FRS102 – How will this impact on your business?
The Financial Reporting Council (FRC) has replaced current UK GAAP with FRS 102 : The Financial Reporting Standard applicable in the UK and Republic of Ireland with effect from periods beginning on or after 1 January 2015, with earlier adoption permitted.
FRS 102 is based on the International Financial Reporting Standard for Small and Medium sized Entities (IFRS for SMEs), amended for use in the UK.
FRS 102 will apply to the majority of UK entities other than those applying IFRS (International Financial Reporting Standards) or the FRSSE (Financial Reporting Standard for Smaller Entities). The FRSSE will be amended before 2015 to make it more consistent with FRS 102.
FRS 102 doesn’t just apply to companies, it will also be applicable for financial institutions (including charities) and Limited Liability Partnerships. For the first time ever special considerations for public benefit entities have been included within the accounting standards and these will be supplemented by various SORPs (Statements of Recommended Practice).
Overall FRS 102 is a significant change to UK GAAP and many of the changes can directly affect profit figures meaning that companies will need to consider its impact on profit sharing agreements, banking covenants, tax liabilities and the level of reserves available for dividend distribution.
In addition, the adoption of FRS 102 will lead to some changes to the format of the financial statements and the disclosures required.
Application of FRS 102 is mandatory for accounting periods commencing on or after 1 January 2015.
Early application is permitted for accounting periods ending on or after 31 December 2012. For those entities that are within the scope of a SORP, early application is permitted providing it does not conflict with the requirements of a current SORP or legal requirements for the preparation of financial statements. If an entity applies FRS 102 before 1 January 2015 it needs to disclose that fact.
The starting point for applying FRS 102 will be to restate the opening balance sheet at the beginning of the comparative period for the first accounts prepared under FRS 102. This is known as the date of transition. If a company prepares its first accounts under FRS 102 for the year ending 31 December 2015, its date of transition will be 1 January 2014. FRS 102 includes provisions to ease the transition.
Overview of major changes
There are many areas of difference between FRS 102 and current UK GAAP and advice should be taken on how this may affect specific entities. ABG would be happy to assist in this area. For some entities there may be little or no significant areas of change.
An overview of some of the key changes is provided below:-
Investments in listed shares
Under current UK GAAP, investments held in listed shares may be measured at cost or fair value. FRS 102 requires the use of fair value for investments in shares which are publicly traded or where the fair value can be measured reliably. Movements in this fair value are recognised in the profit and loss account.
A change in the definition of intangible assets will result in the recognition of a greater range of intangible assets, particularly upon business combinations. Separately identifiable intangibles not currently recognized under current UK GAAP could include brand names and acquired customer lists. Goodwill and intangibles will continue to be amortised but the presumed life will be five years unless a reliable estimate of the life of the asset can be made.
Companies that currently have goodwill or other intangibles being amortised over more than five years will have to consider whether they are capable of making a reliable estimate in order to justify a longer useful economic life.
FRS 102 requires annual revaluations with changes recognised through the profit and loss account rather than…