The impact of the FRS on accounts

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In January the Accounting Standards Board (ASB) issued revised exposure drafts 46, 47 and 48 outlining their intention to replace all current FRSs/SSAPs and UITF Abstracts with a new ‘Financial Reporting Standard applicable in the UK and Republic of Ireland’ which is scheduled to take effect for accounting periods commencing on or after 1 January 2015, explains Steve Collings.

During lectures, the reaction from delegates has been mixed. Many practitioners have expressed their reluctance for the new UK GAAP to take effect as they currently view UK GAAP in its present form to be fit for purpose, while other practitioners are welcoming the new UK GAAP, provided resources are available to help them not only apply the new standards, but also to plan for the change. This article will look at some of the issues within the financial statements that practitioners deal with on a daily basis. It will not go into every conceivable difference between mainstream UK GAAP in its current form and the proposals contained in draft FRS 102, but I have picked out some of the more notable changes that practitioners need to have at the forefront of their mind.

The new UK GAAP will affect many practitioners that deal with clients who are not eligible to apply the FRSSE (effective April 2008). I have always subscribed to the belief that while UK GAAP in its current form is more or less parallel with its proposed successor, there are differences that firms will need to be aware of and additional work will need to be undertaken in the first year that the new standard is applied. For now I will focus on how the accounts might look if the exposure draft is issued without further amendment (which may be unlikely but working on the basis that wholesale changes to the recently issued exposure draft are also unlikely).

Accounting policies...

Steve Collings is the audit and technical partner at Leavitt Walmsley Associates and the author of ‘Interpretation and Application of International Standards on Auditing’. He is also the author of ‘The Guide to IFRS’ and ‘IFRS For Dummies’ and was named ‘Accounting Technician of the Year’ at the 2011 British Accountancy Awards.

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About Steven Collings


Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd where Steve trained and qualified.


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24th May 2012 01:49

Investment Properties

I believe the proposed treatment of investment properties is dreadful. The proposal to recognise unrealised holding gains through the income statement is a fundamental error in my view. Enron's accounts just before it failed showed how such treatments can easily mislead the user of accounts.

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24th May 2012 01:02

investment properties

I agree with Stephen Morris's view entirely !!

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24th May 2012 09:26

Investment Properties

Hi both

You're not the first accountants to criticise the ASB's approach in the way that investment properties are proposed to be measured in the financial statements, but it can be explained and whether it is right or wrong is, of course, subject to individual opinion. The reason the ASB are proposing this treatment is twofold. Firstly the draft FRS is based on an IFRS framework (notably IFRS for SME's, which has been tweaked). IFRS For SMEs is based on full mainstream IFRS.  Secondly IAS 40 'Investment Property' on which essentially our draft FRS is based also requires any changes in fair value of investment property to be reported in profit or loss, as opposed to a revaluation reserve account which we currently do under SSAP 19 and the FRSSE (eff April 2008).

The reason the draft FRS (and indeed IFRS for SME's and IFRS) doesn't require the use of a revaluation reserve for investment properties is because an investment property is neither depreciated, nor subjected to an impairment test.  Instead, all valuation changes from one accounting period to the next are reported in profit/loss. However, on the flip side if you revalue (say) a building which a company uses to undertake its day to day activities and therefore would be classified as 'property, plant and equipment' thus accounted for under the provisions in section 17 of the draft FRS you will then subject this building (plus all the other buildings in that asset class) to the revaluation model.  In this case any revaluation gains/losses would be accounted for under paras 17.15E and 17.15F which does require a revaluation reserve to be set up and accounted for in the same way we currently do so under FRS 15 principles.



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to SteLacca
24th May 2012 14:20

Investment Properties

Thanks, Steve, for describing the rationale for the change.

I still think it is wrong though. The net income, as reported by the income statement, is supposed to represent a) a measure of disposable wealth (available for distribution) and b) a measure of performance. Unrealised holding gains are not distributable, nor should they be. Neither is an unrealised holding gain a measure of performance - the gain is fortuitous. Reporting unrealised holding gains in the proposed way destroys the functions of the income statement.

The justification for reporting unrealised investment property gains through the income statement seems to be wholly irrelevant to the issue of depreciation and impairment testing. Depreciation and revaluations are two entirely separate issues (save for increased depreciation charges where revaluation has occurred). Why must UNREALISED revaluations surpluses on non-depreciable asset be recorded in the income statement? It does not make sense to me. Is this the start of "mark-to-market" accounting, the same model that enabled the Enron directors to mislead its investors? 

I believe the accounting standard setters have lost the plot on this one.




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29th May 2012 09:27

Capital Leasing


It is looking inevitable that leases will be reclassified under strict guidelines brought into force by the IASB in April 2013, resulting in finance leases being included on the balance sheet and properly accounted for. The IASB has been making changes to IFRS legislation and accounting requirements since 2010 and organisations should be carefully monitoring the impact any changes will have on current accounting processes.

The majority of organisations will review their current lease arrangements and may argue that they should remain as operating leases under the current IFRS criteria - this approach is short-sighted. Admittedly any changes to IFRS legislation will impact different sectors at different times, however the re-classification of leases, will affect all sectors over the coming years.

If Financial Directors are not looking at a specialist software solution already, they should certainly be looking at their leased asset register and planning a strategy of how to migrate leases into a specialist software solution. Why wait to make a last minute decision?

Putting off such a decision seems even less sensible when businesses are seeing the benefits now of having a solution in place that assists with calculation and payment of finance and operating leases.

Karen Conneely

Group Commercial Manager

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