1 0 2 F RS g ui de - accountancylive.com FRS... · accounting new uk gaap n 4 accountancy frs 102 guide 2014 accounting for intercompany loans Loans to and from other group companies

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contents n accountancy frs 102 guide 2014

ISSN 0001-4664 © 2014 Wolters Kluwer (UK) Ltd.

3 Ten things you need to know

Helen Lloyd FCA gives an overview of the essentials for smooth adoption

8 Intercompany loans

10 Bank debt

12 Forward contracts

12 Deferred contracts

15 Business combinations

17 Associates and joint ventures

19 Deferred tax

21 Investment properties

23 Financial statements

26 Sources of new policies

28 Impairment reviews

30 Five steps to transition

An action plan to make sure you are ready for the new accounting rules. By Andrew

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Welcome to our exclusive guide to FRS 102, The Financial Reporting Standard

applicable in the UK and Republic of Ireland, also known as new UK GAAP. The FRS will be effective from 1 January 2015, with early adoption available for accounting periods ending on or after 31 December 2012.

In this guide you will find an overview of the ten key issues to consider when planning your move to the new UK GAAP, written by our accounting expert, Helen Lloyd FCA. This includes ten chapters focusing on the key issues to consider from the new format for financial statements, how to report loans and derivatives and the new approach to deferred tax under the revised rules.

In addition, there is a detailed five-step refresher article about the key steps to consider when making the transition, written by Andrew Davies ACA, lead accounting expert at EY. This section includes useful tips and advice on preparing an impact assessment, reviewing disclosures, how to prepare a skeleton set of financials and populate the opening balance sheet.

As FRS 102 evolves, we will continue to cover the topic in detail in Accountancy magazine every month and online at www.accountancylive.com. To keep up to date with all new developments, why not sign up to receive our free newsletter, sent three times a week to registered readers, at www.accountancylive.com/newsletter

making the frs 102 transition

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FRS 102 contentS

n new uk gaap accounting frs 102 guide 2014 accountancy

Helen Lloyd FCA casts an expert eye over the key differentiators in the UK’s

brand new accounting standard

March 2013 saw a ground-breaking event for UK financial reporting with the release of FRS 102, The Financial Reporting Standard applicable in the UK and Republic

of Ireland. This new standard replaces current UK accounting standards, for periods beginning from 1 January 2015, and so has very broad relevance.

The process of introducing FRS 102 has been a long and sometimes painful one, with repeated consultations by the Financial Reporting Council (FRC) and, on occasion, some bitter debate. It was, however, agreed by most that some change was inevitable, as the body of UK standards had become an awkward hybrid of Statements of Standard Accounting Practice (SSAPs), which were usually relatively succinct; Financial Reporting Standards (FRS), developed later and

ten things you need to know


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accountancy frs 102 guide 2014

accounting for intercompany loans Loans to and from other group companies are financial instruments and are in the scope of sections 11 and 12. They will usually be classified as basic and will therefore need to be held at amortised cost, with a finance charge recognised each period (as for any loan). This will be a change in practice for companies with non-interest bearing debt which have previously just recorded the debt at face value on the balance sheet and left it there until settlement. It will be necessary to use a market interest rate for similar debt to discount the initial carrying amount accordingly to present value, then use the effective rate to accrue interest charges, over the life of the loan, so that at the end of its life its value equals the repayment amount.

unusual terms in bank debtAccounting for bank loans received was usually straightforward under UK GAAP. Now, though, preparers will need to review their loan

documentation carefully to establish whether there are any terms that mean the loan would fail to be a ‘basic financial instrument’ (meaning that it would need to be recorded at fair

value). Terms that could give problems include changes in interest rates triggered by a movement in a share index, variable rates that incorporate a cap or collar, and some options to settle in an alternative currency.

forward contractsCompanies that have a practice of using forward currency contracts to manage their exposure relating to planned sales or purchases, for instance of stock or fixed assets, may, under old UK GAAP, have used a type of ‘synthetic accounting’

where transactions and the related outstanding balances were accounted

for using the contracted rate rather than the spot rate. This is not permitted under FRS 102. Instead the original transaction will be recorded at the transaction date rate, with outstanding balances then retranslated at the year-end rate, and forward contracts accounted for

with more expansive content, UITF Abstracts which covered finer application details, and the later set of standards based on International Financial Reporting Standards (IFRS).

Although the former Accounting Standards Board (ASB), now reorganised as the Accounting Council, did not approve standards for use in the UK unless they were broadly consistent with the framework set out in the statement of principles, the tone and style of the later standards, and their emphases, did not sit entirely comfortably with the standards that were already in place.

So, the time was right for a clearing out of all existing standards and guidance, and replacement with the new suite of standards, FRS 100 (determining which reporting framework applies to which entities), FRS 101 (setting out a reduced disclosure framework for qualifying entities choosing IFRS recognition and measurement principles) and FRS 102, the new standard containing the detailed requirements that were previously in the body of SSAPs and FRSs.

This article sets out 10 key features of FRS 102 which are likely to lead to significant changes for preparers.

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separately by being held at fair value, with changes in profit. Hedge accounting is available as an alternative, although many would find its application too onerous.

business combinationsOld UK GAAP ‘acquisitions’ are rebranded as ‘business combinations’ under FRS 102, and while the broad accounting principles

are the same, there are some differences in detail. When determining the fair value of assets and liabilities acquired,

an acquirer may need to bring on to the balance sheet items such as contingent liabilities which had not previously been included. Also in making adjustments after initial accounting, the cost of the investment may be adjusted indefinitely but the values of assets and liabilities acquired can only be adjusted in the 12-month period following the acquisition (unlike in FRS 7, Fair Values in Acquisition Accounting, where adjustments can be made in two post-acquisition balance sheets, giving a theoretical period in some cases of almost two years).

No guidance is given on reverse acquisitions; group reconstructions are addressed briefly with a summary of merger accounting, although there is no detailed application guidance.

accounting for associates and joint venturesAn investor in an associate must use equity accounting in its group accounts, if it is a parent company. If it is not a parent (and therefore does not prepare group accounts) it has a choice between cost and fair value, though

there is also an overriding requirement that if an investment in an associate is

just part of an investment portfolio, it must be held at fair value with changes in profit. Other entities choosing fair value measurement have the option of showing movements in profit or in other comprehensive income (OCI), following the guidance in section 17 for revaluing property, plant and equipment.

The FRS 102 accounting for joint ventures uses the IAS 31, Interests in Joint Ventures, model (not the new IFRS 11, Joint Arrangements, model) and defines jointly controlled operations, jointly controlled assets and jointly controlled entities: preparers will need to establish how their existing structures fit into this

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model. Jointly controlled entities (those that use a separate legal structure in which all the venturers have an interest and share control) must be accounted for in group accounts using the equity method (there is no allowance for the gross equity method that was available in FRS 9, Associates and Joint Ventures).

deferred taxThe section in FRS 102 that covers current and deferred tax has been drafted based on the timing differences approach that was used in FRS 19, Deferred Tax, so much of it will be familiar. It has been modified, though, to a ‘timing differences plus’ approach, so

great care will be needed in its detailed application. For instance, FRS 102 requires

that deferred tax is provided when assets are revalued (under FRS 19, no deferred tax was recognised on revaluation gains unless there was a binding commitment to sell). Unlike under FRS 19, discounting is not permitted.

investment propertiesAgain the definitions for investment properties are very similar to those in

old UK GAAP, although FRS 102 includes properties let to other group companies in

its definition, unlike SSAP 19, Accounting for Investment Properties, which scopes them

out. The required basis of valuation in FRS 102 is ‘fair value’ rather than the SSAP 19 ‘open market value’, and movements each period are recognised in profit, rather than directly in equity.

financial statements presentationThe FRC has struggled with reconciling the original presentation requirements that were included in the IFRS for SMEs with the requirements from Company law. The approach finally chosen has been to incorporate references

to the basic primary statement formats in the legislation, while retaining other content from the IFRS for SMEs. So, entities will produce one primary statement showing profits and losses, and one showing OCI, or may choose to combine these (unlike under FRS 3, Reporting Financial Performance, where the statement of total recognised gains and losses (STRGL) was always distinct from the profit and loss account). It will also be acceptable, in some circumstances, to include other changes in equity, giving one long ‘statement of income and retained earnings’ which will remove the need for a separate statement of changes in equity.

sources of new policiesBecause FRS 102 is (relatively) concise, it contains general outlines and principles rather than detailed guidance. Entities needing an accounting policy for a transaction outside this guidance must look first

to the remainder of FRS 102, then to any relevant SORP (Statement of

Recommended Practice), then to the higher level guidance in section 2, and ‘may

also consider’ requirements and guidance in full EU-adopted IFRS. This means that care will be needed on transition so that all current policies are assessed and there is an understanding of where these policies have come from, and whether they are consistent with FRS 102 or with full IFRS. A policy that was developed based on UK GAAP, but contradicts IFRS, may not be acceptable under FRS 102.

impairment losses and their reversalThe calculation of impairment losses on non-financial assets is based on a different way of grouping them, and may give different

results from FRS 11, Impairment of Fixed

Assets and Goodwill. For instance, on an acquisition, goodwill is allocated between cash-generating units based on which parts of the whole entity it is expected to benefit, instead of simply being assessed based on the business that it came in with. Also unlike under FRS 11, impairment losses are reversed if the reasons for the impairment have ceased to apply, even if the asset is goodwill.

helen lloyd fcaAudit and accounting writer, Wolters Kluwer www.cch.co.uk



http://www.cch.co.uk

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accounting frs 102 guide 2014 accountancy

Following on from the article on the new UK GAAP (Getting to grips with the new UK GAAP, May 2013), this piece is the first in a series exploring in more detail each of the 10 areas where FRS

102, the Financial Reporting Standard applicable in the UK and Ireland, has significant differences from current UK GAAP. The first issue is the accounting for intercompany loans.

It is very common for groups to manage their finances by setting up loans between the parent and its subsidiaries, or directly between subsidiaries. This allows cash to be used where it is needed and may well be cheaper than using external finance if the subsidiary receiving the loan is perceived as risky so that the rate it could borrow at externally would be high. Often, though, the loans are not on strictly commercial terms: perhaps they bear low or zero interest, or have less formality in their repayment arrangements, and it is these non-commercial aspects of intragroup loans that may have accounting consequences under FRS 102.

the requirementsIntercompany loans, like all financial assets and liabilities, are in the scope of either section 11 or section 12 of FRS 102. Most are likely to be ‘basic financial instruments’ in section 11, being debt instruments with a fixed or straightforward variable return, and no other complexities that

would take them outside the definition. Loans to and from subsidiaries that are

repayable on demand are explicitly listed in section 11 as being likely to fall within its scope.

These basic instruments are initially measured at ‘the present value of the future payments discounted at a market rate of interest for a similar debt instrument’. After this initial recognition, they are measured at amortised cost using the effective interest method, which means an interest charge is recognised systematically over the life of the loan, giving a constant rate of return.

the mechanicsWhen a company adopts FRS 102 for the first

time it must assess all of its accounting policies and ensure that the assets and

liabilities on its transition date balance sheet are measured in accordance with the standard (except where there are specific exemptions). Generally the amortised cost method will be

familiar to preparers, although the results may be more

troubling when, as in these cases, an interest charge is recognised

despite the absence of cashflows. In the case of zero-coupon loans

which have previously been held, unadjusted, at their face value, the balances will need to be revisited to recreate the accounting from

their inception in order to give an amortised cost figure at the transition date (see figure 1).

intercompany loansHelen Lloyd

considers the accounting

treatment for intercompany

loans under the new

UK GAAP

FRS 102: paRt 1FRS 102: paRt 1

n new uk gaap


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the difficultiesThe biggest challenge for a recipient of a zero-coupon loan attempting to meet these requirements will be establishing a ‘market rate of interest’ to use in discounting the future cashflows. It may be that a subsidiary is borrowing from elsewhere within its group precisely because it cannot easily access external finance, or not at a reasonable rate.

In this case, if the only finance it could obtain would be at an unfeasibly high cost, the imputed interest charge on the accounting will also be high, which may not be a palatable result. The parent’s borrowing rate would often not be a good proxy if the group is generally lower risk than this individual company, even though it does more accurately reflect the cost to the group of financing the subsidiary.

Large companies may already have found that the lender in an intercompany arrangement has had its taxable profits increased by imputed interest income, because of transfer pricing rules.

Another consideration is the effect of a parental guarantee. A subsidiary which could not obtain finance on its own merits may have access to more options, at a cheaper rate, if its parent guarantees the loan. This should probably be taken into account in determining a market rate, since it reflects the reduction in risk associated with parental involvement.

the exemptionsIn its work developing the standard, the Financial Reporting Council (FRC) noted that these requirements could cause havoc for dormant companies with long-standing, unsettled

intercompany balances: they would all need to begin recognising interest

accounting

9


and thus would lose their dormant status. As a result a special measure was brought

in allowing dormant companies not to re-measure any of their assets or liabilities on transition, until the balances change or new transactions take place.

the alternativesUK companies adopting International Financial Reporting Standards (IFRS) for the first time in recent years are familiar with the problem of having to introduce more complex accounting for what was previously a straightforward item.

One response often seen in practice is to ensure that all intercompany loans include a term stating that they are repayable on demand, since section 12 makes it clear that the fair value of an amount repayable on demand is not less than the face value and this appears to apply equally to the present value of these amounts. Choosing to include this term, though, does mean that the receiving entity must show the whole loan amount as a current liability, which could damage the appearance of its balance sheet (and thus reduce the likelihood of its being able to raise external finance in the future).

If a loan does not specify any terms, the default would normally be to assume it is repayable on demand, since the borrower has no enforceable right to avoid repaying the money. Groups that have in the past relied on informal arrangements and verbal agreements may wish, then, to introduce more formal documentation before their transition date to ensure their intentions are reflected in the contractual terms and in the accounting.


ExAmplE: intErEst frEE loAn on fivE-yEAr fixEd tErm

Challengeco, a subsidiary company, adopts FRS 102 for its December 2015 accounts and, therefore, has a 1 January 2014 transition date.

At the beginning of 2012 it took out a £1m interest free loan from its parent company, with a five-year fixed term. Assuming it can determine that a market rate of interest at the time would have been 12%, it can go back to the inception date and establish what the accounting would have been from the outset.

opening value interest at 12% Closing value

2012 567,427 68,091 635,518

2013 635,518 76,262 711,780

2014 711,780 85,414 797,194

2015 797,194 95,663 892,857

2016 892,857 107,143 1,000,000

The 2013 closing value of £711,780 is used as the carrying value in the transition date balance sheet, and the accounting continues from there.


section 12 makes it clear that the fair value of an amount repayable on demand is not less than the face value


n new accounting


Many private companies will need external financing at some point in their life cycles, because of the limited availability of private equity finance. The focus during

the arrangement of a bank loan will probably be on the timing of cashflows and the ultimate cost of borrowing, with a working assumption that nothing out of the ordinary will arise. This can mean that borrowers sign up to loans with some surprising details, which could have accounting consequences under FRS 102, The Financial Reporting Standard Applicable in the UK and Ireland, that would not have been even considered under current UK GAAP.

the requirementsUnder section 11 of FRS 102, financial liabilities (such as bank loans) are assessed for whether they qualify as ‘basic’ (there is no name for those that do not qualify, though here we will refer to them as ‘non-basic’). The conditions to qualify make reference to:

n How returns to the holder are calculated. These may be a fixed amount (for instance where eventual repayment is of the principal plus a premium), a fixed rate, a variable rate

based on a single index (for instance the Bank of England base rate), or a combination of fixed and variable rates (for instance base plus 2 points, but not base minus 2 points);

n Protection for the holder from losing its principal;

n Prepayment options, and whether they are restricted to those based on deterioration in credit risk or on changes in regulations; and

n Conditional returns.

the consequencesLoan liabilities classified as basic are measured initially at proceeds, and then in the balance sheet at amortised cost. This will be a familiar process from FRS 4, Capital Instruments, and FRS 25, Financial Instruments: Presentation. Those liabilities which are not basic, even by virtue of trivial-seeming clauses which breach the basic conditions, are measured at fair value, re-measured each reporting date, with changes in profit.

some common ‘unusual terms’A variable rate loan with an interest rate cap or collar would fail the definition of basic because the return to the holder is not straightforwardly fixed, variable or a combination. This applies

Helen Lloyd considers the treatment of unusual terms in bank debt and external loans

bank debtFRS 102: paRt 2FRS 102: paRt 2

accounting frs 102 guide 2014 accountancy n new uk gaap

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even where the cap has little or no commercial substance, for instance if a borrower took out a variable rate loan now, with a 2 year life, and an interest rate cap at 30%.

A loan where the issuer has early repayment options or where the lender could demand early repayment needs to be examined very carefully. The wording in section 11 is tortuous but can be untangled to say that a loan can include early repayment provisions and still qualify as basic if the right to invoke the provisions is not based on contingent future events.

So, a loan where either party has the right from the outset to terminate at any time would still qualify as basic; one where the borrower could choose to repay early if interest rates rose above a certain level would not be basic. The only situations where contingencies are acceptable (that is, would not lead to immediate disqualification from being basic) are where they are there to protect the bank from changes in the issuer’s credit risk, or are based on breaches of loan covenants.

Looking at the second example, a loan that includes a condition that the bank can demand repayment immediately if interest cover falls below a certain level, will still qualify as basic

even though it contains a repayment provision contingent on future events.

other problematic conditionsIt is worth pausing to consider other kinds of terms in bank loans that would stop an instrument from being classified as basic. Events that might be specified as triggering early repayment of a loan include a sale or flotation of the borrower, a change in the nature of its business, or a change in the scale of its operations. All of these are contingent on future events so if they are specified as repayment triggers in the loan agreement, they will render it non-basic and force fair value accounting.

What about embedded derivatives?Readers familiar with IAS 39, Financial Instruments: Recognition and Measurement, may identify some of the above clauses as giving rise to embedded derivatives, which under IAS 39 would (if they met all of the conditions) be pulled out at the beginning of the loan and then accounted for separately at fair value through profit or loss, thus leaving the loan itself (the ‘host contract’) to be measured at amortised cost. This option is not available under FRS 102 which, in line with IFRS 9, does not use the concept of an embedded derivative. Instead, some features which might previously have given rise to an embedded derivative instead ‘pollute’ the whole host, so that it is all measured at fair value.

avoiding problemsTo ensure this part of the standard is properly applied, preparers will need to carefully review all of their loan agreements. If problems are identified before the date of transition (which will be 1 January 2014 for calendar year companies) then it may be possible to arrange for agreements to be rewritten to remove or reword any clauses that have unintended financial reporting consequences. Since the assessment of whether or not instruments are basic is performed as at the transition date, with no requirements to go back in time and account for the effects of renegotiations, this would be a simple and effective way of ensuring ‘easier’ accounting. Of course, this may not always be possible or, even, preferable – some complex conditions in loans are carefully phrased to manage the lender’s risk and returns, so the lender may be unwilling to change them.

For those, though, that are merely a result of the use of non-tailored agreements, this could be a helpful way of easing the reporting burden with no change to the underlying economic position.


a loan that includes a condition that the bank can demand payment immediately... still qualifies as basic

accountancy frs 102 guide 2014 accounting

bank debt

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n new UK GAAp accounting


This article is the third in a series exploring in more detail each of the 10 areas where we have highlighted that FRS 102, The Financial Reporting Standard Applicable in the UK and

Ireland, has significant differences from current UK GAAP. The next issue to look at is the accounting for instruments used to manage risk, such as forward contracts and interest rate swaps.

risk managementFor companies that regularly buy fixed assets or stock priced in foreign currencies, or that make sales overseas, there is an exposure to fluctuations in exchange rates, particularly where there is a significant time lag between when the price is agreed and when the items are paid for. Those in this position may choose to manage their risk by taking out forward contracts to buy or sell amounts of currency broadly equivalent to the amounts expected to be paid or received (or perhaps to cover a proportion of the exposure).

Similarly, companies exposed to interest rate fluctuations because they have borrowed money at variable rates may seek to stabilise their cashflows by taking out an interest rate swap, exchanging the variable rate for a fixed rate.

current uk gaap accountingCurrent UK GAAP does not, in general, require any recognition in the primary statements of contracts such as forwards or swaps. There are, however, a couple of circumstances where a type of synthetic accounting is available, so that the effect of the contract can be taken into account.

For a floating to fixed interest rate swap taken

out to mitigate risk on a floating rate loan, the two instruments are treated together, thereby accounting for the loan as if it were at a fixed rate. For foreign currency transactions where a matching forward contract is entered into at the transaction date, the original transaction may be translated at the contracted rate rather than, as would otherwise be required, at the spot rate.

frs 102 approachAs we have seen elsewhere in this series, FRS 102, with its IFRS-based [International Financial Reporting Standards] approach, starts in a very different place for financial instruments.

Arrangements such as forward contracts and interest rate swaps are financial instruments, and would be in the scope of section 12, since they would not meet the definition of ‘basic’. This means that as a default, they would be held on the balance sheet and re-measured to fair value each reporting date, with changes reported within profit (see box).

commercial decisionsFor many, the application of the FRS 102 requirements will result in a baffling outcome. It can seem counterintuitive to recognise volatility in profit relating to a forward contract or a swap, when the end result (in terms of the value of the actual cashflows) is known at the outset.

There are two available avenues to explore for those concerned by this. The simplest way to address accounting consequences that could confuse users is through disclosure, with a detailed description of the accounting policy and an explanation of the reported movements (effectively saying ‘the charge to profit this year is because

Helen Lloyd FCA considers

the treatment of forward contracts

and risk management

instruments

accountingn new uk gaap

forWard contracts


frs 102 guide 2014 accountancy

12

accounting aap

exchange rates have not moved as we expected; we do, however, benefit from certainty about the amount of cashflows, and made this a priority’).

Alternatively, some entities will choose to use the hedge accounting provisions of section 12, although the Financial Reporting Council (FRC) has indicated that it intends to replace these sections with an Exposure Draft expected later this year. The current version would allow, in some circumstances, for the changes in value of the forward contract to be recognised initially in other comprehensive income, rather than profit, and only released to profit when the transaction completes, which means the accounting is better aligned to the economic outcome. There are conditions to be met, though, and this option would require some preparatory work.

be preparedThere are no exemptions from reporting instruments such as swaps and forwards at fair value, so calendar-year entities with open positions at the end of 2013 will need to value these items as at their 1 January 2014 transition date. Those that plan to hedge account will need to have documentation in place by the transition date, but may need to delay preparing this until there is better sight of the detail and timing of the changes to the hedging part of the standard.


Current UK GAAp –

£ strengthens

frs 102 – £ strengthens

[$1.5-$1.5- $2-$2.1]

Current UK GAAp –

£ weakens

frs 102 – £ weakens [$1.5-$1.5-

$1-$0.9]

December 2015 – forward contract value

- - - -

2016 – (charge)/credit to profit - £75k gain - £150k loss

December 2016 – forward contract value

- £75k asset - £150k liability

December 2016 – creditor value £300k £225k £300k £225k

2017 – charge/credit to profit - £11k gain - £50k loss

March 2017 – initial carrying value of asset

£300k £225k £300k £450k

Note: the fair values attributed to the forward contract are simplified for the purposes of the illustration, taking no account of the time value of money

new uk gaap n accounting

ExamplE: currEnt uK Gaap vs Frs 102

In December 2015, Company Q commits to purchasing a piece of plant for $450k, with delivery expected in December 2016 and settlement in March 2017 (it is a bespoke piece, hence the long lead time). To cover its exposure to exchange rate fluctuations, at the same time as Q commits to the purchase it takes out a forward contract at $1.5:£1, to purchase $450k for £300k in March 2017.

If the accounting were under current UK GAAP, then in its December 2015 accounts Q might disclose the purchase contract and the currency contract, but there would be no accounting consequences. In its December 2016 accounts, the $450k liability (because the machine has been delivered) would be recorded at £300k, using the contracted rate.

Under FRS 102, the forward contract is initially and subsequently recorded at fair value. This will usually initially be zero, and might well still be

very low by December 2015 (though its value would need to be properly assessed for materiality purposes).

At December 2016, however, the value would depend on what has happened to exchange rates, and what is expected to happen before March 2017. If, for instance, the rate has moved to $1:£1 (and is not expected to change radically), a contract to buy at $1.5 is valuable, so would be an asset in the balance sheet, and a gain would be reported in 2016; if the pound’s value has risen to $2 then Q is tied to a bad deal, in that it will be paying more than the spot rate, so there will be a liability in the balance sheet, and a loss in 2016.

The $450k year-end liability is, under this accounting, translated at the year-end spot rate. When it is settled in March 2017, there will be a gain or loss on settlement both of the creditor and of the forward contract.

13



forWard contracts


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The next significant changes to UK GAAP brought in by FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland, relate to the accounting for

business combinations.

Acquisitions v business combinAtionsThe language in FRS 102 is a little different from that in current UK GAAP. Section 19 is about ‘business combinations’ (rather than FRS 7, Fair Values in Acquisition Accounting), which includes any bringing together of two or more businesses into one entity. One of the first requirements is to identify which of the combining businesses is the acquirer, meaning that no separate guidance is given for ‘reverse acquisitions’ because these are simply dealt with by identifying the legal acquiree as the accounting acquirer. The crucial part is that the familiar fair value exercise on the acquisition balance sheet is performed, as in FRS 7, but the accounting acquirer’s asset and liabilities are not revalued.

Group reconstructions (within a fairly narrow definition) are also covered, with merger accounting permitted, but the standard does not seem to allow for the possibility of true mergers. Realistically, these are rare, and UK GAAP preparers have always found it hard to meet the many conditions that were imposed by FRS 6,

Acquisitions and Mergers, and company law. But the exclusion here means that in every case where two unrelated entities are brought together, one will have to be identified as the acquirer, even if they are very similar in size, the boards will be brought together, all holders will retain their proportion of voting rights, and so on.

vAluing Acquisition bAlAnce sheetFRS 102 does not bring in many changes in respect of valuing the acquisition balance sheet: the broad principle of reporting acquired assets and liabilities at their fair value continues to apply. There are, though, some nuances of application to watch out for. Deferred tax, for instance, will in some cases need to be provided in respect of valuation uplifts: under FRS 102, but not under current UK GAAP, this would include revaluations of fixed assets. So a company buying a business now which has fixed assets with a book value of £150,000 but a fair value of £550,000 would recognise the higher value in the acquisition balance sheet, but would not provide deferred tax unless there was already a binding commitment in place to sell the asset.

Applying FRS 102 to the same transaction, a deferred tax liability would be recognised based on the revaluation uplift regardless of the acquiring company’s future intentions, with the other side of the entry in goodwill – this gives

Helen Lloyd FCA reviews

accounting for business

combinations in part four

of our series on the new UK GAAP


Accounting frs 102 guide 2014 accountancy n new uk gaap

businesscombinAtions

15




16

a substantial numerical difference in the initial carrying amount of goodwill (and hence also in the annual amortisation charge).

subsequent AdjustmentsThe rules in current UK GAAP relating to changes to the initial accounting for an acquisition are relatively straightforward. Adjustments to the fair value of assets and liabilities acquired may be made up to the second balance sheet following the acquisition: so if a company acquired a subsidiary in January 2011, it would make a provisional estimate of fair values at that point, but then could revisit these in its December 2011 accounts, and then again in its December 2012 accounts. At each point, any adjustments would be made through goodwill (that is, with no effect on profit). If the cost of the acquisition includes contingent elements, the preparer estimates a value for this contingent amount, and then adjusts this value for as many accounting periods as necessary until the actual cost is finalised.

Under FRS 102, there is a strict 12-month limit for adjustments to the fair values of assets and liabilities acquired: after that point, it would only be acceptable to adjust the initial accounting in the case of a material error. Where the purchase consideration is contingent on future events, an estimate is included only if it is probable there will be an outflow and this can be measured reliably.

PiecemeAl Acquisitions, PArt-disPosAlsA further consequence of the FRS 102 definition of a business combination is that goodwill is only recognised relating to the single transaction when an entity gains control of another. So, if a company acquires 60% of a subsidiary and then, later, another 30%, no additional goodwill is calculated on this second tranche, regardless of the pricing, any changes in fair value, etc. Similarly, if an investor held a 40% stake already and increased this to 55%, then at the point when control passes one simple calculation is performed based on the purchase price and the fair value of assets and liabilities at that date. If the stake then increases further, no entries are made to goodwill.

This is a more straightforward approach than the convoluted calculations sometimes required by UK GAAP, though some will argue it presents a less nuanced picture. There is also a corollary for disposals: where a parent reduces its shareholding in a subsidiary without losing control, no gain or loss is recognised, because it is treated as a transaction with shareholders and therefore any consideration received is recognised against equity.

helen lloyd FcAAudit and accounting writer, , Wolters Kluwer www.cch.co.uk

TreATmenT of posT-AcquisiTion AdjusTmenTs

This example shows the changes in treatment of post-acquisition adjustments when moving from current UK GAAP to FRS 102.

A company purchases a subsidiary on 15 January 20X1. It pays cash consideration of £1m; a further £200,000 will be payable if the acquiree meets certain challenging performance targets in the two years to 31 December 20X2. The fair value of the net assets acquired is £600,000. This includes a provision of £100,000 for a court case against the subsidiary, in progress at the acquisition date.

By 31 December 20X1, when the first post-acquisition accounts are being drawn up, there is a strong

expectation that the performance targets will be met so that the additional cash consideration will be paid. There has been no progress on the court case.

On 31 March 20X2, the court case is resolved, with the liability being settled at £180k (ie, £80k more than had been estimated).

Under both GAAPs, the revised total cost including the contingent element will be reflected in goodwill at the year end. Only under current UK GAAP, though, will the updated provision be adjusted through goodwill, since the change arises before the second post-acquisition balance sheet (but outside the 12 month period allowed by FRS 102).

Accounting new uk gaap n

16


current uK GAAp frs 102

Goodwill initially recognised £400,000 £400,000

Goodwill revised as at 31 Dec 20X1 £600,000 £600,000

Goodwill revised as at 31 Dec 20X2 £680,000 £600,000

Note: this example ignores amortisation of goodwill

goodwill is only recognised relating to the single transaction when an entity gains control of another


n new uk gaap accounting

17



Some of the most challenging areas of new UK GAAP are those where FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland, uses familiar terms with new

meanings, or where the accounting is broadly similar to the known version, but with subtle differences: wholesale changes can often be easier to spot and process.

This month’s topic – the accounting for associates and joint ventures – contains both of these potential traps, so clear thinking will be needed on transition to ensure that the path followed is faithful to FRS 102.

definitionsThe definition of an associate is similar enough to that in FRS 9, Associates and Joint Ventures, to be unlikely to give rise to many practical differences. For joint ventures, on the other hand, FRS 102 brings in a new perspective, with its language being based on that of IAS 31, Interests in Joint Ventures, the now-superseded international standard (IFRS 11, Joint Arrangements, applies in Europe for periods beginning on or after 1 January 2014).

Under FRS 102, a joint venture exists when there is joint control, defined as ‘the contractually agreed sharing of control over an economic activity’ – note that as in FRS 9, this sharing must be contractual, rather than being achieved, for instance, simply by virtue of there being a number of investors each happening to own the same percentage of the company.

A joint venture is then classified as being of one of three types: a jointly controlled operation, jointly controlled asset, or jointly controlled entity.

The definitions are, as would be expected, based on the names – the key distinction between a jointly controlled operation and jointly controlled entity is that in a jointly controlled entity there is a separate legal entity in which the shared operations take place. An arrangement that had been, under FRS 9, classified as a JANE (joint arrangement that is not an entity) would usually be a jointly controlled operation or jointly controlled asset under FRS 102.

equity accountingAs shown in the table, equity accounting must be applied to investments in associates and jointly controlled entities in group accounts. The basic principles are the same as those in FRS 9 – an investment is initially recognised at the transaction price, and then adjusted each period for the investor’s share of profit or loss, other comprehensive income, and equity of the associate or jointly controlled entity.

A small difference arises from current UK GAAP with respect to losses made by investees. Under current UK GAAP, the default position is that the investor continues to recognise their share of losses even after the investment value falls below zero (presenting the credit balance as a liability) The only justification for not recognising this ongoing share would be if there was evidence that the investor had irrevocably withdrawn from the relationship such that the investment effectively no longer qualifies as an associate. In FRS 102, the opposite default applies: an investor stops recognising its share of losses when the investment value reaches zero unless it has a legal or constructive obligation to make payments on the associate’s behalf. Investors in

In part five of our series on the new UK

GAAP, Helen Lloyd FCA considers

accounting for associates

and joint ventures (JVs)


AssociAtes/jvs

n new uk gaap Accounting frs 102 guide 2014 accountancy

17


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jointly controlled entities that were, under FRS 9, classified as joint ventures and therefore dealt with using gross equity accounting will need to adjust their policies, as this is not permitted under FRS 102. While this makes no difference to the net reported numbers, it alters the complexion of the balance sheet, and may affect lending based on ratios, return on assets, and so on.

fair value accountingFair value accounting for investments in associates and joint ventures is available as an accounting option in several situations, shown in the table, with the complication that there are two forms: use of the ‘fair value model’ and measurement ‘at fair value with changes in fair value recognised in profit or loss’.

The option to recognise investments at fair value with changes in profit explains itself, and reflects the option in law to hold certain financial instruments at fair value. The fair value model, on the other hand, is new to UK preparers, and allows re-measurement each period end to fair value, with changes reported directly in other comprehensive income (OCI) rather than through profit. In practice, it will be possible to choose the fair value model and yet still record investments at cost, since there is an impracticability exemption.

The cost modelThe cost model, applied to investments in associates or jointly controlled entities, is uncomplicated: investments are measured at cost less impairment. It is important to note that impairment is not relevant only to the cost model: while value changes are all recognised naturally using the fair value model or the option to

hold at fair value through profit and loss (FVTPL) impairments may arise on equity accounted investments.

joint ventures except jointly controlled entitiesThese other ventures are the only ones excluded from the earlier discussion. Although they are new terms, the accounting is not exotic. In short, investors in joint ventures that are not contained in a legally distinct entity recognise in their accounts only balances relating to which they have direct rights or obligations. This contrasts with the situation of an investor that operates through a shareholding in a limited company, for instance, where the owner’s liability is restricted to the capital he put in and his only asset is the ultimate right to receive a share of profits from the investee. Investors in jointly controlled assets and operations are not protected by incorporation, so they account for their full exposures and benefits.

summAryOne part of transition to FRS 102 will be to review all investments, first to check their classification and then to compare their accounting with these new requirements. There are no transition exemptions in this area, so investors that use the cost model and wish to move to the fair value model will need to ensure they obtain a valuation as at the transition date.

helen lloyd FcAAudit and accounting writer, Wolters Kluwer www.cch.co.uk

AccounTinG policy choices for AssociATes And jvs

the fair value model is new to uK preparers and allows re-measurement each period end to fair value, with changes reported directly in oci

Accounting new uk gaap n accountancy frs 102 guide 2014

reporting entity investment Accounting

Parent – consolidated financial statements

Associate Equity method (unless part of an investment portfolio – FVTPL) – s14


Jointly controlled entity

Equity method


Jointly controlled asset

Recognise venturer’s share of jointly controlled assets and liabilities, own liabilities, income from sale or use of its share of output, share of expenses, own expenses


Jointly controlled operation

Recognise assets that venturer controls and liabilities incurred, with expenses incurred and share of income

Parent – separate financial statements

Subsidiary, associate or any type of joint venture

Cost less impairment; fair value with changes in Other Comprehensive Income (OCI); or fair value with changes in profit (s14/15)

Non-parent – individual financial statements

Associate or joint venture

Cost model; fair value with changes in OCI; or fair value with changes in profit (s14/15)

AssociAtes/jvs



19



– that is amounts which are recognised in the statement of comprehensive income in a different period from when they are included in the tax computation. Deferred tax is then usually provided in respect of these timing differences by looking at the expected timing of the reversal of the difference and multiplying it by tax rates that will apply at the time. For permanent differences (where there are items in total comprehensive income that will never be chargeable or deductible for tax purposes, or vice versa), no deferred tax is provided.

These simple principles become difficult through the exceptions or refinements that are then included in the standard, or in the absence of familiar exceptions from FRS 19.

revaluation of property, plant and equipmentUnder current UK GAAP, revaluing a fixed asset does not usually lead to a requirement to provide extra deferred tax, until there is a binding commitment to sell the asset. Under FRS 102,


The section of the new UK GAAP – FRS 102 – covering deferred tax has been one of the standard’s most hotly disputed parts. To put it in context, the IFRS for SMEs, on which FRS

102 is based, took the bold step of basing its tax section on a new model that the International Accounting Standards Board (IASB) was putting forward to replace IAS 12, Income Taxes. This model had some conceptual problems as well as certain requirements which could not practically be applied, and by the time the Financial Reporting Council (FRC) came to work on FRS 102, these problems had become apparent and the IASB’s project to revise IAS 12 on this basis had been set aside.

The FRC, left with a void, originally proposed using a reduced version of the international requirements from IAS 12, but this did not receive much support when the proposal was set out in an exposure draft. So, in the final version of the standard, section 29 sets out a ‘timing differences plus’ approach, which is in many respects very similar to FRS 19, Deferrred Tax, but has a small number of differences in detail which could trip the unwary.

revision of the basics The basics of the approach should be familiar. A preparer begins by identifying timing differences

In part six of our series on the new UK

GAAP, Helen Lloyd FCA

considers the treatment of deferred tax


deFerred tAx

Accounting

19

exAmpleA property asset with a 20-year life, an original cost of £200,000 and a depreciated cost of £150,000 is revalued to £250,000 when it has 15 years of useful life remaining. As the asset is land and buildings, it is not eligible for capital allowances. The applicable tax rate is expected to remain at 30% for both income and capital gains for the whole of the asset’s life.

The revaluation gain of £100,000 gives rise to a timing difference because the accounting gain recognised in other comprehensive income is not matched with an immediate increase in taxable profits.

Accordingly a deferred tax liability of £30,000 (£100,000 at 30%) is recognised, with the charge going through other comprehensive income (OCI) to match the location of the accounting gain.

In subsequent years it seems likely that, by analogy to International Financial Reporting Standards (IFRS), this liability will be gradually diminished as the revalued asset is depreciated.

Under old UK GAAP, no deferred tax entries would have been made in respect of the revaluation unless there was a binding commitment to sell the asset, so the GAAP change means a difference in reported comprehensive income each year from the revaluation onwards, as the deferred tax liability unwinds under FRS 102.


20



intuitive nature of accounting for deferred tax at all: if a deferred tax liability represented an actual future cash outflow, then it would be discounted to reflect the expected timing of the outflow, and so the prohibition of discounting means, to some, that it is not a true liability. The conceptual debate, however, does not change the outcome.

differences from ifrsThis part of FRS 102 is a curious hybrid, with very few practical differences from UK GAAP despite the FRC’s commitment to ‘an IFRS-based solution’. The specific requirements for goodwill, above, are one example of adapting the UK principles to require accounting for a temporary (rather than timing) difference. In some places, though, it is just not possible to reach the same accounting using this framework as would be achieved under IFRS. One example is share based payments where during a scheme’s life the tax deduction, or estimated future deduction, is more than the cumulative accounting charge. IFRS would require recognition of deferred tax in this circumstance, but FRS 102 would not allow it.

This might arise where, for instance, options had a low fair value on issue because the issuer’s share price was expected to remain steady (and the exercise price was close to that share price), but where before the options vested there was an unexpected surge in the issuing company’s value, so that a large deduction becomes likely.

ActionWhile in practice many preparers will find that they need no transition adjustments for deferred tax, this is an area where careful review will be needed to ensure that no necessary adjustments are missed, and there is an unavoidable effect for those that revalue assets.

20


however, there is no special treatment for revaluations – they are treated as giving rise to timing differences.

The accounting gain recognised in other comprehensive income is not matched with an immediate increase in taxable profits; instead, the gain will be taxed when the asset’s additional value is realised. So at the first balance sheet date after a revaluation, deferred tax would be based on the full timing difference. In practice, this means the timing difference provided for will increase by the amount of the revaluation gain, regardless of the owner’s intentions for future use of the property.

Business combinationsUnder current UK GAAP, an acquirer of a subsidiary performs a fair value exercise on the acquiree’s balance sheet, bringing in the assets and liabilities at these new values, and recognising goodwill as the difference between the purchase consideration and the fair value of assets acquired. FRS 7, Fair Values in Acquisition Accounting, tells preparers to recognise deferred tax on fair value adjustments by applying the same principles as in FRS 19, meaning that for fair value uplifts on items such as tangible fixed assets, no deferred tax will be provided.

FRS 102 has a similar requirement, although it is phrased in language more reminiscent of IFRS, requiring preparers to compare ‘the amount that can be deducted for tax for an asset’ to the value recognised for that asset, which is not the way a timing difference is normally calculated. This is a special case, one where only this single paragraph is relevant and the treatment cannot quite be analogised to anything else in the section.

discountingFRS 102 does not allow deferred tax assets and liabilities to be discounted. This has caused discomfort for some critics, and has in some cases been held up as an example of the counter- helen lloyd FcA

Audit and accounting writer, Wolters Kluwer www.cch.co.uk

Accounting new uk gaap n

noTe on The neW uK GAAp seriesFRS 102 has only recently been released and a body of commentary has yet to be built up on it. As such, there will always be a range of interpretations, particularly given the brevity of the standard. Readers are reminded to refer to the text of the standard itself when making their own judgments, and to bear in mind the hierarchy for developing accounting policies in section 10 of the standard:

n first look within FRS 102 itself and any other still extant FRS or FRC Abstract;

n then look to any relevant SORP;

n then apply the pervasive principles and key concepts from section 2; and

n finally, it is permissible (but not required), to look to the requirements in guidance in EU-adopted IFRS.

Other sources of guidance, such as the IFRS for SMEs and accompanying documents, as well as the IASB staff’s training materials, may be helpful in understanding the thinking behind some of the standard’s content, but do not directly have authority.

It is to be expected that over the first few years of FRS 102 application, common practice will develop to form a fuller ‘new UK GAAP’ but until that point, the words included in the standard are the best source of guidance. These articles should be understood to include the author’s views.

20

deFFered tAx



21



fair value is only required if this can be established ‘without undue cost or effort’, and if this is not possible the property is treated as if it were normal property, plant and equipment (that is, held at cost less depreciation). SSAP 19 does not allow for the possibility of not obtaining a valuation, perhaps on the assumption that a RICS-qualified [Royal Institute of Chartered Surveyors] external valuer can always be appointed, though some small preparers may now try to argue that this involves undue cost, and that performing an internal valuation would involve undue effort.

movements in fair valueThe other significant difference from current UK GAAP comes with the FRS 102 requirement to recognise movements in an investment property’s value directly in profit, rather than in equity. Under SSAP 19, an investment property revaluation was effectively treated as any other revaluation, so the movement would have been reported in the statement of total recognised gains and losses (STRGL) and then kept in a separate component of equity, the ‘investment revaluation reserve’. Here, though, there is no comment on the treatment in equity of revaluation gains and losses after they are recognised in profit: this reflects the fact that FRS 102 is based on the IFRS

The accounting for investment properties is not of such narrow interest as it may first appear. Many groups that do not make money directly from holding properties do still have periods when

some of their properties are not in use; when these are rented out or held for capital appreciation, they may qualify as investment properties. Crucially, the change in definition of an investment property means that any entity holding properties that are not owner-occupied needs to review the new requirements carefully to be sure whether or not the properties are in the scope of section 16 of FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland.

An investment property under FRS 102 might be held by an owner, a lessee under a finance lease or, in some cases, a lessee under an operating lease. It is held for rentals and/or capital appreciation, rather than for the holder to use in its own business or to sell in the ordinary course of business.

The main contrast with the familiar definition in SSAP 19, Accounting for investment properties, is that under FRS 102, properties let to other group companies are not excluded. The new standard also includes a specific scope exemption for properties held solely for the provision of social benefits: this was inserted with charities in mind, and should not be interpreted too broadly.

strict valuation basisThe valuation basis for investment properties under FRS 102 is not worded the same as that in current UK GAAP: FRS 102 requires ‘fair value’, whereas SSAP 19 asks for ‘open market value’. In practice, however, it is likely that a SSAP 19 valuation could continue to be used. Interestingly, though, FRS 102 is more relaxed: measurement at

In part seven of

our series on FRS

102, helen lloyd fcA

assesses the accounting

treatment for investment properties


n new uk gaap Accounting

21


investment ProPerties


22



for SMEs, which steered well clear of any advice on matters where laws would vary, for instance in relation to distributable profits. For a UK company, though, Tech 02/10 is very clear that revaluation of an investment property does not give rise to a realised profit, so most preparers will find it helpful to reclassify these amounts into a separate reserve to minimise confusion.

The cosmetic effectAlthough the movement of fair value gains from the STRGL to profit is a clear enough change, it will still leave preparers with an effect on their reported profits that will need to be explained to users until they become familiar with the new requirements. It will also be necessary to check whether there are more extreme consequences, if items such as bonus payments or earn-outs are based on a profit figure: there is still time before the transition date to consider revisiting these agreements to clarify whether profit includes this type of gains.

new group issuesThe change in scope of the definition of an investment property means that for some groups, there will be more work in the preparation of consolidated accounts. Where one group company lets to another, under SSAP 19 the property would not have been classified as an investment property. Now it will be and must be treated as such in the company-only accounts of the property holder. From group's perspective though, the property is not being let to an outside entity, so will be classified as normal (owner-occupied) property, plant and equipment. A consolidation journal will need to be recognised each reporting period to derecognise fair value gains or losses, and replace these with an appropriate depreciation charge.

impairmentOne challenging aspect of previous UK GAAP will be effectively eliminated


by these changes: the requirement to determine, for a reduction in an investment property’s value, whether this reduction is temporary or permanent. This was a crucial distinction in applying SSAP 19, as it determined whether the loss was recognised as usual in STRGL, or as an impairment in profit. Under FRS 102, all changes in value are reported in profit, so there is no need, in this context, for the concept of impairment at all.

deferred taxIt seems likely that this change in accounting will also have consequences for deferred tax. Under current UK GAAP, revaluation gains do not in general give rise to deferred tax, unless there is a binding commitment to sell the asset. Looking at FRS 102, in contrast, deferred tax will be provided just as it is for other property, plant and equipment (PPE) revaluations. For profitable companies, this will reduce the bottom line effect of the accounting change to being only the figure net of deferred tax.

exAmple: invesTmenT properTiesA company purchases a property at the beginning of 20X1 at a cost of £100,000. It is designated as an investment property, and revalued each year until it is sold at the end of 20X4. The treatment in each reporting period is shown below under each of FRS 102 and SSAP 19, with the assumption that the drop in value in 20X3 is viewed as permanent for the purposes of SSAP 19.

date value £ frs 102 £ ssAp 19 £

1/1/20X1 100,000

31/12/20X1 110,000 10,000 P&L gain 10,000 STRGL gain

31/12/20X2 105,000 5,000 P&L loss 5,000 STRGL loss

31/12/20X3 70,000 35,000 P&L loss 35,000 P&L loss

31/12/20X4 75,000 (sale price) 5,000 P&L gain 5,000 P&L gain

Net amounts recognised in P&L 25,000 loss 30,000 loss

Net amounts recognised in STRGL 5,000 gain




23



For the latest insight

on new UK GAAP, Helen

Lloyd FCA considers

presentation of financial statements


FinAnciAl stAtements

did not prove popular with preparers. So in its final version, the standard refers directly to the relevant parts of company law, rather than prescribing formats (this also means that even if the company law formats change, the standard does not need to be updated).

comPonents oF FinAnciAl stAtementsWhile the basic principles behind the primary statements are consistent with current UK GAAP, with a main statement that reports performance and one that reports position, the FRS 102 details of required primary statements are slightly different.

Financial statements must include a statement of comprehensive income (or pair of statements with the same effect, as discussed later), a statement of financial position, a statement of changes in equity, and a statement of cashflows, as well as supporting notes.

While so far this series has focused on some details of recognition and measurement, one change brought about by FRS 102,

The Financial Reporting Standard applicable in the UK and Republic of Ireland, that will definitely affect all preparers relates to financial statement presentation.

The challenge that faced the Financial Reporting Council (FRC) arose where the International Financial Reporting Standard (IFRS) for SMEs prescribed a new set of accounts formats that could not easily be used in FRS 102 because UK companies need to comply with the formats in company law.

In an earlier draft of the standard, the original IFRS for SMEs formats were retained, accompanied by staff guidance showing how these formats could be supplemented, subtotalled and cleverly formatted to achieve technical compliance with the law, but this was not a neat solution, and as a result this


Accounting

23


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stAtement oF comPrehensive incomeUnfortunately the requirements for this statement have retained the somewhat confusing terminology of IFRS. A statement of comprehensive income has two sections: the first shows profit for the year, and uses the formats that company law sets out for the profit and loss (P&L) account, and the second shows other comprehensive income (OCI), being items of income or expense that are recognised outside profit. These will be very similar to items that would previously have been included in the statement of total recognised gains and losses (STRGL), with a typical example being

the effects of property revaluations (except investment properties). This alone would be a straightforward enough requirement, albeit still a change for those more used to showing non-profit items on a separate page.

An alternative option is available, though, involving presenting two statements: one is called an income statement, based on the P&L formats in company law, and the other a statement of comprehensive income. Although this shares a name with the single statement above, in this context it only contains ‘other comprehensive income’ items – making it more directly comparable with the STRGL. Naming issues aside, this option might be pleasing to those that see non-profit movements as being of only secondary interest, though many may find their stakeholders prefer to see total comprehensive income all on one page for a fuller picture. The decision to present the

single statement or two statements is an accounting policy choice, meaning that it cannot be changed unless this change gives reliable and more relevant information.

There are a couple of notable differences between an FRS 102 income statement and an FRS 3 (Reporting Financial Performance) P&L. Firstly, FRS 102 does not require a

subtotal for operating profit, though it effectively acknowledges that many entities will still choose to show this figure, by requiring that if the total is there, it does not include non-operating items.

The other clear visual difference from FRS 3 is in the presentation of discontinued

operations – FRS 3 requires turnover and operating profit to be split on the face of the P&L between continuing and discontinued operations, with the other line items in between split in a note.

In contrast, FRS 102 requires a line-by-line analysis in a column on the face of the income

statement, with a single sum showing the post-tax gain or loss from discontinued operations (including any gain or loss on their disposal). In the original drafting, this

caused presentational problems with reference to the company law formats, because it would be wrong to include such a line within the ‘profit before tax’

statutory total, but including it afterwards would cause arithmetical problems.

The FRC dealt with this by including a requirement for a ‘total’ column


22

FinAnciAl stAtements


25



too, and by adding an appendix to section 5, showing a two-column presentation that means the full totals for each line item are shown, but the discontinued operations column still adds to the required total.

stAtement oF chAnges in equityThe statement of changes in equity fulfils much the same role as the FRS 3 reconciliation of movements in shareholders’ funds, but appears to be viewed as more important since it must be presented as a primary statement. FRS 102 also specifies that it must show movements ‘for each component of equity’ rather than just a reconciliation from total opening to closing equity; a

‘component of equity’ is not defined, though it might reasonably be assumed to mean each of the line items that the entity has chosen to, or is legally required to, present separately.

The interesting point on this statement, though, is the special permission in limited circumstances to collapse it into the other performance statements, showing a single ‘statement of income and retained earnings’, which includes both profit and changes in equity. This is only permissible for entities with simple transactions, with no ‘other comprehensive income’ and the only non-profit movements being payment of dividends, correction of prior period errors and changes in accounting policy. This removes the need to prepare an extra primary statement with no additional information in it.

stAtement oF FinAnciAl PositionThe statement of financial position is equivalent to the balance sheet and, again, looks to the company law formats; it is even permissible to call it a balance sheet rather than a statement of financial position. In general, this should look very similar to an old UK GAAP balance sheet: FRS 102 has even transplanted the UITF 8 requirements in respect of debtors due after more than one year, requiring them to be presented separately where they are sufficiently material in the context of total net current assets to make this presentation necessary.


currenT uK GAAp requiremenTs mATched To BroAd equivAlenTs in frs 102

current uK GAAp requirement comparable frs 102 requirement

Profit and loss account Income statement or ‘top half’ of full statement of comprehensive income

Statement of total recognised gains and losses

‘Bottom half’ of full statement of comprehensive income, or short statement of comprehensive income if separate income statement is also presented

Reconciliation of movements in shareholders’ funds (as note or primary statement)

Statement of changes in equity (as primary statement)

Note of historical cost profits and losses (as note, only required where there is a material difference from reported profit)

No equivalent requirement

Balance sheet Statement of financial position

Cashflow statement Statement of cashflows




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dealing with similar issues, then to any relevant SORP [Statement of Recommendend Practice], followed by a general reference to the key recognition and measurement concepts and the pervasive principles in section 2 of the standard. It is also permissible to look to EU-adopted IFRS, though this is not required, and there is certainly no suggestion that IFRS would override a policy developed using the methods above.

Setting aSide preconceptionSThe difficulty arises when we look at the natural tendency to revert to the familiar. It is exceedingly hard to read only the words in FRS 102, without each individual bringing to them his own accumulated knowledge and experience. This is exacerbated where the standard uses wording identical or very similar to either current UK standards or IFRS: if it includes one familiar paragraph, it is tempting to assume that the surrounding paragraphs in the original text are included by implication, as it were.

This dangerous assumption needs to be avoided, though: the purest approach is to assume that if the FRC meant to include a requirement or explanation, it would be there in the standard. If it is omitted, this means that the words that remain must stand, as far as possible, on their own merits.

If the sources of guidance specified in the standard do not in themselves give enough help to a preparer struggling to design a policy, there is other information and commentary available, but none of this can at this stage be taken as having authority. So, existing manuals on UK

There is a rarely discussed conceptual shift in the move to ‘new UK GAAP’ – FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland – suddenly, to all

intents and purposes, there is no GAAP. Since the first statements of standard

accounting practice (SSAP) were issued in the 1970s, there has been a growing body of accounting guidance, including the standards themselves, relevant parts of company law, vast quantities of commentary by a range of experts and opinion-holders, and a mass of practice.

Similarly, for those using International Financial Reporting Standards (IFRS), there are fewer years of history but because it has such widespread use, accepted interpretations have been developed. For FRS 102, though, the slate is clean, and although commentary publications are beginning to appear before the mandatory effective date, it is likely that some years of application will be needed before consensus is reached on all of the main issues.

FrS 102 guidance on developing accounting policieSSection 10 of the standard sets out the sources to be considered when a new accounting policy is developed. First, a preparer must look to all extant Financial Reporting Standards (FRSs) and Financial Reporting Council (FRC) abstracts. In the absence of suitable guidance, management is then required to use judgement in developing a policy that will give relevant and reliable information. To assist with this, they must refer first to FRSs and FRC abstracts

Developing a policy

based on UK GAAP but

contradicting IFRS may

not be acceptable under FRS 102, says

Helen Lloyd


26

SourceS oF new policieS



27



example

UK preparers that sell goods or services on behalf of other entities may have found themselves looking at Application Note G of FRS 5, Reporting the Substance of Transactions, to help determine whether they are acting as agent or principal.

If they are an agent, they might be a ‘disclosed agent’, in which case they would show only revenues and costs incurred on their own account (ie, not in their role as agent), or an ‘undisclosed agent’, meaning revenues and costs would be gross of those amounts.

While this is well understood in UK GAAP, there is no comparable guidance in FRS 102, and it would be hard to justify continuing to account gross for an undisclosed agency, based on the precise definitions in FRS 102.

GAAP and IFRS may help with understanding the context of a requirement and its normal interpretations, but are not gospel. Similarly, the International Accounting Standards Board's (IASB) staff guidance on the IFRS for SMEs contains a large volume of narrative behind its contents (which are mostly picked up in FRS 102) but it has no precedence over an alternative interpretation that is based simply on the words in the standard.

A slightly more helpful supplement to the standard itself might be the accounting regulator’s own guidance produced by the FRC’s Accounting Council – Advice to the FRC – which is included as an appendix to FRS 102. This explains some of the thinking behind certain elements of the standard, while not forming part of the standard, so it can assist with questions about the precise meaning of a word or phrase.

There is also some FRC staff guidance available at www.frc.org.uk, covering a range of areas across the standard. Again, this does not have authority, but if it contradicted other more distant sources, would have a strong claim for precedence.

Further application diFFicultieSSo far this article has focused on the development of new accounting policies, for instance when an entity has a certain type of transaction for the first time, or perhaps judges its current policy to be in need of change.

The issue may in fact, though, be more pressing than this, since section 35 on transition to FRS 102 requires that the transition date

balance sheet uses FRS 102 in measuring all its recognised assets and liabilities – that is, implicitly, the policies in force at that date need to be FRS 102 compliant. Here an interesting issue may arise. If a company has a policy based on old UK GAAP, which addresses an area where FRS 102 is silent, is it acceptable to continue applying this policy even if it fails to comply with something within IFRS? For new transactions, it would seem hard to justify a new policy based on another GAAP when IFRS, a GAAP explicitly named in the standard, says something different. So, in practice, part of the work to be performed on transition will be reviewing all current policies to ensure they explicitly comply with FRS 102, and, where they do not, examining the reasoning behind them to ensure that this is acceptable within the section 10 hierarchy.

conStant vigilanceIn summary, even where an IFRS transition exercise seems straightforward, it may not be. Preparers wanting to be sure their accounts are fully compliant need to begin by ensuring that they understand where their policies come from, and to be able to justify the use of those which go further than the words in the standard. Time invested now will go a long way towards avoiding obstacles further down the line.

helen lloyd Fcaaudit and accounting writer, Wolters Kluwer www.cch.co.uk

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SourceS oF new policieS



group if that is not possible; estimate whether the asset or group’s value is supportable, by establishing a ‘recoverable amount’; then recognise any unsupported amounts as an impairment charge against profit.

The terminology in FRS 102, being IFRS-based, will be new to some: FRS 102 talks of ‘cash-generating units’ rather than ‘income-generating units’, and the recoverable amount in FRS 102 is reached by looking at the higher of the value in use and the fair value less costs to sell (FRS 11 calls this the ‘net realisable value’).

These shifts in terminology do not have a significant effect, but there is a change in emphasis in how assets are allocated to units. When a business combination happens, FRS 102 is very explicit in requiring that the goodwill on the acquisition is allocated right across the business to all cash-generating units that are expected to benefit from the synergies of the combination.

This means that a holistic review is needed, with an understanding of the effects of the combination even on superficially unrelated parts of the group. This contrasts with FRS 11, which does not appear to acknowledge the possibility of allocating purchased goodwill to pre-existing income-generating units, but instead talks only of distributing it between the income-generating units identified within the acquired business.

allocation of impairment charges to assetsUnder FRS 11, when an impairment loss arises for the assets in an income-generating unit, it is allocated first to any goodwill in the unit, then to any intangible assets, and finally pro-rata across

Under FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland, the approach to impairment of non-financial assets is different in several

respects from current UK GAAP. It is based on International Financial Reporting Standards (IFRS) and so reproduces most of the differences that already existed between the two GAAPs.

Here we look first at the basic calculation, which does not differ much in principle but does show some differences in naming and in allocation of assets, then at recognition of impairment charges, and finally at reversal of impairment losses: there are GAAP differences in each of these categories.

when to perform an impairment reviewThe FRS 102 requirements are simpler than those in old UK GAAP. FRS 11, Impairment of Fixed Assets and Goodwill, requires that impairment reviews are performed whenever there is an indicator of impairment, and FRS 10, Goodwill and Intangible Assets, supplements this with an automatic annual review for goodwill and intangibles with lives over 20 years or indefinite lives.

FRS 102 does not set out any situations where the default would be to perform an annual review, although this is at least in part because all assets must have a finite life attributed to them (sections 17 and 18) and the standard life for goodwill is much shorter, at only five years (section 19).

Basic calculation of an impairment lossThe core principles of FRS 11 and FRS 102 are very similar: look at an asset alone, or in a

In the final part of our

series on new UK

GAAP, Helen Lloyd FCA considers

changes to impairment


impairment reviewS

n new uk gaap accounting frs 102 guide 2014 accountancy n accounting

28

29


the tangible assets. The new FRS 102 approach is arguably simpler because an impairment loss is recognised first against goodwill and then pro-rata against all other assets, without differentiating between intangible and tangible assets. This suggests that there is somehow more confidence in intangible assets under FRS 102: the rush to write them off under FRS 11 might have been read as a gesture of uncertainty about the ‘reality’ of intangibles, or perhaps just as recognition that, in practice, the value of tangible assets is often easier to realise.

reversal of impairment lossesThe rules on reversals of impairment losses are not straightforward and the version in FRS 102 has provoked some debate. As a reminder, under FRS 11 impairment charges on tangible assets are reversed only if the increase in value is because of a change in economic conditions or in the expected use of an asset. Those on intangibles are reversed only if the original impairment arose because of an external event whose effects have now been demonstrably reversed, or if the charge was calculated based on a readily ascertainable market value which has now increased.

Under an earlier draft of FRS 102, the IFRS-based guidance required that impairment losses on tangible and intangible assets are reversed if, and only if, the reasons for the impairment loss have ceased to apply, and that impairment losses on goodwill were never reversed. This was rejected by many, so the final version of the standard treats all assets the same, using the tangible assets condition above for all

impairment losses, meaning that even losses on goodwill can (and must) be reversed if the original reasons no longer apply.

reduction in workload?FRS 11 contained a sting in the tail, which often caused problems for those who were aware of it. It required that where an asset’s or group’s carrying value had been supported by its value in use (rather than its net realisable value) then the forecast cashflows used to calculate that value in use must be compared to actual cashflows for each of the five years following the impairment review, with additional charges then being recognised if necessary.

While this was an excellent idea, and one that should have encouraged preparers to be very careful with the accuracy of their forecasts, in practice it was onerous to perform. Many will be grateful that there is no comparable requirement in FRS 102 – although this should not, of course, encourage inaccuracy in cashflow forecasting.

Overall, the FRS 102 impairment requirements may have only minor effects for preparers. The extra work involved in allocating goodwill across existing cash-generating units will be challenging for larger entities but those that are less complex will find they only have a small number of cash-generating units, and they may be able to make a simple assessment. Either the acquired business is completely new to the entity, in which case there will be little or no goodwill allocated elsewhere, or it is very similar to an existing part of the acquirer, which may mean that all of the assets acquired (thus including the goodwill) are allocated to a pre-existing unit anyway.

under FrS 102 an impairment loss is recognised first against goodwill, then pro-rata against all other assets

helen lloyd Fcaaudit and accounting writer, Wolters Kluwer www.cch.co.uk

example: allocation of impairment lossesGroup G has suffered from a regulatory change which will make its business much more costly to run, and as such is required to perform an impairment review. For one of its FRS 102 cash-generating units, the total carrying value of the assets allocated to the unit is £1.6m, but the recoverable amount is calculated to be only £1m. This means an impairment loss of £600,000 needs to be recognised.

The impairment writedown by asset class is shown below, and contrasted with what it would have been under FRS 11.

asset category initial carrying value (£)

frs 102 writedown (£)

frs 11 writedown (£)

Goodwill 200,000 200,000 200,000

Other intangible assets

600,000 171,000(6/14 x £400,000)

400,000

Tangible assets

800,000 229,000 (8/14 x £400,000)

-

Total 1,600,000 600,000 600,000

accounting new uk gaap n accountancy frs 102 guide 2014 accounting


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30



– the greater the number of permutations, the more work you need to do to determine the best outcome for your business.

So analyse your objectives and identify any areas of sensitivity. What do you want out of transition to new UK GAAP? Are you looking for:

n policies that are closest to group accounting policies in order to minimise consolidation adjustments?

n the earliest tax deductions? n least change from your current policies in order to minimise transition effort?

n an opportunity to spring clean your books and records?

n People are sensitive to change, and different stakeholders will have different focus areas. You might plan to capitalise development costs under FRS 102 in order to spread the expense, but how does your wider team feel about the process and monitoring that goes alongside that policy?

Where should I concentrate my energy?As with anything, it is important to focus first on the areas that you think will result in the most significant change. This is different for every business, which is why the impact assessment is so important. There is already plenty of comment available online and in industry publications discussing key areas of change such as pensions, tax, business combinations and financial instruments. Doing some research first will help you to identify the critical areas.

Some decisions are time critical, so make sure you know what these are. For example, certain tax elections must be made by 1 January 2015 (or the start of the date of first application, if your business is a December year end). Common tax elections made are in relation to separate tax functional currencies, financial instruments

You’d be hard pushed to avoid it even if you tried at the moment. The topic on so many lips in our profession is the transition to new UK GAAP – FRS 102, Financial Reporting Standard

applicable for UK & Ireland – effective for periods beginning on or after 1 January 2015. Whether you’re dealing with a listed group or a smaller business, transition to a new accounting framework is a project, and one that requires appropriate time, resources and skill.

determine the implications on the accounting policies (ie, measurement differences), normally through the use of an impact assessment

How do we make the decision about which framework to choose and which accounting policies to apply within that?Making the overarching decision of which framework to apply is not a linear process. It may well be influenced by a high-level objective such as alignment with International Financial Reporting Standards’ (IFRS) group policies. Issues that arise as you work through the detail will inevitably prompt you to circle back and re-examine that objective; for example, because of an unexpected tax or distributable reserves consequence.

The new UK financial reporting regime contains multiple areas of flexibility, so you can investigate combinations of accounting policies that give you a better answer for a particular issue. Do you want to apply new, more user friendly, hedging rules? FRS 102 allows you to access IFRS 9, Financial Instruments [replacement of IAS 39], earlier than those entities applying IFRS, so you could do that. However, flexibility is a double-edged sword

With new UK GAAP set to

come into force starting

1 Jan 2015, Andrew

Davies runs through the

essentials for a smooth

transition

30


FRS 102FRS 102

Five StepS


31



(disregard regulations) and goodwill amortisation. However, at some point you will also have to

cover the detail, and there are some intricacies that will need to be worked through. For example, broadly speaking, the measurement of a plain vanilla term loan follows similar principles under old and new UK GAAP. However, if you have off-market interest rates between group companies, the answers can be quite different, affecting your entity profit, distributable reserves and tax position. This is why it is so important to work through an impact assessment, to ensure completeness of the GAAP differences identified.

What can go wrong?The law of unintended consequences… it is almost certain that somewhere along the process you will realise that an accounting policy decision you thought was agreed would cause significant problems for another colleague that you had not previously appreciated. Whether that is a financial impact such as an adverse tax consequence or a process one because significant, additional information is needed at month end, you will need to circle back and work out the best response. And this takes time.

At this stage, the best way to minimise these potential issues is to get all relevant colleagues into a room and discuss the key implications. Everyone then has the opportunity to flag any consequences early.

determine the implications on the disclosures and the presentation in the financial statements by preparing a disclosure checklist

Will there be new disclosures to include?It is likely that there will be at least some.

For instance, if you prepare group accounts, reduced disclosures will not be available to you, and so for example narrative regarding financial risk will be new.

A disclosure checklist is a very helpful tool when first preparing financial statements under a new GAAP. Use it to identify new areas and to aid completeness of your review and preparation; who will write the financial instruments disclosures, for instance? Does it exist already in policy documents or is it something you will need to write from scratch?

Once you have identified the key new disclosures and how they will be gathered, think about whether you need to prepare for any questions that might arise, for example will your stakeholders understand your position on liquidity risk? New information can make people think in a different way or make new connections.

Thinking of the questions you could be asked and preparing in advance is not only good planning, but will help identify if there are any inconsistencies in your presented information that need to be resolved before the audit.

How can I make sure my disclosures are materially compliant without going overboard?Once complete, step back from the disclosure checklist; it is a tool, not an absolute authority. Your financial statements may be heavily weighted to financial information, but that does not mean they should be crowded with immaterial numbers. They are an important mode of communication with your stakeholders and should convey good quality, relevant and reliable information.

What does your audience want to know? What are the important messages you want to get out? Assess both the materiality of numerical and narrative disclosures; can 30

action planA typical transition project consists of five stages:

1 Determine the implications on the accounting policies (ie, measurement differences), normally through the use of an impact assessment

2 Determine the implications on the disclosures and the presentation in the financial statements, by preparing a disclosure checklist

3 Consider any wider business implications (tax, distributable reserves, KPI changes, IT, structuring, etc)

4 Prepare a skeleton set of financials, then populate the opening balance sheet

5 Prepare the first set of financials, with full year and comparatives, then finalise the audit

accounting new uk gaap n accountancy frs 102 guide 2014

Effective date for the new UK GAAP – FRS 102, Financial Reporting Standard applicable for UK & Ireland, effective for periods beginning on or after 1 January 2015

01/01/2015

31

Five StepS


32



consider any wider business implications (tax, distributable reserves, key performance indicator (Kpi) changes, it, structuring, etc)

It’s just accounting though, isn’t it?The application of new UK GAAP is a huge change. EU listed groups made the important first step towards international convergence in 2005, but that, while significant, did not impact most entities in the UK, nor did it affect any tax or reserves positions, which are based on individual accounts.

The adoption of new UK GAAP affects a wide population and does have ramifications for your business outside of the pure finance team. Here is some food for thought:

TaxMore and more, tax follows accounting. So if you have a different profit before tax in your single entity accounts under the new regime, you are likely to have a different tax charge as a consequence. Where are the risks and opportunities? It is not just ongoing profits and losses that you need to think about; transition adjustments may also be taxable or deductible. For instance, a lease incentive for a lessee might have been spread over a shorter period under old UK GAAP, so, on transition you may be debiting reserves and re-spreading your credit over a longer period – this could be tax advantageous.

Deferred tax implications arise from a different accounting model, but also when certain first-time adoption differences are posted.

Transition is a cross-functional project, and your tax team is a key contributor to achieving those optimum decisions on framework, policies and the application of transitional exemptions.

Distributable reservesThere are some big ticket items here and you need to pick these up in your initial impact assessment. For example, if a group has a defined benefit (DB) pension plan that has been recognised only on consolidation under FRS 17, Retirement Benefits,

you positively state why a piece of information is included?

Within our profession, there is increasing emphasis on quality over quantity of disclosure. The Financial Reporting Council’s ‘cutting the clutter’ initiative is a good example of this. This does not imply that you can take a red pen to half the notes; something like a defined benefit pension scheme contains a huge amount of judgment and assumptions in preparation of the numbers, so whether or not that is numerically material to your balance sheet, it is likely that the judgments involved and their implications for the future will be material to a reader. However, if you were to include every last required disclosure without question, that would probably result in some immaterial information taking up space and distracting from the key messages.

Talk early with your auditors about disclosures that you believe are immaterial to avoid surprises at the end of the audit process.

I have heard about ‘reduced disclosures’, what does that mean?During the drafting of the new regime, the FRC responded to comments that certain entities should be permitted to omit some disclosures in the interests of cost versus benefit.

Qualifying entities, which are those entities preparing individual accounts and whose results are also included in a set of publicly available consolidated accounts, have two possible routes to ‘reduced disclosure’:

n FRS 101, Reduced Disclosure Framework: IFRS measurement with certain disclosures omitted; or

n Disclosure exemptions embedded within FRS 102: FRS 102 measurement with certain disclosures omitted.

The disclosure exemptions are applied only in the individual accounts of the qualifying entity; this includes parent company accounts. But certain criteria have to be met to qualify.

The exemptions are similar within both standards and include items like the cashflow statement and share-based payment disclosure. Again, preparation is required in order to take advantage of this flexibility:

n Some exemptions are available only if equivalent disclosures exist in the consolidated accounts that the qualifying entity is part of; and

n Shareholders must be notified of your intention to apply reduced disclosures. Not all your shareholders will be well-versed in accounting requirements; do you know how they might react to this request?

FRS 102FRS 102

many covenants are based on current gaap and changing the shape of the income statement or balance sheet could certainly impact covenant compliance

accounting frs 102 guide 2014 accountancy

32

Five StepS


33



it will have to come onto at least one entity’s balance sheet, which could significantly reduce reserves available for distribution.

There will be other, subtler effects as well. Derivatives are coming on balance sheet; movements in respect of these generally create realised profits and losses, so there will be increased volatility in your reserves.

For a December 2015 adopter, transition adjustments must be taken account in the payment of dividends from 1 January 2015. Does your company secretary appreciate that the 2014 UK GAAP accounts alone might not support the payment of dividends made in 2015? If you do identify a dividend block, there are remedies available for some scenarios, but they will entail additional work. For example, you might be able to reduce capital or reorganise your group to recognise previously unrecognised value.

KPI changesWhat measures do you use consistently in your management information? EBITDA (earnings before interest, taxes, depreciation and amortisation) could be affected by certain changes to policy, such as the recognition of derivatives or the fact that investment property fair value movements now hit profit rather than reserves. This might require you to alter your management information; will you accept the changes and amend your targets and criteria for review, or add a new process by adjusting the statutory figures for internal reporting purposes?

Covenants on financing arrangements might also be affected by similar changes. Are your covenants based on frozen GAAP – if so, you should be fine. However, many covenants are based on current GAAP and changing the shape of the income statement or balance sheet could certainly impact covenant compliance.

Financial reporting processes and ITTransition will inevitably involve some changes to systems and processes. For example, you now need to value derivatives: how will you obtain valuations? Do you have the inhouse skill to assess what the bank has sent you? Who will

reconcile the new general ledger account? How are the new processes for impairment reviews, depreciation methods, asset lives and residual values going to be incorporated into the year end close?

There may be greater demands for information, which must be embedded into processes. You might need IT to write a new automated report, or gather timesheet information for staff working on development projects.

These changes will probably not be on the radar of staff outside finance, so you will need to secure their support for your project.

prepare a skeleton set of financials, then populate the

opening balance sheet

prepare the first set of financials, with full year and comparatives, then finalise the audit.

Are there any templates I can use to help me?Yes, probably. Many accounting firms have developed their own resources such as model accounts and templates to track adjustments from old to new GAAP. Whether you tap into these or develop your own, they are an important part of your transition process and will form key support for your first accounts under the new UK GAAP.

What about accounts production software?If you use software for preparing accounts with iXBRL tagging, you should speak to your provider for the process to update the inbuilt taxonomies for FRS 101 and 102.

Will the audit be more work than usual?For the majority of entities, yes – in the year of transition. For companies with more year end processes and disclosures under the new regime, the audit fee may be higher in future too. Auditors will need to review your transition process and evidence to satisfy themselves that you have considered all relevant accounting differences, calculated numerical adjustments appropriately and included all material disclosures. They will also want to help you get through the process as painlessly as possible, so early engagement on key issues is always better than late.


andrew davieS partner, UK&i leader, financial accounting advisory services, eY www.uk.ey.com

accountingaccountancy frs 102 guide 2014

33For a december 2015 adopter, transition adjustments must be taken account in the payment of dividends from 1 January 2015

Five StepS

FRS 102FRS 102

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