FRS 100/101 and 102

The new accounting

standards for the UK

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FRS 102 New UK GAAP

What is ‘new UK GAAP’

A complete replacement for all existing UK GAAP except the FRSSE

The separate body of literature currently referred to as UK GAAP will cease to exist

Effective for accounting periods starting on or after 1 January 2015, early adoption permitted

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FRS 102 New UK GAAP

What is ‘new UK GAAP’

Continued

Transition date Earliest opening balance sheet

Year-end 31 December

Opening restated balance sheet is 31 December 2013.

Run old GAAP/new GAAP in parallel for 2014.

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FRS 100 and FRS 101

What are FRS 100 and FRS 101

FRS 100 introduces the new UK GAAP and sets out who can use FRS 101, FRS 102 and the FRSSE.

Also sets out when to use a SORP.

FRS 101 is a reduced disclosure framework for UK subsidiaries of IFRS user groups. Introduces measurement complexity as Companies Act formats to be used.

Generally, not many people will adopt FRS 101.

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FRS 102 New UK GAAPOther matters

Adopt early? Can adopt early and it may be convenient to do so.

SORP If using a SORP (Charity) use the new SORP when finalised.

Update frequency Updated every three years (reference to IFRS 9 financial instruments when published).

Note: Does not have references to the Companies Act as does the FRSSE.

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FRS 102 New UK GAAPOther matters - continued

Simplified basic rules

Contains simplified accounting and measurement rules.

Complex transactions

Where complexity exists refer directly to IFRSs (EU) when directed.

Auditors Refer to other GAAP (auditors now likely to only accept policies set out in IFRSs).

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FRS 102 New UK GAAPOptions available for companies and groups (small/medium/large)

IFRS New GAAP

FRSSE

Listed, AIM, other EU market, quoted debt instruments

Yes No No

Medium and large non-listed entities

Yes Yes No

Small Companies and micro-entities

Yes Yes Yes

Option to use ‘higher levels’ N/a Yes Yes

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FRS 102 New UK GAAP

Companies Act format and content

IFRSs specific format

FRS102 use basic Companies Act formats

Other aspects of companies Act 2006 continue to apply.

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FRS 102 New UK GAAPA warning: SMALL GROUPS BECOMING MEDIUM/LARGE

Current UK GAAP FRSSE to full UK GAAP.Small group to large group.Historic consolidation data required (three years)

Under FRS 102 FRSSE to FRS 102.Small group to large group.Historic consolidation data also required (three years)

Duplicated effort Consider adopting FRS 102 early.

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FRS 102 New UK GAAPWhat about the Companies Act 2006?

Distributable profits Calculated as determined by Full EU adopted IFRS or FRS 102. Use of FRS 101 reduced disclosures will add complexity.

Specific guidance on distributable profits, impact of fair-value accounting

See ICAEW Tech 02/10

This is a complex area, be aware of the effect of fair-value accounting and hedging arrangements if significant

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FRS 102 New UK GAAPWhat about the Companies Act 2006?

Disclosures applicable to both FRS 102 and IFRS

Directors reports content and layout

Business review

Requirement to prepare financial statements

Audit requirements

Directors emoluments/transactions

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FRS 102 Contents of financial statements

Primary statements

Statement of financial position.

Statement of comprehensive income

Statement of changes in equity

Statement of cash flows

Notes (and some….)

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FRS 102 Main changes to look out for

Degree of change Can be very little/can be extensive.

Effects on: • Distributable reserves• bank and other debt

covenants• bonus schemes/share

schemes/profit share arrangements (look out for impact on LLP profit-sharing arrangements)

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FRS 102 Main changes to look out for:Financial instruments

What are they? Interest rate swaps/caps/collars.

Exchange forwards/options

Complex combinations of these/sometimes embedded in other contracts

Most will be fair-valued to profit and loss

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FRS 102 Main changes to look out for:Financial instruments continued

Basic financial instruments (choice 1)

Amortised cost (This is the NPV of the receivable or payable).

Such as: • Trade and other debtors• trade and other creditors• simple bank loans

Other financial instruments (choice 2)

Measure at Fair-value to profit and loss

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FRS 102 Main changes to look out for:Financial instruments continued

Price contract at forward contracted rate?

No longer available.

Hedging: Available subject to certain conditions i.e. documentation/policy/accuracy of forecast transactions.

Accounting treatment of hedged items until maturity

Asset/liability accounting and fair-value reserve through Other Comprehensive Income.

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FRS 102 Main changes to look out for:Defined benefit pension schemes

Income statement Charge will be calculated on the net liability and not investments/liabilities separately

Balance sheet Old UK GAAP option for a Group to show on consolidation only - No.

Net asset/liability must appear either in the sponsoring entity or allocated to the subsidiaries.

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FRS 102 Main changes to look out for:Employee benefits continued

Calculated on an accrual/prepayment basis for all entitlements

Look out for holiday pay/sick pay/bonus schemes

Some additional accruals Collect the necessary information from 1 January 2014!

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FRS 102 Main changes to look out for:Investment properties

Held at fair-value Changes in value to profit and loss WHENEVER fair-value can be determined reliably.

Cannot determine fair-value

Account for as Property, plant & equipment.

‘Split accounting’ for mixed use properties

Not ‘own use’ or ‘trading’

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FRS 102 Main changes to look out for:Intangible assets – EXTERNALLY ACQUIRED

More recognition of these for an acquisition

Brand namesDistribution contractsLicence agreements etc.

Basic life unless demonstrated otherwise

Default 5 years (no longer 20 years)

Reverse impairment Yes

Negative goodwill On balance sheet/release to profit over the periods expected to benefit.

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FRS 102 Main changes to look out for:Intangible assets continued – INTERNALLY GENERATED

Research phase and development phase.

All research costs written off.

Development costs Specific project/commercial viability (flow of economic benefits)

Forbidden - internally generated:

Brands/ Publishing titlesDistribution contractsGoodwillStart-up costsAdvertisingTraining……

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FRS 102 Main changes to look out for: Deferred tax

Timing differences ‘plus’ Basically timing differences similar to current UK GAAP

What is the plus? All ‘Fair-value adjustments’ require deferred tax effects to be recognised.

Examples: • Acquisition fair-values• Revalued fixed assets -

fixed assets/intangible assets)

• Investment properties.22

FRS 102 Main changes to look out for: Merger accounting/business combinations

Permitted only for: Internal group reconstruction.

Some public benefit entity combinations

Business combination An acquirer must be identified/use the purchase method.

Acquisition costs added to cost of investment

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FRS 102 Main changes to look out for: Business combinations - continued

Goodwill default amortisation period

5 years (was 20)

Minority interests renamed Non-controlling interests

Contingent consideration Continue to adjust the goodwill (no change)

Accounting estimates Adjust up to 12 months (shorter than the old ‘to the next balance sheet)

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FRS 102 Main changes to look out for: Group Investments and loans

Investment in subsidiaries Cost less impairment unless quoted/listed in which case fair-value through profit and loss.

Intra-group loans If due on demand hold at cost less impairment (as current UK GAAP)

Internal interest charge/tax implications

If not due on demand hold at amortised cost less impairment

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FRS 102 Main changes to look out for: Leases

Rent free periods/other incentives

Release over the expected period of the lease (not just to the first optional break period).

Lease commitments Disclose amount of expected annual payments year-by-year

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FRS 102 Main changes to look out for: Associates – PARENT COMPANY

Consolidated financial statements

Must use equity accounting. UNLESS investments held as part of an investment portfolio.

Investment portfolio Fair-value through profit and loss

Proportional consolidation NOT available.

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FRS 102 Main changes to look out for: Associates - NOT A PARENT

Choice of: • Equity accounting (‘gross equity method’ removed)

• Cost less impairment (subsidiary only not parent)

• Fair value accounting (through Other Comprehensive Income)

• Fair value accounting through profit and loss.

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FRS 102 Main changes to look out for: Joint ventures

Joint venture Contractual basis

Three types recognised • Jointly controlled operation• Jointly controlled asset• Jointly controlled entity

(Including LLP)

Joint control Only exists where unanimous agreement required for strategic decisions

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FRS 102 Main changes to look out for: Other accounting issues:

Borrowing costs Option to capitalise interest into asset under construction retained.

Restatement of errors Use of ‘material’ rather than ‘fundamental’ will result in more restatements of opening balance sheets

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FRS 102 Main changes to look out for: Other accounting issues:

Government grants An accounting choice for income recognition:

Performance model – recognise income when all conditions met

Accruals model – match to related expenditure

Deduct from cost of asset? No!

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FRS 102 Main changes to look out for: Other accounting issues:

Exchange movements Select functional and presentation currencies (new)

Exchange differences arising from consolidation NOT re-cycled to income statement (maintains current position)

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FRS 102 Main changes to look out for: Other accounting issues:

Discontinued operations Columnar presentation in income statement preserved

Must have been disposed of by the year-end).

Old GAAP – disposal within 3 months of year-end

Net profit or loss to be disclosed.

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FRS 102 Main changes to look out for: Other accounting issues:

Also consider:

Fair value accounting Emphasis is more on fair-values.

Change of basis on which the business is reported on – need to be continuously aware of this.

Related parties Concept of ‘key management personnel’ and wider disclosures.

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FRS 102 Main changes to look out for: Other accounting issues:

Also consider tax issues: Fair value accounting – particularly financial instruments

Amortisation of intangibles

Alternative accounting treatments permitted

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FRS 102 Main changes to look out for: Other accounting issues:

SORPs These are to be progressively rewritten to comply with FRS 102.

Charity SORP draft already issued.

Companies Act 2006 is still there!

Capital maintenance/use of reserves/share premium etc.

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FRS 102 Main changes to look out for: Other things to think about:

Describe the basis of preparation: two types of accounting policy:

Accounting policies to be rewritten.

Significant accounting policies

Critical accounting estimates and judgments

Statement of compliance Specifically required.

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FRS 102 Main changes to look out for: Other things to think about

Some practical issues: Accounting systems – need to change?

Compilation and sources of fair-value data.

Corporation tax and deferred tax/’iXBRL’ tagging methodology

Stakeholder education/owners/key employees/banks

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FRS 102 Main changes to look out for: Other things to think about

Questions

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