Save content
Have you found this content useful? Use the button above to save it to your profile.
FRS 102 wall
istock_belterz_fotor

FRS 102: The FRC proposes changes

by
13th Oct 2016
Save content
Have you found this content useful? Use the button above to save it to your profile.

Steve Collings reports on the changes proposed to accounting standard FRS 102 by the Financial Reporting Council (FRC).

The FRC issued a consultation document (condoc) in September 2016 relating to the first triennial review of UK and Ireland accounting standards, which outlines the approach to changes in IFRS that could have an impact on FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, and perhaps other standards.

My previous article gave a general overview as to the intentions of the FRC and the amendments made to IFRS, which may trigger changes to UK and Irish accounting standards. Since publication of the condoc, many practitioners have queried why the FRC is conducting a triennial review of the standard when many companies (especially small companies) have not yet implemented the new framework.

When FRS 102 was first issued in March 2013, the FRC indicated that it would review the standard at least every three years. FRS 102 became mandatory for unlisted entities that were not part of the small companies’ regime (i.e. medium-sized and large companies) for accounting periods starting on or after 1 January 2015 (i.e. 31 December 2015 year-ends).

As a result, many entities have already started to use the standard and the FRC has received feedback on implementation issues that first-time adopters have already encountered. In addition, the FRC is already aware of improvements which can be made to the standard as more entities implement it, and the FRC actively encourages these suggestions for improvement to continue.  

Also, the Companies Act 2006 was revised last year to incorporate the provisions of the EU accounting directive. The revised act increased the size thresholds which determine whether a company is a micro-entity, small, medium or large, with consequential increases to the group size limits also.

Under the revised act, small companies have a turnover limit of £10.2m (previously £6.5m) and a balance sheet total of £5.1m (previously £3.26m). SI 2015/980, which amended the companies act 2006, contained an early-adoption clause allowing a company that would have been classed as medium-sized under the old thresholds, but which now becomes small under the new thresholds, to early-adopt the revised companies act 2006.

Early-adoption of the revised act applies to accounting periods starting on or after 1 January 2015, but before 1 January 2016, hence a 31 December 2015 year-end would be eligible. Many companies that are now reclassified as small under the new thresholds have decided to take up the early-adoption clause and prepare their (say) 31 December 2015 year-end accounts under section 1A Small Entities in FRS 102 (although they would be required to have an audit as early-adoption of the revised audit exemption thresholds, which have also been aligned to the revised small company thresholds, is not allowed). Therefore, more companies have chosen to early-adopt the revised act, and therefore FRS 102, to take advantage of a less burdensome framework.

It should be emphasised that the condoc issued by the FRC is not an exposure draft and the FRC is using the condoc as an opportunity to receive comments on suggested improvements to UK accounting standards so that they can be considered when the exposure drafts (expected in 2017) are being developed.

Practitioners are encouraged to make any suggestions for improvements or feedback on implementation issues to the FRC as they are keen to hear such suggestions. These can be sent by email to [email protected] no later than 31 December 2016. Practitioners and small companies that have not yet implemented the standard will still have opportunities to make constructive comments to the FRC to influence proposals for changing the standard.

Phase 1 amendments

The condoc outlines the FRC’s intentions to issue two Financial Reporting Exposure Drafts (FRED) during 2017. The first FRED Triennial review 2017 Phase 1 – Incremental improvements and clarifications will be issued towards the end of the first quarter of 2017. The amendments in this Phase 1 FRED are only intended to be limited in nature and are expected to be effective for accounting periods starting on or after 1 January 2019, although early-adoption is expected to be permissible. The limited amendments would:

  1. incorporate relevant improvements from the 2015 Amendments to the IFRS for SMEs (on which FRS 102 is principally based);
  2. incorporate the ‘control model’ of IFRS 10 Consolidated Financial Statements;
  3. update definitions and the fair value hierarchy to achieve greater consistency with IFRS 13 Fair Value Measurement; and
  4. improve the ‘separation of contracts’ for the purposes of recognising and measuring revenue so that it is more aligned to IFRS 15 Revenue from Contracts with Customers.

Control model from IFRS 10

The FRC is proposing to make limited amendments to the definition of ‘control’ and provide guidance on its application. These amendments will be in addition to any specific circumstances in which company law requires a group to prepare consolidated accounts.

The changes in this respect are not expected to have any practical effect on accounting for many subsidiaries or joint arrangements. Amending FRS 102 by aligning it to the control model in IFRS 10 is viewed as an improvement in financial reporting. The FRC expects that many entities will be able to determine that any changes in FRS 102 will not have an impact on their accounting because they will already meet the company law criteria for preparing group accounts, and hence the cost of implementing this amendment is likely to be limited.

Fair value measurement

FRS 102 was amended in March 2016 to require financial institutions to provide information in accordance with the fair value hierarchy, which was based on IFRS 13. The FRC indicated that paragraph 11.27 of FRS 102, which sets out the process for estimating fair values, would be reviewed in the future for greater consistency with IFRS 13, and they plan to do this in the first triennial review.

Revenue

IFRS 15 Revenue from Contracts with Customers was issued in May 2014, but it was not short of controversy. The IASB pushed back the effective date of IFRS 15 from periods starting on or after 1 January 2017 to periods starting on or after 1 January 2018 because the standard needed further clarifications. It should also be noted that IFRS 15 has not yet been endorsed in the EU.

The FRC recognises that the effects of IFRS 15 are going to be significant for entities under the standard’s scope, and therefore entities applying FRS 102 will want to take advantage of the experience of others in preparing for a transition.

The changes to FRS 102 in respect of revenue and IFRS 15 requirements are not significant in this triennial review, but the more significant changes will be considered in the next triennial review in 2019. The FRC is proposing to provide additional guidance as to how revenue can be allocated to the component parts of a single transaction to reflect the substance of the transaction. The guidance is likely to highlight the need to consider all goods and services which have been transferred, and may recommend the use of relative stand-alone values as a basis for allocation.

Phase 2 amendments

The amendments to FRS 102 planned in the Phase 2 FRED Triennial review 2017 Phase 2 – Expected loss model and leases are more significant. Therefore, the FRC are proposing to issue this Phase 2 FRED towards the end of quarter three of 2017. The amendments are planned to take effect for accounting periods starting on or after 1 January 2022, but early-adoption may be permissible. The reason the planned effective from dates are so far into the future is to give entities enough time to assess the impact of the change, understand the technicalities of the revisions and plan for the transition.

There are two significant amendments proposed:

  • incorporate the ‘expected loss model’ for impairment of financial assets which will be based on IFRS 9 Financial Instruments; and
  • update lease accounting so that it is consistent with IFRS 16 Leases.

Expected loss model

IFRS 9 is being completed by the IASB in phases and the most recent changes to IFRS 9 was finalising the requirements for the impairment of financial assets. The revisions moved IFRS 9 from an ‘incurred’ loss model approach to an ‘expected’ loss model approach, and it is the latter which the FRC are planning to incorporate into FRS 102.

For entities that are not financial institutions, the most likely instrument that perhaps would be affected (in practice) are trade and/or other debtors, such as loans made, and assessing recoverability of these debtors at the balance sheet date. IFRS 9 contains a simplified approach to bad debt provisions for trade debtors and therefore the impact of amending FRS 102 is not expected to be significant for entities that are not caught under the definition of a financial institution (indeed, financial institutions are expected to be impacted the most as a result of IFRS 9, and some financial institutions are under the scope of FRS 102).

The FRC has three options currently available to them in respect of this amendment:

  1. incorporate similar, detailed, requirements to those found in IFRS 9 into FRS 102 which would be consistent with how the hedge accounting requirements of IFRS 9 were reflected in FRS 102;
  2. require financial institutions (as defined in FRS 102), or a sub-set of financial institutions (e.g. banks/building societies), to apply the impairment requirements of IFRS 9, whilst replacing the existing impairment requirements of FRS 102 for all other entities with new requirements that are based on the simplified approach (this is the FRC’s preferred option); or
  3. require financial institutions (as defined in FRS 102), or a sub-set of financial institutions (e.g. banks/building societies), to apply the impairment requirements of IFRS 9 and not make any other amendments to FRS 102 unless there is evidence that the current impairment requirements in the standard are not operating effectively.

Leases

IFRS 16 was issued in 2016 and significantly overhauls the way in which a lessee accounts for leases; namely operating leases. The standard has a single model for lessee accounting and results in the vast majority of, what would otherwise have been, operating leases being recognised on the balance sheet as a finance lease.

In broad terms, IFRS 16 changes the accounting for lessees by providing them with a single model, but lessor accounting essentially remains more or less the same. It is also to be noted that at the present time, IFRS 16 has not been endorsed in the EU.

IFRS 16 says that is only short-term (i.e. leases with a term of 12 months or less) and low-value leases (examples of low-value leases cited in the application guidance to IFRS 16 include tablets and personal computers, small items of office furniture and telephones), which can be treated as operating leases. Everything else is on the balance sheet in the same way that a finance lease would be treated.

The FRC is proposing to incorporate the requirements of IFRS 16 into FRS 102. In addition, a practical expedient in respect of short-life and low-value leases will be included which will probably mean the same treatment as that of IFRS 16 will apply under FRS 102, and hence these types of leases will continue to be recognised as operating leases. The FRC is going to give particular consideration as to how the low-value expedient will operate in FRS 102.

Clearly such a change is significant and the FRC has said that entities will need sufficient time to prepare for implementation and assess the impact on current, and proposed, leases and similar contracts. This is particularly the case where other financial arrangements might require amendment (such as loan covenants).

As a consequence, any changes to lease accounting will be delayed until 1 January 2022 and will be included in the Phase 2 FRED, although early-adoption is likely to be allowed. In the meantime, the FRC will consider whether the lease disclosures of FRS 102 can be enhanced in order to improve the information in the accounts. Where any changes are considered necessary, they will be viewed as minor changes and will be included in the Phase 1 FRED and be implemented for accounting periods starting on or after 1 January 2019, again with early-adoption potentially allowed.

Conclusion

As FRS 102 is primarily based on the principles found in IFRS, it is to be expected that the FRC will change the standard to reflect the provisions in IFRS. Some clients are likely to be less affected than others, particularly those that will fall under the scope of the Phase 1 changes. However, the Phase 2 amendments are more significant in nature, which is why the FRC wants to give as much notice as possible that these changes are on the FRC’s work plan so that practitioners and clients have enough time to prepare.

The proposed changes have been announced via the condoc, so comments can be sent to the FRC to influence development of the FREDs. However, depending on the comments that the FRC receives in response to the condoc, the proposals highlighted above may be changed. 

Tags:

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.