Dubbed as ‘incremental improvements and clarifications’, the latest proposed amendments to FRS 102 arising from the first triennial review were published in Financial Reporting Exposure Draft (FRED) 67 in March this year. We highlight the key things that you need to be aware of.
What was the intended goal of the FRC’s review?
As promised, the FRC did not propose any drastic changes or new requirements. Instead, the focus was on making FRS 102 more cost-effective and easier to apply in practice but ensuring the retention of important and useful information in financial statements.
We analyse three areas of change that a busy finance director of a larger entity needs to know.
Revenue recognition is always a key issue
To put any fears to rest in this area, the FRC is only making certain clarifications to existing requirements and is incorporating guidance to help preparers:
- identify the principle and agent in a transaction
- allocate consideration receivable to separately identifiable goods and services within a particular transaction.
Our view: We welcome additional guidance and do not expect any significant change in accounting practice.
Classification of debt instruments is a key challenge
FRS 102 classifies debt instruments (eg bank loans) as either basic (accounted at amortised cost) or non-basic (accounted at fair value). Going forward a new guiding principle will accompany existing rules on classification. Consequently, we might see more debt instruments classified as ‘basic’ where key features of the instrument include the repayment of principal and where interest charged reflects the time value of money and credit risk.
Benefits: There will be less reliance on professional valuations to obtain the reporting numbers. Volatility of reported profits for affected entities might reduce.
Challenges: In terms of classification, we expect that significant professional judgement might still be necessary.
Our view: The accounting for financial instruments will remain challenging but the new principle should help preparers.
Properties occupied by other members of a group
FRS 102 currently requires the treatment of properties occupied by other members of the group as investment property in individual accounts of the ‘Propco’. Going forward the FRC propose to allow such properties to be accounted for at cost (less accumulated depreciation and impairment) instead of at fair value through profit or loss.
Benefits: This is a much welcome and simple, pragmatic solution, which might reduce the cost of reporting for many group companies.
Challenges: Where groups have already incurred costs on obtaining valuations and will have reported fair values they will need to consider whether stakeholders who have benefitted from understanding property values will support a change in policy.
Our view: We warmly welcome this amendment.
Intangible assets and goodwill
The FRC propose to allow an entity to choose to recognise fewer types of intangible assets separately from the goodwill arising on a business combination. This could be through allowing an entity a choice of which classes of intangible assets (eg customer relationships) to recognise consistently on all combinations.
Benefits: Entities might welcome the cost savings (internal and external) from not having to obtain valuations of certain intangible assets.
Challenges: This proposed amendment might confuse less experienced preparers. We are concerned that the proposals will introduce greater inconsistency in the reporting business combinations.
Our view: We have alternative recommendations. In our view, entities should be able to make the following accounting policy choices consistently to all combinations:
- either recognise intangible assets separately from goodwill (irrespective of class); or
- leave all intangible assets subsumed in goodwill and instead disclose what factors have led to the recognition of goodwill.
What other changes make things easier?
We welcome the following proposals:
- additional guidance to help eliminate immaterial information disclosures, which can obscure the more material information
- the removal of unnecessary disclosure requirements such as a share reconciliation and the total cost of inventories expensed
- the reinstatement of disclosure of the net debt reconciliation to support the cash flow statement.
When are the changes applicable?
The new version of FRS 102 will be applicable for periods commencing on or after 1 January 2019 with early application permitted. All changes must be applied together.