How to produce your first set of FRS 105 accounts

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Matt Bailey, founder of online tax and accounts system gbooks, outlines how to handle the transition to the new accounting standard.

The time for talking about adopting FRS 105 is almost over. While firms must switch to one of the two new accounting standards for periods starting from 1 January 2016, they have the option of adopting either FRS 105 or FRS 102 for accounting periods starting in 2015. So if you have small companies with a 31 December 2015 year end, you could find yourself producing your first set of FRS 105 accounts (or at least considering the idea) as soon as next month.

Let’s say the directors of one of your client companies are keen to adopt FRS 105 because it involves disclosing less information to their competitors. What exactly do you do next?

When you produce your first set of FRS 105 accounts your software package will do some of the work for you (i.e. formatting the accounts and assisting with the required notes). But it won’t do everything. Your accounts will need to meet the FRS 105 standard “from the first period presented” (so normally the comparatives), and any material restatements must be made to the prior period (rather than the current period) if it is “reasonably practicable” to do so.

So you need to revisit the (FRSSE-based) comparative accounts and make them FRS 105 compliant. The two areas most likely to need restating are (i) deferred tax and (ii) investment property carried at open market value.

Let’s assume your client claimed accelerated capital allowances and included a charge for deferred tax of £1,200 in last year’s P&L account. They also carried a provision for deferred tax of £8,000 on the balance sheet.

Deferred tax is not permitted under FRS 105. The directors decide the amounts involved are material, and it is reasonably practicable to restate the figures in the comparative accounts.

The workings for the required restatements are shown below:

Very little needs to be disclosed about these revisions. In both the FRS 105 balance sheet formats there is only one line for “provisions and liabilities” and another single line for “capital and reserves”. So neither the make-up of reserves nor a breakdown of provisions is displayed on the balance sheet, nor is any information required in the two statutory notes.

So, in this example, the figures shown for “provisions and liabilities” will fall by £8,000, leading to a rise in net assets of the same amount. “Capital and reserves” also rises by £8,000.

Life becomes more complicated if your client holds an investment property that needs to be restated at cost less depreciation. Let’s say the company bought a freehold office building for £150,000, and this is carried on the balance sheet at its open-market value of £225,000 with the £75,000 gain added to the revaluation reserve.

You need to estimate a net book value (NBV) for the property (excluding the land component) at the start of the comparative period. This NBV is then divided between the main components of the building structure (e.g. roof, heating system etc.), and depreciation calculated for each component using the policy set for each category. From these figures you can work out both the depreciation charge and the values to carry forward.

We won’t go through these workings in detail, but let’s say you go through these steps and estimate the opening NBV to be £127,000 (i.e. purchase price of £150,000 less depreciation of £23,000). The depreciation charge for the comparative year is calculated to be £5,000, leaving an NBV carried forward figure of £122,000.

The adjustments required are as follows:

Once again, very little is disclosed in the accounts, other than deducting £103,000 from the “fixed assets” line and reducing “capital and reserves” by the same amount.

Conclusion

The time is fast approaching when you’ll need to complete your first set of FRS 105 accounts. Part of the transition process will be to restate the comparative figures originally prepared using FRSSE, and you’ll need to do this where changes are material and it is “reasonably practicable” to adjust the prior period. But, if you get to grips with the areas most likely to need restating - deferred tax and investment properties in particular - your own transition to FRS 105 will be a doddle.

To view a full step-by-step guide to the new FRS 105 accounting standard, download Matt Bailey’s article here.

About Matt Bailey

matt_bailey

Founder of Azura Cloud Systems (Gbooks), the leading cloud-based tax and accounts system.

Replies

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16th Dec 2015 11:30

 

 

have not done 14/15 year ends yet - so these may include accounts/accounting which may need amending in the comapartives for year ends post 1/1/16 ?

1]   small share listed investment portfolio, which currently , has a provision for diminution of value    ie realisable less than cost  [ contra debit ultimately now sitting in retained reserves ]........  what needs to happen to this in the new FRS105 regime

2] what else may need to reverse out...

thanks

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16th Dec 2015 12:34

@ kiwilondon99

Under FRS 105 you need to carry assets at cost less amortisation, depreciation and impairment charges as appropriate.

So if the value is lower than cost there's an impairment charge and you'll need to carry the shares at the recoverable amount as at the balance sheet date - i.e. similar to what you're doing now.

It would be a different story if the shares had gone up in value - in that case you'd need to reverse out the gain.

I'm not 100% sure what you mean about the year end dates. But when you switch from FRSSE to FRS 105 you'll need to consider amending the FRSSE-based comparatives to make them compliant with FRS 105.

Thanks (1)
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16th Dec 2015 16:23

March 31 2016 year ends

Most of my clients have March 31 year ends.

For 31.3.16 year ends can I still use the FRSSE?

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By mabzden
16th Dec 2015 16:28

Yes but...

...you'll need to use the new version of the FRSSE (i.e. the 2015 version). That said, there are very few changes between the old 2008 version and the new one.

You'll then need to change to either FRS 105 or FRS 102 the following year.

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17th Dec 2015 09:07

Put Off

Sounds like a good job to put off until after 31/12/16 year ends.

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17th Dec 2015 10:58

There are reasons to adopt early

You can put this off but there are some reasons why people may want to adopt early:

1. In most cases you'll disclose less information in a set of FRS 105 accounts versus Abbreviated Accounts. So Directors may prefer FRS 105 accounts for that reason.

2. If you carry on using FRSSE some of the entries you put in your year-end 2015 accounts (e.g. deferred tax) will need to be reversed (in the comparatives) the following year. So you'll do the calculations to add them in, only to remove them again the following year.

3. It's a minor point, but you'll need to switch to the 2015 FRSSE for your 2015 year-ends and then switch standards again (to FRS 105 or FRS 102) the following year.

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22nd Aug 2017 15:54

So if the deferred tax is not material, but you still need to get rid of it, is this possible by some other means rather than re-stating the comparatives?

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