UK Undergoing major changes to its financial reporting standards.
By Kassim Harunani, Lawrence Grant
Changes and updates have been introduced to the UK GAAP which relate to the FRSSE (Financial Reporting Standards for Small Entities) and FRS’s (Financial Reporting Standards), by the FRC (Financial Reporting Council) in the form of FRS 100, FRS 101 and FRS 102. The revisions fundamentally reformed financial reporting. These 3 financial reporting standards will replace almost all extant standards.
These new standards are issued as part of the FRC’s fundamental reform of existing accounting standards, bringing them into alignment with the International Financial Reporting Standards (IFRS). The standards will be applicable to all companies and entities in the UK and Republic of Ireland, other than listed groups. They will be effective from 1 January 2015 (i.e. for accounting periods commencing 01 January 2015), but may be adopted early for accounting periods ending on or after 31 December 2012.
They are progressively replacing the different national accounting standards that have evolved over many years. As international shareholding and trade become more prevalent, investors, accountants, regulators and auditing firms all recognise the importance of having common standards in all areas of financial reporting. This drive towards global standardisation will make company accounts more readily understandable. It will become easier to ‘compare apples with apples’ and there will be greater consistency of reporting within groups, too. The new standards are as follows:-
- FRS 100: Application of Financial Reporting Requirements: sets out the overall financial reporting requirements, giving many entities a choice of detailed accounting requirements depending on factors such as size, and whether or not they are part of a listed group.
- FRS 101: Reduced Disclosure Framework: applies to the individual financial statements of subsidiaries and ultimate parents, allowing them to apply the same accounting as in their listed group accounts, but with fewer disclosures.
- FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland; providing succinct accounting and reporting requirements for unlisted entities. The standard completes a fundamental modernisation of UK and Irish accounting standards. It Introduces a single standard based broadly on the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs).
FRS 102 – Its introduction will have a major impact on the financial statements of any entity currently preparing accounts under UK GAAP.
Overview of the changes – as a result of FRS 102
The adoption of FRS 102 will lead to some changes to the format of the financial statements and the disclosures required, but most importantly for many businesses there will be changes to the numbers as well. FRS 102 will change the recognition criteria for various assets and liabilities, the basis on which some items are measured and the treatment of certain gains and losses compared to current UK GAAP.
Changes in the numbers may have implications beyond just the accounts. For example, where loan covenants are calculated based on profit or balance sheet measures, transition to FRS 102 could affect the headroom on those covenants. The starting point for applying FRS 102 will be to restate the opening balance sheet at the start 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.
Snapshot of the areas with the biggest differences between FRS 102 and current UK GAAP
Which differences on transition will have the biggest impact will depend on the individual circumstances of each entity. Some of the key differences are in the following areas:
- Terminology used in the financial statements
- Cash flow statement exemptions
- Error correction by way of prior-period adjustment
- Investment properties recognition
- Deferred tax recognition on revalued assets
- Grants accounting policy
- Investments in listed shares recognition
- Stock valuation methods available
- Lease accounting
- Classification of leases between finance lease and operating lease
- Recognition of lease incentives (rent free period).
- Accounting methods available for business combinations
- Intangible assets and goodwill
- Changes to Useful economic lives if no reliable estimate can be made
- Recognition in business combinations where
- Disclosure exemptions for parent company and subsidiary accounts
- Employee Benefits - provisions for unpaid benefits
- Presentation currency – financial statement reporting currency
The above information can only serve as an introduction to the main issues raised by the FRC’s fundamental changes to UK GAAP. The impact of these changes will vary from entity to entity.
Lawrence Grant, Chartered Accountants,London, UK
published: January 2014