The Financial Reporting Council (FRC) recently published March 2018 editions of all UK accounting standards. This includes a new version of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (“FRS 102”).
The new version of FRS 102 incorporates all amendments arising from the recent triennial review originally released in December 2017. These changes comprise key simplifications, incremental improvements, clarifications, and editorial amendments. This is a high-level summary of the main changes to FRS 102.
What are the key areas of simplification to FRS 102?
Although there are some other changes to FRS 102, below are the three key accounting simplifications that will have the greatest effect on reducing the cost of reporting going forward.
Good news: Fewer intangible assets will require separation from the goodwill recognised in a business combination.
Challenge: Entities that have already accounted for business combinations under FRS 102 will have already separated intangible assets such as customer relationships. Deciding to recognise fewer intangible assets on future business combinations might create inconsistency and confusion for users.
Implementation: Prospective application is required and this prohibits an entity from subsuming previously recognised intangible assets back into goodwill.
Investment property owned by group companies
Good news: Permission to record investment property owned by a group entity and rented to another group entity by reference to cost, rather than at fair value through profit or loss.
Challenge: Groups that have already reported such property at fair value in individual accounts will need to consider whether stakeholders have perceived a benefit from understanding such property values and whether they will support reporting property at cost less depreciation.
Implementations: It will be possible to revert to historical cost less depreciation or to use a valuation as the property’s deemed cost when retrospectively applying any policy change.
Loans from shareholders who are directors
Good news: FRS 102 will permit a basic loan to a small entity from a person who is a director or within a director’s close family to be initially recognised at transaction price instead of at fair value. A similar concession is available for loans from a member (or within the close family of a member) who is a natural person to a small LLP.
Challenge: Where an entity becomes small and chooses to apply this relief, it must apply the change to transaction price retrospectively.
Implementation: Early application is possible without having to apply all other amendments.
What incremental improvements and clarifications are there?
The following incremental improvements should improve the overall quality of financial statements:
- Re-introducing the requirement to present a net debt reconciliation to support a cash flow statement
- Relief from disclosing remuneration of key management personnel remuneration where there is a legal requirement to disclose directors’ remuneration (or equivalent) and the directors and key management personnel are the same
- Repealing unnecessary disclosure requirements
- Enhancing guidance on the application of materiality in financial reporting.
Furthermore, clarifications on how to account for debt for equity swaps and on how to identify the principal and the agent in a transaction involving revenue recognition reduces the need to look towards International Financial Reporting Standards (IFRS) for additional guidance.
When are the changes applicable?
The above amendments are applicable for accounting periods commencing on or after 1 January 2019 with early adoption permitted. The amendments must be applied together unless available for immediate implementation.
What do we think about the changes?
The accounting requirements of FRS 102 will remain challenging but the simplifications are very welcome. Preparers expecting new reporting challenges can breathe a welcome sigh of relief.
The changes are intended to make FRS 102 easier to use and more cost-effective to apply although some preparers might conclude that the amendments are not relevant to their transactions. Those preparers nonetheless can be thankful that the FRC’s approach to this particular round of amendments might indicate that UK GAAP will not become more complex in the future.
What does the future hold?
For now the FRC have deferred big decisions on whether to align FRS 102 with impending changes to IFRS, in particular regarding new leases accounting and revenue recognition rules.
Meanwhile at Grant Thornton, we are already helping preparers to navigate through the above changes and any uncertainty regarding the future direction of UK GAAP and are in a strong position to help preparers implement the amendments to UK GAAP in a manner that suits their reporting needs.
Where can I find out more?
To discuss any of the changes to FRS 102 and other changes to UK GAAP please contact either Jake Green or Neil Parsons. The new versions of the UK GAAP standards are available for download free of charge from the FRC website.