Whitepaper Are you FRS-ready? An overview of how the introduction of FRS 101 and 102 is set to affect accountants in business and in practice.

Transcription

1 Whitepaper Are you FRS-ready? An overview of how the introduction of FRS 101 and 102 is set to affect accountants in business and in practice.

2 Contents Introduction 1.0 IFRS - the background 2.0 The new standards for small and medium entities 3.0 How significant is the move to FRS 101 and 102? 4.0 Preparing for the change 5.0 Is your software vendor FRS-ready? iris.co.uk Are you FRS-ready?

3 Introduction An overview of how the introduction of FRS 101 and 102 is set to affect accountants in business and in practice. The rules governing financial reporting continue to change. After initiatives such as ixbrl and Real Time Information (RTI), the adoption by the UK of new reporting standards for small and medium entities, based on International Financial Reporting Standards (IFRS), is now upon us. This whitepaper reviews some of the key ways that the new frameworks will affect both corporate accountants and those in practice, and includes some tips on how to prepare for their introduction. 3

4 1.0 IFRS - the background A global standard. International Financial Reporting Standards (IFRS) are designed to be a common global language for business. They are progressively replacing the different national accounting standards that have evolved over many years. As international shareholding and trade become more prevalent, investors, accountants, regulators and auditing firms all recognise the importance of having common standards in all areas of financial reporting. This drive towards global standardisation will make company accounts more readily understandable. It will become easier to compare apples with apples and there will be greater consistency of reporting within groups, too. There is an indirect benefit for accounting professionals: being trained in a single internationally based framework is likely to increase their career mobility. All the many and varied national frameworks are being brought into a single international framework. In this country, UK GAAP (Generally Accepted Accounting Principles) is now being brought into alignment with IFRS, and in nearly all cases will be replaced by FRS 101 and 102. In September 2015, the FRC issued a revised version of FRS 102 which includes provisions applicable to small companies because the FRSSE is withdrawn in its entirety for accounting periods commencing on or after 1 January In addition, a new standard, FRS 105 was issued for micro-entities and this also applies mandatorily for accounting periods commencing on or after 1 January The EU has been one of the biggest drivers towards IFRS. In the UK and the Republic of Ireland, all publicly owned limited companies and their subsidiaries with shares listed in an EU-regulated stock exchange have been required to use EU-adopted IFRS since Since that date, companies not obliged to report under IFRS have been able to do so if they wish, though in reality very few have done so. 4 iris.co.uk Are you FRS-ready?

5 2.0 The new standards for small and medium entities As with any regulatory change, developing and consulting on the common standard has been a complex, iterative process. After much consultation and debate, standards based on IFRS (specifically IFRS for SMEs) are now set to affect a much wider spectrum of businesses with the introduction of FRS 101 and 102: Subsidiary and parent members of group companies who currently adopt full IFRS will have to comply with a cut-down version of IFRS - namely FRS 101 Reduced Disclosure Framework. The change will chiefly affect corporate accountants. The reduced disclosures available in FRS 101 may deliver efficiency savings when preparing year end accounts, without having a negative impact on the quality of the financial reporting. Qualifying small and medium-sized businesses will have to comply with FRS 102, which applies to unlisted companies and subsidiaries of listed companies, as well as to public benefit entities such as charities. The change will chiefly affect accountants in practice. Small companies will have the option of preparing financial statements in accordance with Section 1A of FRS 102 Small Entities which outlines the presentation and disclosure requirements for a small company s financial statements; although recognition and measurement of amounts in the financial statements of a small entity will be in accordance with full FRS 102. As happens now, these businesses will be able to choose to apply the full IFRS, if they so wish. FRS 102 modernises and simplifies financial reporting for unlisted companies and subsidiaries of listed companies as well as public benefit entities such as charities. The standard updates UK accounting to take account of evolving business practices. It is succinct, easy to digest and use. Developed with considerable consultation, FRS 102 brings a distinctly British flavour to the international standard for small and medium sized businesses. At around 350 pages, the standard replaces close to 3,000 pages of UK GAAP. The Financial Reporting Council 5

6 3.0 How significant is the move to FRS 101 and 102? The new standards should be considered as completely new accounting frameworks, not just a shift in accounting policy. They introduce many changes that accountants need to understand. Accountants who completed their training some years ago and have not covered IFRS will have a whole new language to learn, as presentational terms will change. Some examples: TERMINOLOGY UNDER GAAP TERMINOLOGY UNDER FRS Balance sheet Statement of financial position Profit and loss account Income statement Cash flow statement Statement of cash flows Debtors Trade receivables Creditors Trade payables Not just cosmetic changes However, it must be stressed that the changes are more than superficial and will mean that disclosures also change; particularly for small and micro-entities where changes reflected in the EU Accounting Directive have been incorporated into FRS 102 and FRS 105. The provisions of the EU Accounting Directive have been transposed into company law and apply for accounting periods commencing on or after 1 January 2016 (although an early-adoption clause has been written into the revised legislation). Under FRS 101 qualifying entities will no longer be required to prepare a cash flow statement. A similar exemption exists in FRS 102 for subsidiaries and ultimate parents at paragraph 1.12(b). Other changes include: Changes to fair value gains and losses in respect of investment property, which will be taken directly to profit or loss rather than a revaluation reserve Intangible assets and goodwill will have their useful economic life limited to ten years or less, unless management can provide a reliable estimate for longer Under FRS102, you will no longer be allowed to apply LIFO for stock valuation This means that a significant consequence of the adoption of FRS 102 will be that reported profits may change because of the different accounting treatment. This could affect a company s tax charge and its ability to pay dividends. Careful planning beforehand assessing the impacts of the accounting changes is strongly advised. However, the overall goal is to reduce the reporting burden on both businesses and accountants. 6 iris.co.uk Are you FRS-ready?

7 4.0 Preparing for the change The timeline - the mandatory application date of the revised financial reporting framework to bring UK GAAP into alignment with IFRS is periods beginning on or after 1st January If we assume a December 2015 year end, this requires an opening balance sheet to be prepared under FRS 102 as at 1st January 2014 for disclosure purposes. The actual opening FRS 102 balance sheet is not disclosed, but Section 35 Transition to this FRS requires disclosures, in the form of reconciliations and explanations, to be made in the first FRS 102 financial statements which explain the impact the transition has had on the entity s opening equity position and prior year profit and loss. Companies in the SME sector can learn from the experience of publicly listed companies. When they had to move over to IFRS in 2005, many seriously underestimated the task, which resulted in significant time and resources having to be spent at the last minute to ensure their compliance. Moreover, if you re set to benefit from the reduced disclosure framework, you may as well start doing so sooner rather than later. A plan of action for the countdown We know that forward-looking practices, firms and businesses are already planning for a smooth transition to FRS 101 or 102: They are asking, Which frameworks will affect us? They are identifying the education needed on the principles behind IFRS, FRS101 and FRS102, both for professionals involved in the preparation of financial reports and for those using the information. They are taking steps to understand the changes required to accounting systems and management reporting to make the transition. They are deciding who should be their FRS champion, a team member who will have overall responsibility for driving the change and cascade training to the rest of the team. Sole practitioners will, of course, have to be their own FRS expert. They are finding out what support their accountancy software vendor can offer, in terms of: Developing the software to handle FRS 101 or FRS 102 Ensuring a smooth and straightforward conversion process to reduce burden on them Providing information and guidance based on best practice during the transition Offering training for users of their software 7

8 5.0 Is your software vendor FRS-ready? Over the decades, IRIS Software Group has had an unbeatable track record of being ready for new statutory requirements ahead of the deadline. Our constant drive is to help our customers to automate their processes wherever possible to reduce the burden of compliance. All accountancy software vendors will need to have a development plan for helping their customers to meet the new requirements for company disclosure in line with FRS 101 and FRS 102 and the resulting change in the ixbrl taxonomy. IRIS fully supported the original IFRS compliance for publicly listed companies in When ixbrl was introduced 6 years ago in 2010, IRIS software provided automatic tagging of the required ixbrl taxonomy for both UK GAAP and IFRS ahead of the 2011 legislative mandate, including an automated report that showed the comparison between the two, simplifying the transition. IRIS now similarly supports accountants working with non-listed companies and smaller businesses to make the transition to FRS 101 and FRS 102. It is important to note that the new HMRC ixbrl taxonomies that accommodate the new accounting standards no longer include a minimum tag set. This means a significant uplift in the information that will need to be tagged when you are submitting accounts in the FRS 101 and FRS 102 standards These ixbrl taxonomies are vastly different from the current taxonomies in issue, resulting in additional knowledge and training for your staff to be able to tag final accounts. IRIS is committed to providing you with everything you need to ensure you are compliant. Thus IRIS has provided automatic tagging of the new ixbrl taxonomies for the legislative filing mandate as part of our drive to reduce the burden of these new standards. The repealing of the concept of abbreviated financial statements means that filing requirements for Companies House will change significantly and IRIS is committed to making sure all options are made available to customers. Resources The following websites offer helpful information on the introduction of FRS 101 and 102, including key facts and frequently asked questions: The Financial Reporting Council - The Institute of Chartered Accountants in England and Wales - The Charity Commission iris.co.uk Are you FRS-ready?

9 With 37 years experience, IRIS Software Group is the leading provider of business critical software and services to accountants and payroll professionals in the UK. More than 17,500 accountants and 39,000 small and medium sized companies rely on IRIS every day to run their business. For further information on anything you ve read in this whitepaper please contact: To find out more call or visit IRIS Accountancy Solutions offers customers the greatest choice of specialist accountancy software and services managed under three leading brands - IRIS, PTP and Drummohr. With 3 million tax returns filed with HMRC and 60% of the top 50 practices as customers, IRIS is the most trusted accountancy software provider in the UK today. IRIS SME Solutions provides payroll technology to over 39,000 SMEs and payroll bureaus. As a leading provider of payroll software, IRIS serves a number of sectors, including 70% of UK GP practices and a growing number of UK retailers. More than 10% of UK businesses pay their employees via IRIS solutions. IRIS & IRIS Software Group are trade marks. IRIS Software Ltd 1/2016. All rights reserved.