The financial reporting overhaul is going to happen sooner than you think and represents the biggest change UK GAAP has seen.
To launch our new financial reporting channel, AccountingWEB technical editor Steve Collings outlines the key differences between existing UK GAAP and FRS 102.
Cash flow statement
There is no exemption from preparing a cash flow statement under FRS 102. There are also considerable presentational differences. A cash flow statement prepared under FRS 102 has three cash flow classifications: operating activities, investing activities and financing activities as opposed to FRS 1’s nine classifications.
Error correction
FRS 3 requires the correction of errors by way of a prior-period adjustment if the error is judged as ‘fundamental’ (i.e. one that destroys the true and fair view). Under FRS 102, error correction by way of prior-period adjustment will be carried out where the error is ‘material’, hence more errors are expected to be carried out by way of a prior period adjustment.
Stock valuation
SSAP 9 permits the use of the LIFO method of stock valuation, where the directors can demonstrate this method is appropriate in the company’s circumstances. FRS 102 outlaws the use of the LIFO method and hence companies employing the use of LIFO will have to choose between FIFO or average cost.
Investment property
Under SSAP 19, fair value gains and losses are taken directly to the revaluation reserve (losses are taken there to the extent of a revaluation surplus). Under FRS 102, gains and losses in respect of fair value fluctuations are taken directly to profit or loss. It is to be noted that fair value gains under FRS 102 are not distributable as a dividend to shareholders.
Intangible assets and goodwill
Under FRS 10, there is a rebuttable presumption that the useful economic life of intangible assets and goodwill is limited to periods of 20 years or less. This presumption may be rebutted, and a useful economic life regarded as longer or infinite in certain circumstances. Under FRS 102, the useful economic life of intangible assets and goodwill is limited to periods of five years or less should management not be able to place a reliable estimate of the intangible asset or goodwill’s useful economic life.
Leasing
In the guidance notes to SSAP 21, leases are treated as finance leases when the present value of the minimum lease payments equates to 90% or more of the fair value of the leased asset. This treatment is generally the ‘benchmark’ treatment in practice. Under FRS 102, there is no 90% guideline; instead a lease is usually indicative of a finance lease when ‘substantially all’ of the present value of the minimum lease payments is equivalent to the fair value of the leased asset.
Employee benefits
There is a specific requirement in FRS 102 for reporting entities to make accruals for unpaid short-term employee benefits at the end of the reporting period (unpaid sick pay and holiday entitlement being the two key examples). There is currently no specific requirement in UK GAAP to make these accruals (although paragraph 11(b) to FRS 12 does cite an example of holiday pay meeting the qualifying criteria of an accrual).
Deferred tax
FRS 19 does not require deferred tax to be recognised on revalued assets if the reporting entity has not entered into a binding agreement to sell the asset and has already recognised the gain or loss expected to arise on the sale. However, under FRS 102, deferred tax is recognised on a revalued asset, regardless of whether the entity has entered into a binding agreement to sell or not. The rate used in the calculation of deferred tax is the rate that would apply to the disposal of the asset.
Grants
SSAP 4 requires income from grants to be matched against the related expense in the profit and loss account. Under FRS 102, there is an accounting policy choice - entities can recognise grant income when the performance-related conditions have been met (under the performance model), or they can match the income to the related expense (as in SSAP 4 currently and also under the accrual model).
Terminology
FRS 102 uses international terminology (e.g. balance sheet = statement of financial position, profit and loss account = income statement, cash flow statement = statement of cash flows). It is permissible to use alternative titles to those referred to in FRS 102 (i.e. entities can still call the balance sheet the balance sheet), provided the titles are not misleading.
Steve Collings is the audit and technical partner at Leavitt Walmsley Associates and the author of ‘Interpretation and Application of International Standards on Auditing’.
Along with his other responsibilities Collings is the co-author of a soon to be launched major new title for Bloomsbury Professional – 'Financial Reporting for unlisted Companies in the UK and Republic of Ireland'.
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Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd where Steve trained and qualified.
Replies (5)
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Extremely informative and concise
Thanks.
Thanks to Steve Collins.
I've been waiting for someone to save me the trouble. Many thanks. Shades of RTI, I guess! Just what I needed; a redesigned wheel. I do US and Singapore etc accounts and I already call spades shovels, among other "alternative nomenclatures".
revaluation reserve effectively disappears ?
on the take up of FRS102...the revaluation reserves stays on the balance sheet ?
when the annual revaluation that takes place, then goes via the profit and loss and ends up in the 'B/Sheet P&L Reserves' which then would make this a combination of distributable[earned and taxed] and non distributable[ unrealised gains /losses ] how difficult would that be from a dividend availability perspective ...if correct
what happens to the Revaluation reserve that existed prior to FRS102 adoption ?
confused....
On transition
It will be a transitional adjustment and be taken to the profit and loss account reserves.
Best wishes
Steve
On Transition
Thanks.
Could you tell me whether this would be a distributable or non-distributable reserve?
Regards
Majuran