March/April 2013

Financial Reporting Update

FRS 102 - the new UK GAAP

The main part of the new UK GAAP regime, FRS 102, has been issued and is effective for accounting periods commencing on or after 1 January 2015 although it may be adopted for periods ending on or after 31 December 2012.  It is based on the IFRS for SMEs but includes some key differences to both EU-IFRS and previous UK GAAP.

The Financial Reporting Council (FRC) has issued FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.  This is the main part of the new UK GAAP regime and follows the issue in November 2012 of FRS 100 and FRS 101 (see the November/December 2012 Update).  A specialist standard (FRS 103) for insurers is yet to be issued.

Under the new structure there will be three types of ‘Companies Act accounts’ – those prepared using any of FRS 101, FRS 102 (with or without reduced disclosures – see below) and the Financial Reporting Standard for Smaller Entities (FRSSE).  In meeting the requirement of the Companies Act for consistency of GAAP across its UK subsidiaries, a group may mix and match any of these for which the subsidiaries are eligible. 

Now that the three principal standards are in place, entities can start to consider which standards best fit their circumstances and when to adopt them.  We discuss the effective dates later in this article.

How does FRS 102 differ from EU-IFRS and current UK GAAP?
FRS 102 is based on the IFRS for SMEs with amendments for application in the UK.  It includes some significant differences from EU-IFRS, including:

  • requiring the Companies Act formats to be applied by all entities, including non-companies;
  • requiring the amortisation of goodwill;
  • permitting the expensing of borrowing and development costs;
  • a “timing difference plus” approach to deferred tax; and
  • a different approach to financial instrument accounting.

Some of the key differences from current UK GAAP include:

  • a different approach to financial instrument accounting, including the recognition of derivatives at fair value;
  • the recognition of deferred tax on revaluations, rolled over gains and fair value adjustments in a business combination; and
  • no multi-employer exemption being available in relation to group pension schemes: any liability (or asset) is recognised on at least one entity’s individual balance sheet.

Entities that currently apply a Statement of Recommended Practice (SORP), e.g. limited liability partnerships and charities, will continue to do so under FRS 102.  Most of the existing SORPs are being updated to reflect the requirements of FRS 102.  Note that an entity that applies a SORP can early-adopt FRS 102 only if the requirements of the current SORP do not conflict with those of FRS 102.

Reduced disclosures
Similarly to FRS 101, FRS 102 includes a reduced disclosure regime that allows the individual accounts of ‘qualifying entities’ to omit certain disclosures provided that certain conditions are met.  A qualifying entity is a member of a group (either a parent or a subsidiary) and:

  • the parent of that group prepares publicly available consolidated accounts that are intended to give a true and fair view; and
  • that member is included in the consolidation on a full-consolidation basis.

Unlike under FRS 101 (EU-IFRS with reduced disclosures), charities may be qualifying entities under FRS 102. 

The exemptions include cash flow statements, certain group share-based payment disclosures and (unless the qualifying entity is a financial institution) disclosure of information about financial instruments. 

In order to take advantage of the disclosure exemptions, the entity’s shareholders must have been notified in writing about, and must not object to, their use. Appropriate disclosure must also be given of the exemptions that have been applied. In addition, certain of the exemptions are contingent on the parent’s consolidated accounts giving equivalent disclosures: the meaning of “equivalent” is considered in the application guidance to FRS 100 (see the November/December 2012 Update).

Financial institutions
The disclosure exemptions in relation to financial instruments are not available to qualifying entities that are financial institutions, and financial institutions are also required to give additional disclosures in relation to financial instruments under Section 34 of the standard. The definition of a financial institution includes any entity whose principal activity is to generate wealth or manage risk through financial instruments, for example banks, building societies, broker-dealers and investment trusts. It does not include a parent entity whose sole activity is to hold investments in other group entities, but is likely to include group treasury companies.

Effective date
FRS 102 is effective for accounting periods commencing on or after 1 January 2015.  This will require the restatement of comparatives for 2014 and the preparation of a transition balance sheet at the start of the 2014 financial year (i.e. as at 31 December 2013 for those with December year ends).  Early adoption is permitted for periods ending on or after 31 December 2012.

Next steps
Consideration should be given at an early stage to which standard(s) entities will apply in 2015.  This will require careful consideration of the effect on taxation, distributable reserves, debt covenants, remuneration schemes and systems, although the ability to pick and choose between the three types of Companies Act accounts on a subsidiary-by-subsidiary basis may allow companies within a group to mitigate such effects.  In addition, entities planning, for example, to hedge account under EU-IFRS, FRS 101 or FRS 102 will need to ensure that appropriate documentation is in place at the date of transition. As noted above, this could be as early as 31 December 2013 even if the standards are not early-adopted.

FRS 102 is available here on the FRC’s website. Please refer also to KPMG in the UK’s web page on the Future of UK GAAP.

KPMG in the UK will publish shortly, Cutting through UK GAAP, which summarises the requirements of FRS 100, FRS 101 and FRS 102 and notes the main differences between FRS 102, EU-IFRS and previous UK GAAP. This publication will be available for download from the Future of UK GAAP web page mentioned above.


Financial Reporting Lab project reports

The FRC’s Financial Reporting Lab has issued reports on the reporting of pay and performance and the presentation of market risk disclosures. The report on pay and performance focused on two of the reporting requirements set out in the new directors’ remuneration regulations that are set to be issued shortly.

Reporting of pay and performance
In June 2012, the FRC’s Financial Reporting Lab issued its first project report on directors’ remuneration reporting as part of the Department of Business, Innovation & Skills (BIS) project to introduce a ‘single figure for remuneration’.  The May/June/July 2012 edition of Update discussed the BIS proposals to replace the current directors’ remuneration requirements (as set out in the Companies Act 2006) with a single figure, as well as the key findings of the Lab’s project to seek views from the investor community and account preparers as to how that single figure might be measured and presented. BIS is set to issue the new directors’ remuneration regulations shortly that will come into force on 1 October 2013.

This latest report from the Lab on the reporting of pay and performance is in response to a request from BIS for the Lab to consider two of the new proposed reporting requirements:

  • the requirement to include scenario charts demonstrating how directors' pay varies with performance; and
  • the requirement to include a graph comparing pay of the chief executive officer (CEO) with company performance.

The project participants favoured a simplified version of the scenario charts initially proposed by BIS and called for practical guidance on the interpretation of the regulations in this area.  There was general agreement amongst project participants that the total shareholder return (TSR) graph required by the current directors’ remuneration regulations provided useful information and should not be abolished. They agreed that it should instead be supplemented by tables setting out historical CEO remuneration levels that allow investors to assess the relationship between remuneration and performance over the longer term.

The Lab report also comments on particular items that respondents had requested clarification of during the initial consultation process, e.g. the disclosure requirements regarding clawback of bonus payments.

The FRC’s Lab report on the reporting of pay and performance is available here.

Investor feedback on changes in presentation of market risk disclosures
The FRC’s Financial Reporting Lab has recently published its findings on a project conducted jointly with HSBC that explored investors’ views on certain changes that HSBC had made to the presentation of market risk disclosures in its financial statements.  In particular, the updated presentation splits the risk disclosures into a main section discussing current period results and ‘dynamic’ risk trends (e.g. changes to assumptions or risk management policies) and an appendix providing the ‘static’ information (e.g. unchanged risk management policies). 

The project found that investors were either neutral or positive towards the change in presentation and that many investors would even welcome static information being moved to company websites, if regulatory changes were made to permit this.

Whilst the report discusses the findings mainly in the context of the banking sector, it nevertheless provides useful general observations regarding the format and content of risk disclosures that investors typically find useful. 

The FRC’s Lab report on the presentation of market risk disclosures is available here.


News in Brief

IFRS 10 transition amendments endorsed for use in the EU
The amendments to IFRS 10, IFRS 11 and IFRS 12, Consolidated Financial Statements, Joint Arrangements and Disclosure of Interest in Other Entities: Transition Guidance have been endorsed for use in the EU with an effective date of 1 January 2014 but may be applied early. The amendments provide additional transition relief on adoption of IFRSs 10 to 12 so that adjusted comparative information need only be provided in respect of one comparative period (i.e. for the period immediately preceding the current one).

Further guidance on the transition to IFRS 10 is available in KPMG IFRG Limited’s IFRS Practice Issues: Adopting the consolidation suite of standards – transition to IFRSs 10, 11 and 12, which is available for download here.


The latest EU endorsement report is available here.


IFRS newsletters and other publications

KPMG in the UK publishes Financial Reporting Matters, a short newsletter to alert you to key changes in UK and International Financial Reporting Standards and UK company law.  It is available for download here. Alternatively, you may subscribe by sending an email to Financial Reporting Matters.

KPMG IFRG Limited has published the following since the January/February 2012 Update, which are available on its web site at


The Application of IFRS: Retail (March 2013)
New on the Horizon: Financial instruments – expected credit losses (March 2013)


KPMG IFRG Limited also publishes In the Headlines, which provide information in relation to new exposure drafts and standards issued by the IASB, as well as any other relevant developments affecting current and future IFRS reporters, including summaries of IASB meetings on a monthly basis.

In the Headlines, Issue 2 – Continuing hedge accounting after derivative novations
In the Headlines, Issue 3 – Reminder: Effective dates of IFRS
In the Headlines, Issue 4 – Expected credit losses
In the Headlines, Issue 5 – Employee contributions
In the Headlines, Issue 6 – Integrated reporting
In the Headlines, Issue 7 – Accounting for rate-regulated activities



FRS 102 - the new UK GAAP »

Financial Reporting Lab project reports »

News in Brief »

IFRS newsletters and other publications »