP.

As a result of the notable changes inherent in FRS 102, clients that are affected by FRS 102 will have to carefully examine their accounting policies and make the necessary changes if required, at the date of transition, to ensure compliance with FRS 102.

Q. I understand that in the first year FRS 102 affects a client they will have to apply the rules retrospectively to the date of transition. Does that mean I have to resubmit the prior year comparatives to HMRC and Companies House if they change because presumably the prior year comparatives will change due to the retrospective application?

A. No you won’t need to resubmit accounts for the transitional effects of FRS 102 but you will have to make additional disclosures in accordance with Section 35 Transition to this FRS in the first financial statements prepared under FRS 102 which explains the impact that the transition has had on reported and equity and profit or loss. Paragraph 35.13 of FRS 102 requires the following reconciliations in the first set of FRS 102 financial statements:

                (a) A description of the nature of each change in accounting policy

                (b) Reconciliations of its equity determined in accordance with its previous financial reporting framework to its equity determined in accordance with this FRS for both of the following dates:

                                (i) the date of transition to this FRS

                                (ii) the end of the latest period presented in the entity’s most recent annual financial statements determined in accordance with its previous financial reporting framework

                (c) A reconciliation of the profit or loss determined in accordance with its previous financial reporting framework for the latest period in the entity’s most recent annual financial statements to its profit or loss determined in accordance with this FRS for the same period

The effects of transition can be reported within the notes to the financial statements and some reputable software companies are including such disclosures at the end of the notes - although there is no specific place in the FRS as to where these should be as long as the disclosures are clear.

Q. I have a client with two investment properties on its balance sheet. I understand that fair value adjustments under FRS 102 go to profit or loss, but should I just keep the related revaluation surplus in the balance sheet going forward or should this be written off to the profit and loss account at the date of transition to FRS 102?

A. On transition to FRS 102 any investment property-related revaluation surplus held in the equity section of the balance sheet will be put into profit and loss reserves as a transitional adjustment (i.e. debit revaluation surplus, credit profit and loss reserves (retained earnings)). Alternative categories of equity can be used to take transitional adjustments if the client considers this appropriate.

Q. I realise FRS 102 extinguishes the use of a revaluation reserve for investment properties and thus changes in investment property fair values go through the profit and loss account. Is this the same for freehold property as well that is on a balance sheet and carried under the revaluation model?

A. No. Investment property is accounted for under Section 16 Investment Property, while freehold property would be accounted for under Section 17 Property, Plant and Equipment. For property accounted for under Section 17 you would continue to recognise revaluation gains in the revaluation surplus account accumulated in equity and reported through other comprehensive income (the statement of total recognised gains and losses). Increases are only recognised in profit or loss to the extent that it reverses a revaluation decrease of the      same asset previously recognised in profit or loss (and vice versa). 

Q. I do not like the term ‘statement of financial position’ and ‘statement of comprehensive income’ for the financial statements and I think my clients will be very confused. Can we keep to the original names for the financial statements?

A. Yes. Paragraph 3.22 of FRS 102 does allow flexibility in the titles of the financial statements provided the titles given are not misleading. As the terms ‘balance sheet’, ‘profit and loss account’, etc. are derived from regulations it would be permissible to continue their use.

Q. My client currently carries its freehold buildings in the balance sheet using the revaluation model in FRS 15 Tangible Fixed Assets however he objects to commissioning a surveyor to perform these valuations. Can he switch back to using the depreciated cost basis for these properties?

A. Yes because of the optional exemptions contained in Section 35 (specifically paragraph 35.10(d)). This paragraph allows an entity to elect to use a previous GAAP revaluation of an    item of property, plant and equipment at, or before, the date of transition to be frozen and then treated as deemed cost at the revaluation date. However, where you take this exemption be careful with the dates. Where the date of valuation is before the date of transition, the deemed cost should be depreciated from the valuation date. You do not need to revise any estimates made to calculate depreciation (for example residual values or useful lives).

Q. I have a client that is not amortising goodwill on the basis that they consider the life of the goodwill to be indefinite. Can this be the case under FRS 102?

A. The short answer to this is ‘no’. FRS 102 says that goodwill is considered to have a finite useful life and therefore should be amortised on a systematic basis over that useful life. In situations where the entity is unable to make a reliable estimate of that useful life, they must amortise it over a five-year period from the date of transition. In addition, disclosure of the useful life of goodwill is required in the financial statements and where management have concluded that the useful life of goodwill exceeds five years, supporting reasons as to how this conclusion has been drawn should be disclosed also.

Q. I have a client that uses forward foreign currency contracts - what are the implications of FRS 102 in this case?

A. A forward foreign currency contract would be treated as a derivative financial instrument and would therefore be accounted for under the provisions in Section 12 Other Financial Instruments Issues. Unless your client has chosen to adopt FRS 26 Financial Instruments: Recognition and Measurement (which would require derivatives to be included on the balance sheet at fair value), they are going to have to bring them on the balance sheet under FRS 102 at fair value. Existing UK GAAP (other than FRS 26 for listed groups and the fair value rules in Companies Act 2006) have derivatives in the balance sheet at their historical cost, which is usually zero, and accounted for when they are settled. The transition across to FRS 102 means they will be brought on to the balance sheet at fair value much earlier and with changes in their fair values reported in profit or loss. This is likely to cause volatility in reported profits than would otherwise be the case under current UK GAAP.

Q. Has there been any guidance published concerning the tax implications of the transitional adjustments to FRS 102?

A. Yes. HMRC has issued an Overview Paper which outlines the tax consequences of the transition across to FRS 102.

Q. How long is a transition likely to take?

A. There is no definitive answer to this. Some transitions may take a long time to complete due to several accounting policy alignments, whereas some will probably only take a short     amount of time as the client may only have one or two accounting policy alignments to deal with. My advice would be to consider the most complex client that is going to be affected by FRS 102 and work down from that. The most complex case will take the longest and will give you a sort of “benchmark” timescale which should (in theory) allow you to work out an approximation of how much the transition will cost for each of your clients.

In line with the advice being given by the professional bodies, it is important to start to plan   for this change sooner rather than later.

Steve Collings is the audit and technical partner at Leavitt Walmsley Associates. He is about to publish a book for Bloomsbury on the Audit and Accounts of Limited Liability Partnerships and recently wrote a book on FRS 102 with Paul Gee.

Replies (3)

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By D V Fields
20th Aug 2014 19:27

Statement of financial position and statement of comprehensive

income.

Sound like someone was given the challenge of coming up with a different name for a Balance Sheet and Profit and Loss Account, because some "idiot" thought it a good idea! This was the best they could come up with - and totally unnecessary. In my view a poor reflection on the decision makers.

 

Dave

 

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By MarinaAbbott
10th Sep 2014 11:22

Investment properties and FRSSE

Hi

I work in a business whose raison d'etre is the buying and selling of investment properties.

We follow currently the FRSSE and use a revaluation reserve account for the surplus  in market value above historic cost and all gains and losses are reflected in the reserve.

1) Will the conditions for a company  applying  FRSSE, for reporting purposes, stay the same after Jan 2015?

2) If so, is it likely that in light of FRS 102 the FRSSE will be adapted to eliminate the use of a Revaluation Reserve ?

 

Kind regards

Marina   

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By Samimk
15th Jan 2016 15:24

TFA: Freehold+ improvement that rented to fellow subsidary

My client had a freehold property & improvement the balance sheet using the revaluation model and showing as fixed assets as property was rented to fellow subsidiary and claimed some capital allowance as well .

Per FRS102 the freehold +improvement have to move from TFA to freehold investment.

1) What kind of affect will be for  for the improvement&building to transfer from TFA to investment property under FRS102 (transition)?

2) What kind of affect will be for depreciation accounted for the improvement&building  under FRS102 (transition)?

3) What kind of affect will be in corporation tax calculation purposes under FRS102 (Transition) for the capital allowance claimed?

4) What kind of affect will be in deferred tax calculation purposes under FRS102 (Transition) for revaluation reserve?

Any help from any one?  Thanks 

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