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.
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).
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.
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.
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.