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FRS 102: Proposals for change

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28th Sep 2016
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The Financial Reporting Council (FRC) has issued a consultation document Triennial review of UK and Ireland accounting standards – Approach to changes in IFRS, and this consultation forms part of the FRC’s triennial review of FRS 102 which is now underway.

The FRC is keen to hear from accountants to help formulate possible improvements to FRS 102 and the consultation considers whether, and to what extent, FRS 102 should be updated for recent changes in IFRS.

The comment period for the consultation closes on 31 December 2016. This is the first article in a two-part series which considers the impact of the proposed changes. The second article will focus on the technical impact of the changes.

FRS 102 is built on the provisions in IFRS (specifically IFRS for SMEs), and hence part of the FRC’s work is to consider whether changes in IFRS should be reflected in FRS 102. It should be noted that following the UK referendum to vote to leave the EU, the overall framework for financial reporting has not changed and the FRC will continue to develop and maintain accounting standards within the boundaries of UK and Ireland legislation.

Companies outside the small companies’ regime are already under the scope of FRS 102 as the standard is mandatory for such companies for accounting periods starting on or after 1 January 2015. Small companies (and micro-entities choosing not to report under FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime) are mandatorily required to apply FRS 102 (Section 1A Small Entities) in the preparation of their financial statements for accounting periods starting on or after 1 January 2016, with early-adoption permissible.

The triennial review offers the opportunity to make improvements to FRS 102 and while some amendments to the standard might be incremental, others may be more fundamental. In all cases, any amendments to accounting standards will be the subject of a public consultation through the release of Financial Reporting Exposure Drafts (FREDs). In this instance, however, the FRC is seeking the views of stakeholders, via the consultation document, in advance of developing detailed proposals for change.

After the consultation period closes, the FRC expects to issue two FREDs which will take account of all feedback received:

  • FRED Triennial review 2017 Phase 1 Incremental improvements and clarifications. This is expected to be issued towards the end of the first quarter of 2017.
  • FRED Triennial review 2017 Phase 2 – Expected loss model and leases to be issued towards the end of the third quarter of 2017.

The incremental improvements and clarifications in Phase 1 are expected to be effective for accounting periods commencing on or after 1 January 2019. Phase 2 amendments are expected to be more significant in nature and hence are expected to be effective for accounting periods beginning on or after 1 January 2022 in order to give entities enough time to prepare for transition. The FRC do expect that early application of the amendments will be permissible.

New standards and significant changes to IFRS which are not currently reflected in FRS 102 and which form part of the triennial review are:

  1. IFRS 3 Business Combinations (revised 2008);
  2. IFRS 9 Financial Instruments;
  3. IFRS 10 Consolidated Financial Statements;
  4. IFRS 11 Joint Arrangements;
  5. IFRS 12 Disclosure of Interests in Other Entities;
  6. IFRS 13 Fair Value Measurement;
  7. IFRS 15 Revenue from Contracts with Customers; and
  8. IFRS 16 Leases.

The proposals for change in respect of the above are outlined in the table below (see ‘Amendments to IFRS’ section).

Amendments to IFRS

FRS 102 was developed from IFRS for SMEs which was issued in July 2009. However, in developing FRS 102, the FRC made several amendments, such as the inclusion of additional policy choices and the content of Section 29 Income Tax to reflect UK-specific issues.

UK and Ireland accounting standards have to be consistent with IFRSs, unless an alternative will better meet the overriding objective. As a result of this principle, when an IFRS or IFRS for SMEs changes or is revised, it is necessary to consider whether similar changes should be made to FRS 102 so as to maintain consistency.

Recently there have been several changes to IFRS which are not reflected in FRS 102, but conversely there are a number of changes that have been considered but are not reflected in FRS 102 because FRS 102 offers a better alternative, and the FRC are not proposing to revisit these areas unless there is evidence that FRS 102 can be improved.

The FRC proposes changes as follows:

Standard

Changes proposed?

Phase 1 FRED

Phase 2 FRED

IFRS 3 Business Combinations (2008)

No

 

 

IFRS 9 Financial Instruments

Yes – expected loss model

 

ü

IFRS 10 Consolidated Financial Statements

Yes (limited) – control model

ü

 

IFRS 11 Joint Arrangements

Yes (limited) – control model

ü

 

IFRS 12 Disclosure of Interests in Other Entities

No

 

 

IFRS 13 Fair Value Measurement

Yes (limited) definitions and process for determining fair value, but the changes will not reflect the extended disclosures in IFRS 13

ü

 

IFRS 15 Revenue from Contracts with Customers

Yes (limited) – separating contracts

ü

 

IFRS 16 Leases

Yes

 

ü

 

The approaches which the FRC is proposing are as follows:

  1. Do nothing. There may be restrictions in law and/or it may be unclear that the changes proposed would improve financial reporting by entities under the scope of FRS 102.
  2. Make limited amendments to FRS 102 to improve consistency and clarity and either:

i.review the standard at a subsequent triennial review once more implementation experience is available; or

ii.do not review the standard again.

  1. Make significant amendments to FRS 102 to improve financial reporting by entities under the scope of FRS 102.

Conclusion

The FRC has acknowledged in the consultation that any changes to FRS 102, including those for consistency with IFRS, are to be developed in a proportionate and practical way keeping in mind the types of entities that are under the scope of FRS 102. The FRC will make changes when the changes for consistency with IFRS are considered to improve financial reporting.

The consultation is only a consultation at this stage; it is not an exposure draft and the proposals for change may be modified depending on the comments received before a FRED is issued. Should you wish to make constructive comments on the consultation, send an email to [email protected] no later than 31 December 2016.

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Replies (12)

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Teignmouth
By Paul Scholes
29th Sep 2016 16:38

Sorry Steve but you have to laugh, triennial review? Some of us haven't even used it yet.

How many decades can the accounting industry keep this stuff churning on, until somebody susses that they are only doing it to keep the mystery and fees running?

In other words, how many more decades till they get it right?

Thanks (13)
Replying to Paul Scholes:
By cheekychappy
30th Sep 2016 07:40

Paul Scholes wrote:

Sorry Steve but you have to laugh, triennial review? Some of us haven't even used it yet.

How many decades can the accounting industry keep this stuff churning on, until somebody susses that they are only doing it to keep the mystery and fees running?

In other words, how many more decades till they get it right?

Why do you think that industries, and the world in general should change dramatically, but accounting should carry on unchanged?

Thanks (1)
Replying to cheekychappy:
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By rememberscarborough
30th Sep 2016 09:54

The issue is who all this change benefits. I'm sure many outside our accounting industry feel it's much like the legal system where any change is purely to benefit the accountants/lawyers to keep them in well paid jobs.

Look at any set of accounts on Companies House and you'll know that all figures have to be taken with a large pinch of salt because most of them are "tarted up" to reflect the company/group's own agenda and that any change in accounting standards has little or no effect on Joe Public except to bump up their costs...

Thanks (1)
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By johnjenkins
30th Sep 2016 10:07

Can anything really be done until we know the full scope of MTD.

Thanks (1)
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By Ayesha Bham
30th Sep 2016 10:31

I had a discussion with my institute about all of this change we are going through. Apparently MTD will have no bearing on changes to FRS 102 because The accounting standards board don't get involved with tax and vica versa. I also tried to explain to our institute that clients don't understand the accounts anyway so all of this change is probably unnecessary . That was met with a very harsh response by the person on the other end of the phone who basically said that it is our job to make sure clients understand their accounts and any non compliance with accounting standards would result in a negligence claim that wouldn't be covered by PI insurance! Quite scary really. Roll on retirement.

Thanks (2)
Replying to Ayesha Bham:
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By johnjenkins
30th Sep 2016 10:52

Ah but MTD is not just about tax. HMRC are moving the goal posts and taking basis (year ends) periods away in order to get money in real time. I have no doubt that once the unincorporated are on RTI then it's only a matter of time before HMRC look at how they can do the same with Limited Companies (especially the one man bands). Nothing will be sacred anymore.

Thanks (1)
By Nick Graves
30th Sep 2016 11:17

Change for the better is often a good thing.

Change for the sake of change is akin to putting lipstick on a pig.

We have too many useless people on a job-creation exercise these days.

Thanks (3)
Replying to Nick Graves:
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By Twickers Call
01st Oct 2016 08:15

I am a small practice with 40 unincorporated clients who are mostly over 50 years old. The clients heavily depend on my input every year and concentrate on their businesses.
I cannot do quarterly for them due to the fact that my input time will multiply by 4 times. I also have to do vat returns every quarter within 30 days. Monthly RTI returns every pay period. Now digital reporting every three months within the 30 days of every quarter.
What is the plot of the OTS? Are they aware of the practicality? Have they ever run a business ?
I am totally convinced that this is to get rid of the accountants like ourselves and tax the public in an unruly manner with fines and surcharges.
Mark my word. There will be less self-employed and more unemployed when years to come with these senseless MTD regislation. Another fine mess.

Thanks (1)
Replying to Nick Graves:
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By Twickers Call
01st Oct 2016 08:26

I am a small practice with 40 unincorporated clients who are mostly over 50 years old. The clients heavily depend on my input every year and concentrate on their businesses. Most of them are self-employed due to poor education at young age or due to illnesses. They have not operated computers. Very inexpensive mobile phones are being used for their emergencies. It will never be within their ability of accounting input on daily basis or quarterly basis. They do not believe in online banking after a hard days of work at their work places.
I cannot do quarterly for them due to the fact that my input time will multiply by 4 times. I also have to do vat returns every quarter within 30 days. Monthly RTI returns every pay period. Now digital reporting every three months within the 30 days of every quarter.
What is the plot of the OTS? Are they aware of the practicality? Have they ever run a business ?
I am totally convinced that this is to get rid of the accountants like ourselves and tax the public in an unruly manner with fines and surcharges.
Mark my word. There will be less self-employed and more unemployed when years to come with these senseless MTD regislation. Another fine mess.

Thanks (0)
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By carnmores
01st Oct 2016 13:11

i'd rather watch paint dry

Thanks (1)
By ireallyshouldknowthisbut
03rd Oct 2016 18:21

With all these changes to reporting standards, I am moving my stance away from "what is correct?" to "what wont get rejected by Companies House?" given the main users of the accounts - the clients and HMRC couldn't give a rats [***], the former just what the minimum possible disclosed in public. Given the accounts I see other accountants file, I don't seem to be in much of a minority. Its becoming a fools errand to seek to get it right.

Thanks (1)
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By AndrewV12
19th Nov 2016 16:20

This could run and run
'The FRC has acknowledged in the consultation that any changes to FRS 102, including those for consistency with IFRS, are to be developed in a proportionate and practical way keeping in mind the types of entities that are under the scope of FRS 102. The FRC will make changes when the changes for consistency with IFRS are considered to improve financial reporting'.

My gosh this could run and run, but I think it will be done and dusted by 2020, its not as far away as you think.

Thanks (0)