Steve Collings assesses the changes made to FRS 102 in the March 2018 edition of the standard, including intangible assets, undue cost or effort exemptions and investment property.
The Financial Reporting Council’s (FRC) first triennial review of FRS 102 was completed in December 2017 and the amendments formed the March 2018 edition of the standard.
This article examines the changes made by the FRC in respect of:
- Intangible fixed assets;
- Undue cost or effort exemptions; and
- Investment property (within a group).
The amendments arising as part of the FRC’s triennial review are eligible for early adoption. The only two amendments which can be early adopted separately are the directors’ loan and gift aid amendments.
In all other respects, if an entity wishes to early adopt other amendments early (eg the investment property within a group accounting policy), it must early adopt the entire suite of amendments.
The amendments to FRS 102 are mandatory for accounting periods starting on or after 1 January 2019.
Intangible fixed assets
Prior to the amendments, some practical difficulties arose when a business combination took place (ie when a parent acquired a subsidiary) because paragraph 18.8 of the September 2015 edition FRS 102 stated that an intangible asset acquired in a business combination is normally recognised as an asset because its fair value can be measured with sufficient reliability.
The same paragraph then went on to state that such an intangible asset is not recognised when it arises from legal or other contractual rights and there is no history or evidence of exchange transactions for the same or similar assets, and estimating fair value would depend on immeasurable variables.
Under FRS 102, goodwill must always be amortised on a systematic basis over its useful economic life. This is notably different than IFRS 3 Business Combinations, which does not allow goodwill to be amortised; it is instead tested for impairment at each reporting date.
The FRC recognised that the fact that goodwill is amortised under FRS 102 means there is perhaps less of a need to separate intangible assets acquired in a business combination from goodwill.
Paragraph 18.8 of FRS 102 was extensively amended as part of the FRC’s triennial review. This amended paragraph now requires intangible assets acquired as part of a business combination to be recognised separately from goodwill when all three of the following conditions are met:
- the recognition criteria set out in paragraph 18.4 are met (ie future economic benefits are probable and the cost or value of the asset can be measured reliably);
- 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).
Paragraph 18.8 of FRS 102 now contains an accounting policy choice. Entities can either separately recognise intangible assets from goodwill when condition a) and only one of b) or c) is met. However, if an entity chooses to recognise additional intangible assets, that policy must be applied to all intangible assets within the same asset class (eg licences) and must also be applied consistently to all business combinations.
In addition, if an entity chooses to recognise intangible assets acquired in a business combination separately from goodwill, it must disclose the nature of those intangible assets together with the reason why they have been separated from goodwill (paragraph 18.28A FRS 102 (March 2018)). The aim of this additional disclosure is so that users can draw comparisons between different entities.
Undue cost or effort exemptions
The FRC has removed the undue cost or effort exemptions contained in the September 2015 edition of FRS 102, which were brought in for consistency with IFRS for SMEs. The FRC became aware that these undue cost or effort exemptions were not being applied with sufficient rigour and entities were using them as accounting policy options, which they were not intended to be.
In practice, it is likely that the undue cost or effort exemption which was removed from Section 16 Investment Property will affect some reporting entities that may have viewed the undue cost or effort exemption as an accounting policy choice. However, the FRC has introduced an accounting policy option for investment properties in a group context which should help groups (see next).
Where an undue cost or effort exemption has been used from FRS 102, it is likely that an accounting practice will have to change once the entity is moved under the scope of the March 2018 edition of the standard.
Investment property within a group
Prior to the amendments to FRS 102, Section 16 only required investment property whose fair value could be reliably measured without undue cost or effort to be accounted for under that particular section. Where fair value could not be obtained without undue cost or effort, the property was accounted for using the cost model in Section 17 Property, Plant and Equipment.
To address feedback received from groups, the FRC has introduced an accounting policy choice for groups only which rent out investment property to other group members. The accounting policy option contained in paragraph 16.4A allows a group to measure investment property at fair value through profit or loss or at cost less depreciation and impairment. It is likely that the second option will be popular among groups.
The FRC recognises that in the UK, most entities can obtain a fair value for investment property and hence the undue cost or effort exemption has been removed. Therefore, investment property which is not rented out to another group member will now be required to be measured at fair value through profit or loss (with associated deferred tax consequences being brought into account to comply with paragraph 29.16 of FRS 102).
While the amendments to FRS 102 do not come into mandatory effect until accounting periods starting on or after 1 January 2019, it is advisable for practitioners to consider the effect of these changes on clients’ financial statements – particularly where an undue cost or effort exemption has been used as an accounting practice(s) may have to change.
In addition, it might be worthwhile early adopting some of the amendments early (eg the investment property within a group amendment) as it may reduce the costs of compliance with the standard.
Do bear in mind that when an amendment (other than the directors’ loan or gift aid amendment) is early adopted, the entire suite of amendments also has to be early adopted.
About Steven Collings
Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd where Steve trained and qualified.