On 14 December 2017, the Financial Reporting Council (FRC) issued the final amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland which have arisen as part of the FRC’s first triennial review.
The amendments are incremental improvements and clarifications and should not be viewed as wholesale changes.
The FRC has taken on board feedback from commentators and practitioners following a period of consultation and the amendments have been developed in response to that feedback, hence FRS 102 should be clearer and easier to use, with certain accounting policies being simplified and some additional exemptions being introduced.
Future articles will examine the detail of the amendments. However, there are some amendments to FRS 102 that will have a direct impact on the financial statements themselves (including those for small companies) which are outlined as follows:
Undue cost or effort exemptions
The FRC has removed a number of undue cost or effort exemptions, as they were not being applied correctly. In some cases, the undue cost or effort exemptions were being applied as accounting policy options, which they were never designed to be. For example, the undue cost or effort exemptions in Section 16 Investment Property have been removed, meaning that all investment property must be measured at fair value through profit or loss at each balance sheet date. There is an accounting policy choice available for groups, which is discussed next.
Investment property in a group
For groups which let property out to other group members, there has been an accounting policy option included in Section 16 Investment Property. Paragraph 16.4A allows groups to account for such properties either at fair value through profit or loss or under the cost model in Section 17 Property, Plant and Equipment. It is likely the latter option will be popular for groups. Where an investment property is accounted for under paragraph 16.4A(b), the disclosures per Section 17 will be required with the exception of those related to fair value measurement.
The FRC has introduced a description of a basic financial instrument whose objective is to support the detailed conditions in paragraph 11.9. This description confirms that when a financial instrument does not meet the condition in paragraph 11.9, the instrument is still basic if cash flows arise on specific dates which constitute repayment of capital together with reasonable compensation for the time value of money, credit risk and other basic lending risks and costs such as liquidity risk. Such instruments will, therefore, be accounted for under Section 11 Basic Financial Instruments. Instruments which contain terms that introduce exposure to unrelated risks or volatility such as changes in equity or commodity prices would be inconsistent with this description.
In May 2017, the FRC introduced an immediate relief for small companies whose director-shareholders have provided the company with a loan at below market rates of interest or at zero rates of interest. This relief was made immediately available and hence can be applied to small companies’ financial statements for year-ends on or after 31 December 2016. The relief is not available to loans from the small company to a director-shareholder and is only available for small companies.
The scope of the relief has been extended slightly for loans from a person who is within a director’s group of close family members when that group contains at least one shareholder (the glossary to FRS 102 defines the term close members of the family of a person) and includes a person who is the sole director-shareholder of an entity. It must be emphasised that intra-group loans from one group entity to another are not covered by this relief.
If the entity outgrows the small companies’ regime, ie becomes medium-sized, the entity re-measures the liability to present value prospectively from the first reporting date after it ceases to be a small entity. Present value will be determined based on the facts and circumstances existing at that time, or at the date on which the financing arrangement was entered into.
Companies will be able to recognise fewer intangible assets that are acquired in a business combination separately from goodwill. Paragraph 18.8 of FRS 102 has been amended quite significantly to introduce three conditions which have to be met before recognising intangible assets separately from goodwill as follows:
- the recognition criteria set out in paragraph 18.4 are met (ie probable expected future benefits and the cost/value of the asset can be reliably measured);
- the intangible asset arises from contractual or other legal rights; and
- the intangible asset is separable (ie capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged either individually or together with a related contract, asset or liability).
The FRC has amended paragraph 18.8 to reduce the costs of compliance. However, this amendment does not preclude a reporting entity from recognising intangible assets separately from goodwill (although condition (a) in paragraph 18.8 must always be met beforehand). However, when the reporting entity chooses to recognise such additional intangible assets, this policy must be applied to all intangible assets in the same class and must be applied consistently.
The principles included in the definition of a ‘financial institution’ have been amended to remove references to ‘generate wealth’ and ‘manage risk’. This will help to reduce the number of interpretational difficulties and reduce the number of entities meeting the definition of a financial institution.
Issues concerning gift aid were set out in a separate exposure draft, that of FRED 68, outlining the situation where gift aid payments are made by subsidiaries to their charitable parents. The amendments now allow the tax effects of such payments to be taken into account at the balance sheet date but only when it is probable (ie more likely than not) that the gift aid payment will be made within the following nine months. This clarification will reduce divergent practice in this area.
Other notable changes to FRS 102
Some other notable changes to FRS 102 include the following:
- The fair value hierarchy which was contained in paragraphs 11.27 to 11.32 of FRS 102 has now been moved into an appendix to Section 2 Concepts and Pervasive Principles at paragraphs 2A.1. This has been done on the basis that the fair value hierarchy applies to other items in the financial statements rather than confined to financial instruments.
- The Accounting Council’s advice at the back of the previous editions of the suite of standards is now the basis for conclusions.
- The illustrative statement of comprehensive income in Section 5 has been amended to align the line item descriptors to company law by removing references to ‘on ordinary activities’ and ‘interest payable and similar charges’ becomes ‘interest payable and similar expenses’. The profit on disposal of operations is now removed from operating profit in the illustration and is shown as a separate line item underneath operating profit.
- Entities preparing a cash flow statement under Section 7 Statement of Cash Flows will have to provide an analysis of changes in net debt. This should not be too arduous for practitioners because this had to be done under previous UK GAAP.
- Appendix D to Section 1A Small Entities contains the disclosure requirements for small entities in the Republic of Ireland
Changes to FRS 105
The notable amendments to FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime include the following:
- FRS 105 now covers issues concerning micro-entities in the Republic of Ireland, including relevant disclosure requirements.
- The disclosures required by section 396(A1) of the Companies Act 2006 are required which require a micro-entity to disclose (paragraph 3.13B deals with micro-entities in the Republic of Ireland):
- the part of the UK in which it is registered;
- the micro-entity’s registered number;
- that the micro-entity is a private company (the law refers to both public and private entities but public companies are excluded from the micro-entities’ regime) and whether it is limited by shares or guarantee;
- the address of the micro-entity’s registered office; and
- where appropriate, the fact that the micro-entity is being wound up.
- For UK micro-entities, two additional disclosures are required at the foot of the micro-entity’s balance sheet as follows:
- information concerning off-balance sheet arrangements; and
- information about employee numbers.
Additional detail concerning these disclosures is provided in the appendix to Section 6 which is an integral part of FRS 105.
The principal effective date for the amendments to FRS 102 is for accounting periods beginning on or after 1 January 2019. Early adoption is permitted, provided that all the amendments are applied at the same time. The only exceptions are in respect of the amendments relating to directors’ loans and the gift aid payment amendments for which early adoption is permitted separately.
Changes to the disclosure requirements for small entities in the Republic of Ireland and for micro-entities in both the UK and the Republic of Ireland apply for accounting periods starting on or after 1 January 2017 (ie 31 December 2017 year-ends onwards).
About Steven Collings
Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd where Steve trained and qualified.