FRS 102 tunes financial instruments

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Richard Hattersley
Community correspondent
AccountingWEB
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Accountants grappling with the FRS 102 transition may discover section 11 and 12 posing a problem for those who did not adopt FRS 26.

Section 11 and 12 applies to financial instruments, but brings with it a few new concepts for non FRS 26 adopters under the old GAAP, which could slip up those unfamiliar with the new regime.

 The financial instruments which fall under section 11’s scope are:

  • Cash
  • Demand and fixed term deposits
  • Commercial paper and bills
  • Notes, loan receivable and payable
  • Bonds and similar debt instruments
  • Accounts payable, accounts receivable
  • Investments in non-convertible preference shares, non-puttable ordinary and preference shares
  • Commitments to make or receive a loan to another entity that cannot be settled net in cash, loans due to or from group companies, directors loan accounts

Paul Brace, head of business development at Wolters Kluwer, cited aspects from section 11 as trouble areas. “There are some significant disclosure changes and a lot of IFRS principles that have been brought in with FRS 102 so they are being lulled into a sense of false security.” 

For those still wrestling with certain aspects of FRS 102, Omni Pro have a wealth of information on their supplier page, as well a link to their comprehensive 100 page FRS 102 guide.

So what areas should accountants watch out for? Omni Pro has identified four sections where accountants should pay extra attention.

Listed shares

Omni Pro has found some accountants are not aware of the implications when carrying investments in listed shares at fair value through profit and loss. These were previously carried at cost less impairment under old GAAP, says Omni Pro. “This will result in volatility in the profit and loss account,” says Omni Pro.

This affects all entities that have investments which can be fair valued based on reliable estimates.

Intercompany loans

Under the old GAAP regime, director and inter-company loans were carried at transaction amount. Now under FRS 102, there are directors or intercompany loans issued at market rate which are not repayable on demand. These will have to be recognised on an amortised cost basis. 

“This will result in a transition adjustment which will also result in a charge to the profit and loss for companies where it is a loan due and a credit where it is owed from the other parties,” explains Omni Pro on their supplier page.

Omni Pro warns, where repayments or advances are made which were previously not forecasted, an entity is required to assess whether a substantial modification has occurred which can be a time consuming exercise in itself. Therefore, Omni Pro advises, if these loans can be deemed to be repayable on demand the present value of the future cash flows does not have to be determined as the present value of the loan is actually equal to the amount of the loan received/given. 

Once accountants have gotten to grips with cost amortisation, Omni Pro assures AccountingWEB that the process is “not as daunting as it first looks from a distance”.

Transactions on Unusual Credit Terms

Section 11 poses more administrative work where sales are made at unusual terms to connected parties. In this case, the financial element will need to be separated from the sales price and recognised in the profit and loss on an effective interest rate basis.

“This is something which practically happens in group scenarios that accountants didn’t have to consider previously, like the loans with directors and related companies, the practical process of calculating the financing element of the transaction and the effective interest rate can be daunting when performed the first time without some assistance or practical guidance,” said Omni Pro.

Forward currency contracts

Under FRS 102 derivatives need to be recognised as fair valued on the balance sheet and on statement of financial position unless hedge accounting is provided, as explained in section 12. This differs from the old GAAP where financial instruments were not recognised but instead needed to be disclosed.  

Omni Pro warns that accountants could find applying fair values could be an administrative burden for entities. But where hedge accounting is not adopted, Omni Pro says to expect “significant volatility in profit and loss”.

For a comprehensive guide to all of the changes coming into force with FRS 102, head over to Omni Pro’s supplier page. Are you prepared for FRS 102?  

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