The decision to change the basis of preparation of financial accounts from the FRS 101 to FRS 102 framework is often taken quite late in the process, and while there may be benefits for the company to make this change the same cannot be said for the people preparing the accounts.
A change in the basis of preparation, particularly a last minute one, can result in disruption, additional work and increased stress - but it doesn’t have to.
As with most reporting tasks, a clear objective and a well-defined structure and process will help. Unfortunately, the clear objective too often begins with a set of model or illustrative accounts and while these are useful they only show the destination without any explanation as to how to get there.
For users of some accounts production tools it is often quite a simple process: change the reporting option ‘purpose’ from FRS 101 to FRS 102 and the software does the rest.
However, we know there are a lot of people who don’t have accounts production software, and they must tackle the challenge with Word and Excel and it is for these people that IFRS SYSTEM has published ‘Converting from FRS 101 to FRS 102 financial statements’ booklet. This booklet highlights the differences (additional disclosures) and guides you through the process.
The strategic report and directors' report disclosures between FRS 101 and FRS 102 remain the same, as these reports are governed by the Companies Act 2006 and not the Accounting Standards.
Also, the Accounting Standard recognition and measurement requirements are the same for both FRS 101 and FRS 102. The disclosure requirements are where the two frameworks differ (although it is noted that some preparers of FRS 101 over-disclose some items) and additional disclosures required for FRS 102 are:
- Directors’ responsibilities statement should refer to FRS 102, not FRS 101
- Statement of cash flows, applying either the direct method (receipts and payments) or the indirect method (movements in assets and liabilities)
- Significant accounting policies - Basis of preparation: should refer to FRS 102, not FRS 101
- Significant accounting policies - New Accounting Standards and Interpretations not yet mandatory or early adopted
- Reconciliations for the comparative period (such as intangible assets and tangible assets)
- Intangible assets impairment testing
- Impairment of debtors/receivables
- Capital risk management
- Financial instruments
- Fair value measurement
- Key management personnel disclosures
- Business combinations
- Non-cash investing and financing activities
- Changes in liabilities arising from financing activities
- Share-based payments
The FRS 101 framework, when fully applied, eliminates some ‘big ticket’ disclosures such as cash flows, financial instruments and fair value measurement.
This means that under the FRS 102 framework, these disclosures are added. Whilst the statement of cash flows can be derived from all of the other information already in the financial statements, financial instruments and fair value measurement disclosures will need some thought as to the policies and additional financial data.
For instance, forward foreign exchange contracts, remaining contractual maturities, the three-level fair value hierarchy and sensitivities. This will involve establishing methods to harvest and gather this data.
The above-mentioned IFRS SYSTEM booklet ‘Converting from FRS 101 to FRS 102 financial statements’ provides specific examples of these additional disclosures. Click here to download the complimentary PDF booklet).
Michael Berrington is the founder and chief architect of IFRS SYSTEM and for many years has been regarded as a leading authority on the automation of statutory financial statements.
Since his very early PwC days Michael has been drawn to statutory financial reporting, so much so that he left PwC in 2004 and founded Financial Reporting Specialists (FRS) which became (and still is) one of Australia’s leading ‘non-accounting firm’ preparers of statutory financial statements.
While Michael remains a major shareholder in FRS his focus these days is on building the ‘best and easiest to use’ statutory financial reporting software available. Since 2010 when the first commercial version of IFRS SYSTEM was launched Michael has sought (and generally found) ways to overcome the frustration of templates and template based tools that many preparers still use.
Testimony to his success is that IFRS SYSTEM is one of only two ‘statutory financial reporting’ solutions accredited by the Institute of Chartered Accountant England and Wales (ICAEW) and even more compelling is that IFRS SYSTEM is used by, or on behalf, some of the largest and best-known companies in the world.