A STEP BY STEP GUIDE TO IMPLEMENTING FRS 102

Transcription

1 A STEP BY STEP GUIDE TO IMPLEMENTING FRS 102

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3 This book is published by UK Training (Worldwide) Limited and is designed to help people complete a smooth transition from existing UK GAAP to FRS 102. The author of the book is Bill Telford who is a foremost expert in financial reporting standards and regularly presents seminars for UK Training. The book is subject to copyright law and should not be reproduced by any unauthorised person for their own use, selling on to a third person or for presentation to other people. UK Training (Worldwide) Limited

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5 1 The changing face of UK accounts Where are we now - General? Where are we now? Companies? UK GAAP and true and fair view Where are we going? FRS Application of Financial Reporting Requirements FRS 101 Reduced disclosure framework The Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland (includes FRS 102 Section 1) FRSSE What should you do? When and how will we get there? Underlying principles, concepts and pervasive principles FRS 102 Section Form and contents of accounts FRS 102 Section Statement of financial position FRS 102 Section Statement of Comprehensive Income and Income Statement FRS 102 Section Statement of changes in Equity and Statement of Retained Earnings FRS 102 Section Statement of Cash Flows FRS 102 Section Notes to the Financial Statements FRS 102 Section Accounting Policies, Estimates and Errors FRS 102 Section How will group accounts change? FRS 102 Sections 9, 14, 15 and Financial instruments FRS 102 Sections 11 and Inventories FRS 102 Section Investment Property FRS 102 Section Property, plant and equipment FRS 102 Section Intangible Assets other than Goodwill FRS 102 Section Leases FRS 102 Section Provisions and Contingencies FRS 102 Section Liabilities and Equity FRS 102 Section Revenue FRS 102 Section Government Grants FRS 102 Section Borrowing Costs FRS 102 Section Share-based payments FRS 102 Section Impairment of Assets FRS 102 Section Employee Benefits FRS 102 Section Income Tax FRS 102 Section Foreign Currency Translation FRS 102 Section Hyperinflation FRS 102 Section UK Training (Worldwide) Limited P a g e 2

6 38 Events after the Reporting Period FRS 102 Section Related Party Disclosures FRS 102 Section Specialised Activities Statements of recommended practice under the new regime Agriculture Extractive industries Service concession arrangements Financial institutions Retirement benefit plans Heritage assets Funding commitments Public benefit entities General guidance Public benefit entities: Incoming resources from non-exchange transactions Public benefit business combinations Public benefit entity concession loans Transition Section Appendix 1: Small companies the Companies Act Appendix 2: Micro-companies Appendix 3 FRS and UITF abstracts in issue at 1 February 2014 replaced by FRS Appendix 4 Companies Act formats Appendix 5 Structure of FRS Appendix 6 Transition Ltd case study Appendix 7 - Answer To Case Study UK Training (Worldwide) Limited P a g e 3

7 Part One: Introduction and objectives 1 The changing face of UK accounts 1.1 Introduction UK accounts are changing. These changes are driven by changes in company law, primarily emanating from Europe, and from the replacement of all extant UK accounting standards by new ones. Additionally there are some changes in International Accounting Standards which are outside the scope of this book and the related course. There are 3 major projects being worked on by the International Accounting Standards Board which will, no doubt, and in due course impact on UK GAAP. These are accounting for leases, income recognition and the finalisation of IFRS 9: Financial Instruments. 1.2 Objectives This book and the related training course - are designed to help companies and others affected by the change 1 to develop an action plan for compliance. We seek to answer 4 key questions: 1. What are our options under the revised framework? Part two outlines where we are now, and what options are available under the revised framework. It also suggests what the best option is likely to be for you. 2. How will our accounts change? Parts three to five outline some of the key changes which the new framework will introduce. (a) Part three considers to what extent the presentation of the financial statements will change as a result of the adoption of FRS 102, both within individual company accounts and within group accounts; (b) Part four highlights the principal changes relating to individual elements of the financial statements; and (c) Part five deals with specialised activities. This will assist you to make a decision on which of the available options to adopt and therefore assess the impact on your individual and group financial statements. As we will show, most entities will elect for FRS 102, with or without reduced disclosures. 3. What should we be doing now? Part six of the notes outlines the transitional process and gives guidance on where and how to start that process. 4. What will we need to do over the next years? The first mandatory financial statements will be for periods commencing on or after 1 January Having identified the impact of changes and the transitional provisions the remaining period until the first set of financial statements under FRS 102 will be concerned with ensuring that the information is obtained and the first year runs smoothly. 1 The changes outlined below will generally apply to all financial statements required or intended to give a true and fair view (or equivalent.) 2 A maximum 3 year time scale is suggested because as will be seen later the mandatory effective date of the changes is accounting periods commencing on or after 1 January For a company with a 30 November year end the mandatory effective date will be 30 November 2016 and the accounts will need to be filed by 31 August UK Training (Worldwide) Limited P a g e 4

8 Part Two: Where are we now, where are we going and what are our options? 2 Where are we now - General? Requirement for financial statements At the date of preparing this material (February 2014) the following statements summarise the position for entities preparing financial statements: (a) Legislation usually determines whether accounts are required and, if they are, the basis on which accounts are required. For example the Companies Act 2006 includes detailed requirements for varying categories of company (see chapter 3 below.) (b) Where there is a requirement for accounts to show a true and fair view (or equivalent) accounting standards must be complied with (see chapter 4 below.) (c) Tax law requires taxable trading profit to be based on accounting profit computed under generally accepted accounting practice (as under (b) above), adjusted for tax law. This applies for entities and individuals 3 even where there is no statutory requirement for accounts Use of accounts and implications for users Accounts are used in many practical situations: (a) Distributable profits are based on accounting profits. This impacts on the level of dividends; (b) Loan agreements often include borrowing covenants which are set by reference to items in the accounts, both in the profit and loss account and the balance sheet; (c) Accounts are used by lenders, creditors and others in making business decisions connected with dealing with entities. Therefore any change in accounting standards will have a potential impact on compliance with regulation, availability of distributable profits and taxable profit, together with the picture presented to third parties. It is thus essential that companies, and other entities, make an early assessment of the potential changes, make sensible decisions where choices are available and plan for the changes. 3 Where are we now? Companies? 3.1 Introduction The form and content of company accounts is driven by the Companies Act 2006 which requires accounts to be true and fair and properly prepared under the Act and related regulations. The statutory requirements are now included within regulations enacted under CA The application of these regulations is driven by (a) The size of the company: a. SI 2008/ 410 Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 sets out the requirements for the separate accounts of large and medium sized companies and groups; b. SI 2008/409 Small Companies (Accounts and Directors Report) Regulations 2008 sets out the requirements for the separate accounts of small companies 4 and groups 3 Finance Act 2013 introduces a cash based alternative for very small unincorporated businesses as an alternative to generally accepted accounting practice. 4 The definition of small companies in particular is important to the application of accounting standards as well as the accounting regulations and is covered in Appendix 1. UK Training (Worldwide) Limited P a g e 5

9 c. In November 2013, the Government introduced regulations dealing with microcompanies in the Small Companies (Micro-entities accounts) Regulations 2013 SI 2013/3088. (b) The nature of the financial statements. In addition to the above regulations dealing with the full accounts, SI 2008/374 deals with summary financial statements and sections 444 and 445 allow small and medium sized companies to file abbreviated accounts. 5 In practice this means that: (a) Quoted companies must prepare group accounts in accordance with what CA 2006 refers to as IAS Group Accounts (S403). IAS in this context means International Accounting Standards as adopted by the EU 6. Note that for purposes of the Companies Act, quoted companies only refers to those admitted to trading on a regulated market in an EEA state. This includes those on the full list, but excludes AIM and PLUS markets. The AIM rules require IFRS for group accounts, the PLUS rules permit, but do not require, IFRS. The individual parent company accounts and the accounts of the subsidiary companies do not need to be prepared under IFRS. Therefore a stand-alone listed company such as a Venture Capital Trust may use IFRS or UK GAAP. Anecdotal evidence is that most parent companies, and subsidiaries have continued to use UK GAAP for their individual company accounts and stand-alone listed entities have continued with UK GAAP, rather than IFRS as adopted by the EU. (b) Companies which qualify as small are permitted to use the Financial Reporting Standards for Smaller Entities (FRSSE) alongside the Small Companies Regulations for their accounts for shareholders. They can file abbreviated accounts. Since these are based on the full accounts, their preparation is driven by the generally accepted accounting practice which is the subject of this book; (c) Micro-companies can use FRSSE and the micro-entities regulations. (d) Companies which are ineligible to use the small companies regime, or are eligible but choose not to, may prepare their accounts in accordance with UK GAAP or IFRS as adopted by the EU. For this purpose, UK GAAP includes all accounting standards and UITF abstracts applicable to the period. This will include all accounting standards with a mandatory effective date plus those which an entity chooses to adopt early, if applicable. 4 UK GAAP and true and fair view 4.1 Introduction For many years UK company law and other legislation - has required company accounts to be true and fair. The expression true and fair itself was introduced by the Companies Act 1948 but similar terms had been used previously. The EU Fourth Directive, enacted in the UK in the Companies Act 1981, introduced true and fair to the rest of Europe, and standardised formats for profit and loss accounts and balance sheets to the UK. The Act has never defined true and fair view and increasingly has left the definition and interpretation to accounting standard setters (see 4.2 below.) 5 Summary financial statements and abbreviated accounts are not dealt with further in these notes. The effect of the changes arising under FRS 102 and related standards will be reflected in the summary financial statements or abbreviated accounts. 6 In the notes which follow we use the acronym IFRS to refer to the general body of extant International Accounting Standards (which includes those prefixed by IAS or IFRS) plus Interpretations (prefixed by SIC or IFRIC). UK Training (Worldwide) Limited P a g e 6

10 IFRS uses fairly presents rather than true and fair but it is generally agreed that in practice these expressions are the same. ICAEW has obtained counsel s opinion that IFRS accounts are and acceptable basis for a true and fair view. 4.2 Accounting Standards Accountings Standards Committee and SSAPs In 1971 the Accounting Standards Committee (ASC) published the first ever UK Accounting Standard, Statement of Standard Accounting Practice (SSAP) SSAP 1 - which dealt with the relatively esoteric subject of accounting for investments in associated companies 7. This was quickly followed by SSAP 2, Disclosure of Accounting Policies, which was relevant to all entities producing true and fair accounts. The fact that the third standard was on earnings per share which applies only to listed entities illustrates that the early standard setters were concerned with giving guidance on problem areas, often linked to areas open to abuse or misinterpretation, rather than creating a structured framework. Indeed, it was only in 1999 that the Statement of Principles for Financial Reporting was published, followed the next year by Financial Reporting Standard (FRS) 18 - Accounting Policies, which superseded SSAP 2 and introduced more rigorous requirements for the selection of accounting policies Accounting Standards Board and FRSs The Accounting Standards Committee was succeeded by the Accounting Standards Board and SSAPs were followed by Financial Reporting Standards (FRSs). Appendix 2 lists those accounting standards currently in issue which will be replaced by new UK GAAP. All of these standards with the exception of FRS 27 Life Insurance. That standard will also be replaced when FRS 103 becomes effective Urgent Issues Task Force Abstracts SSAPs and FRSs were published after formal consultation and due process. A need was identified for quick response guidance in areas where there was insufficient time, or need for due process and Urgent Issues Task Force (UITF) abstracts were introduced. Latterly these did follow a shorter period of consultation. Appendix 2 includes the UITF abstracts currently in force, all of which cease to be effective when new UK GAAP is applied Statements of Recommended Practice (SORPs) Over the years SORPS have been developed to give guidance on accounting for specialist areas. Examples of those currently in issue relate to charities, pension schemes and limited liability partnerships. SORPs are prepared on the basis of UK GAAP and do not take account of IFRS, although they may be adapted where an entity is using IFRS. There are a number of SORP issuing bodies and the SORP should be consistent with existing accounting standards at the date of issue. Chapter 40 below deals with SORPs under the new regime. 4.3 Financial Reporting Standard Small Entities (FRSSE) The Financial Reporting Standard for Small Entities was developed to provide guidance on the application of accounting standards for entities which qualified as small under the Companies Act. In general, FRSSE usually requires items to be accounted for on the same basis as the full standard but with reduced disclosure. However, as one of the key criteria for guidance under the FRSSE is simplicity some choices have been removed. 7 Although reasonably esoteric SSAP 1 was important in practice as it introduced the concept of substance over form and required an entity to include its share of profits and losses when it exercised significant influence (see also chapter 20 below). UK Training (Worldwide) Limited P a g e 7

11 Initially, FRSSE only included accounting standard guidance but latterly it has included all accounting requirements in one place i.e. those required by accounting standards and the Companies Act. FRSSE is updated infrequently and indeed the last full revision was in In 2008 a further revision was made which dealt with changes introduced by the implementation of the Companies Act When stating in the accounts that FRSSE has been adopted it is essential to disclose which version has been adopted. 4.4 The underlying issues in GAAP There are 4 elements considered by accounting setters and which are relevant in assessing whether an item has been dealt with correctly under GAAP: (a) Recognition and derecognition when should a transaction, asset or liability be included in the financial statements? When (and how) should it be removed? (b) Measurement at how much should a transaction, asset or liability be included in the financial statements, initially and then in subsequent years? (c) Presentation how should a transaction, asset, liability or equity be shown in the financial statements? (d) Disclosure what note disclosures are required? In assessing the changes which new GAAP introduces, it is necessary to identify how, if at all, new GAAP changes the answers to the above 4 questions. Within this book we concentrate on the first three. Disclosure is best dealt with by a good Accounts Disclosure Checklist whether computerised or manual. 5 Where are we going? 5.1 Introduction As noted in chapter 4 above, the requirements for, and the format of, company accounts is driven by: (a) Company law; and (b) Accounting standards. Therefore when there is a change in either company law or accounting standards this will change the format or content of company accounts. We are currently anticipating major changes in both. 5.2 Changes in company law At the date of writing these notes, a new accounting directive is expected from the EU. It is anticipated that there will be some changes for small companies but not for others. In particular, it is expected that the new directive will increase the small company thresholds and prohibit the introduction by national governments of additional requirements over and above those of the Directive. 5.3 The new structure of GAAP in the UK and Ireland After a prolonged period of consultation, and at least one false dawn 8, the UK standard setters have now published the accounting standards which set the scene for the application of GAAP within the UK and Ireland. In the restructuring of the Financial Reporting Council (FRC) and its constituent bodies, ASB the previous standard setter was replaced by the Accounting Council. The Accounting Council is not a standard setter. It is the FRC who issue the standards, on the basis of advice from the Accounting Council. There are 3 new standards in issue at the date of publishing this material (1 July 2013), and a fourth is promised: (a) FRS Application of Financial Reporting Requirements (see chapter 6 below); (b) FRS Reduced Disclosure Framework (see chapter 7 below); and 8 FRED 42, 43, 44 and 45 proposed a three tier system based on IFRS for SME which would have extended the application of IFRS to all publicly accountable entities, introduced a separate public benefit standard and a standard to be known as the Financial Reporting Standard for Medium Sized Entities (FRSME). The new standards take account of some significant adverse reaction to these proposals. UK Training (Worldwide) Limited P a g e 8

12 (c) FRS 102 -The Financial Reporting Standard applicable in the UK and Republic of Ireland. (see chapter 8 and subsequent chapters below). In addition, FRS 103 Insurance Contracts will be issued to replace FRS FRS Application of Financial Reporting Requirements 6.1 Introduction FRS 100 sets the framework under which an entity decides which accounting standards apply. It also includes key definitions and imposes requirements in relation to SORPs. Of particular interest to those who act for small companies, FRS 100 also includes consequential amendments to FRSSE (see [check reference] below). FRS 100 requires a statement of compliance in the notes to the financial statements, in accordance with the relevant standard. 6.2 Which standards apply? Introduction Paragraph 4 of FRS 100 is as follow: Financial statements (whether consolidated financial statements or individual financial statements) that are within the scope of this FRS, and that are not required by the IAS Regulation or other legislation or regulation to be prepared in accordance with EU-adopted IFRS, must be prepared in accordance with the following requirements: (a) If the financial statements are those of an entity that is eligible to apply the FRSSE, they may be prepared in accordance with that standard; (b) If the financial statements are those of an entity that is not eligible to apply the FRSSE, or of an entity that is eligible to apply the FRSSE but chooses not to do so, they must be prepared in accordance with FRS 102, EU-adopted IFRS or, if the financial statements are the individual financial statements of a qualifying entity, FRS Effective date FRS 100 is mandatory for periods commencing on or after 1 January 2015, earlier adoption is permitted for periods ending on or after 31 December 2012 (see chapter 10 below). 6.4 Withdrawal of accounting standards and consequential amendments to the FRSSE All existing standards (except FRS 27) will be withdrawn for accounting periods commencing on or after 1 January The Statement of Principles is also withdrawn. FRS 100 confirms that all existing standards are withdrawn earlier on early adoption. There are consequential amendments to FRSSE which are considered below. 7 FRS 101 Reduced disclosure framework 7.1 Introduction During the consultation process on FREDs referred to above it became clear that listed groups would value the option to adopt IFRS in their individual parent and subsidiary company accounts as it would facilitate the preparation of group accounts, were it not for the potentially onerous disclosure requirements within IFRS. Accordingly ASB introduced a reduced disclosure option which has been carried forward to the new framework. This is reflected in FRS 101 which introduces a reduced disclosure framework for qualifying entities which are included within group accounts prepared under EU adopted IFRS. UK Training (Worldwide) Limited P a g e 9

13 A qualifying entity is defined as a member of a group where the parent prepares publicly available consolidated financial statements which are intended to give a true and fair view (of the assets liabilities, financial position and profit or loss) and that member is included in the consolidation. This is a standard which is likely to be adopted early by listed groups. Note that the reduced disclosures apply only in the individual financial statements of a qualifying entity, and not in the consolidated accounts. A parent company may therefore use the reduced disclosure framework for its own accounts, but not for the group accounts. 7.2 Conditions Section 5 of FRS 101 outlines the conditions for the use of the disclosure exemptions: (a) Its shareholders have been notified in writing about, and do not object to, the use of the disclosure exemptions. Objections to the use of the disclosure exemptions may be served on the qualifying entity, in accordance with reasonable specified timeframes and format requirements, by a shareholder that is the immediate parent of the entity, or by a shareholder or shareholders holding in aggregate 5% or more of the total allotted shares in the entity or more than half of the allotted shares in the entity that are not held by the immediate parent. (b) It otherwise applies as its financial reporting framework the recognition, measurement and disclosure requirements of EU-adopted IFRS, but makes amendments to EU-adopted IFRS requirements where necessary in order to comply with the Act and the Regulations, given that the financial statements that it prepares are Companies Act accounts as defined in section 395(1) (a) of the Act, not IAS accounts as defined in section 395(1) (b) of the Act. Application Guidance I to this FRS sets out the necessary amendments. (c) It discloses in the notes to its financial statements: (i) a brief narrative summary of the disclosure exemptions adopted; and (ii) the name of the parent of the group in whose consolidated financial statements its financial statements are consolidated, and from where those financial statements may be obtained. 7.3 Summary of FRS 101 The following table summarises the approach adopted in FRS 101. Recognition IFRS as adopted by EU Measurement IFRS as adopted by EU Presentation Companies Act formats Disclosure FRS 101 The resulting standard is UK GAAP. Company law has been amended to permit entities to change back from IFRS to UK GAAP. 7.4 The disclosure exemptions The detailed disclosure exemptions are found in paragraphs 8 and 9 of FRS 101 and are not repeated here. There are variations in the disclosure exemptions in relation to qualifying entities which are not financial institutions, qualifying entities which are, and those which have financial instruments held at fair value or derivatives and those which do not. To some extent they are meaningless as FRS 101 simply cross refers to paragraphs in an IAS or IFRS. The important thing for delegates is to ensure that they use up to date accounts disclosure checklists. UK Training (Worldwide) Limited P a g e 10

14 7.5 Statement of compliance The practical effect of adopting FRS 101 is that recognition and measurement are in accordance with EU adopted IFRS, but disclosure and presentation are in accordance with FRS 101 and CA 2006 i.e. they are prepared under UK GAAP. Therefore they cannot include a statement of compliance with IFRS, but must include a statement of compliance with FRS Practical application Introduction When IFRS became mandatory for quoted companies in their group accounts, and when the AIM rules introduced the requirement for group accounts to be prepared under IFRS, subsidiary companies were able to continue under UK GAAP. The changes introduced by this package means that parent and subsidiary companies are likely to change, either to FRS 102 or to FRS 101, although some who currently use full IFRS as adopted by the EU may continue to do so. Moving to FRS 101 will facilitate the consolidation process as measurement and recognition in the subsidiary s accounts are in accordance with IFRS, without requiring all the detailed disclosures which full IFRS would impose. If a subsidiary moves to FRS 102, there consolidation adjustments will still be required in converting FRS 102 into IFRS. However given that FRS 102 includes more IFRS based items than current UK GAAP, there may be fewer adjustments than currently Parent and subsidiary companies previously adopted IFRS as adopted by the EU Where a subsidiary did adopt IFRS as adopted by the EU in the past, FRS 101 will be attractive as the accounting policies will need little change (if any) but there will be significantly reduced disclosure. Indeed such groups are likely to be amongst the earliest adopters and may even apply FRS 101 for their 31 December 2012 year-ends. A change in CA 2006 effective from 1 October 2012 removed the condition that an entity could only change back to UK GAAP form IFRS if there was a relevant change of circumstances 9. This means that a company can change from IFRS to UK GAAP as outlined in FRS 101, provided that they have not already changed from IFRS to UK GAAP in the previous five years, other than due to a change in relevant circumstances Parent and subsidiary previously adopted UK GAAP moving to FRS 101 It is expected that those subsidiaries which did not adopt IFRS when it was introduced, and continued with UK GAAP will transition to FRS 101. They cannot continue with current UK GAAP. Where a company transitions from UK GAAP to FRS 101, this is effectively moving to IFRS for recognition and measurement purposes and therefore the transition must follow IFRS 1. 8 The Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland (includes FRS 102 Section 1) 8.1 Introduction FRS 102 is based on the International Financial Reporting Standard for Small and Medium-sized entities (IFRS for SMEs) but with major adaptations to meet the requirements of UK GAAP. Consequently it is a unique standard, including as it does, elements of existing UK GAAP and elements of IFRS for SME and some new treatments which are a combination of both or neither! 9 A relevant change of circumstance is one in which the company ceases to be a subsidiary, becomes a subsidiary of a company not required to prepare IAS accounts, or the company or its parent ceases to be a quoted company. UK Training (Worldwide) Limited P a g e 11

15 In this chapter we outline the scope of the standard, and identify specific features relevant to different entities. In part three we review the changes in format and presentation of the accounts under FRS 102 and in part four we identify the key changes in recognition, measurement, presentation and disclosure. In part five we review requirements for specialised activities. Finally in part six we consider transition in detail. 8.2 Scope of FRS General FRS 102 applies to all entities required to prepare true and fair (or equivalent) financial statements who are not required, eligible or choose not to comply with EU adopted IFRS, FRS 1010 or the FRSSE Publicly accountable entities IFRS for SME may not be used by an entity with public accountability. An entity has public accountability if (a) Its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an OTC market, including local and regional markets);or (b) It holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance companies, securities broker/dealer/mutual funds or investment bank Initially, UK GAAP was going to include a similar prohibition which would have led to publicly accountable entities having to move to EU adopted IFRS. This was rejected during the consultations. Therefore publicly accountable bodies may use FRS 102. Because of this scope difference, the content of FRS 102 has had to be extended to cope with such publicly accountable entities Listed companies Listed companies are required to produce earnings per share and segmental information. Since IFRS for SME did not include guidance on these areas, FRS 102 has had to include guidance. FRC has decided to do this by including a requirement to follow the relevant IFRS rather than developing their own guidance (or replicating the IFRS requirements within FRS 102.) Public benefit entities In an earlier consultation it was proposed that there would be a separate public benefit standard. There is no longer to be a public benefit standard. FRS 102 includes some general guidance on accounting by public benefit entities. In addition some of the sections have relevant guidance on public benefit issues. The guidance for public benefit entities is given in chapter 49 below Qualifying entities Having accepted the concept that the provision of full disclosure is unnecessary in the individual accounts of parents and subsidiaries of listed groups prepared under IFRS, the ASB proposed a similar exemption for financial statements prepared under UK GAAP. This proposal has been included by FRC and FRS 102 provides that a qualifying entity (for the purposes of FRS 102) which is not a financial institution may take advantage of disclosure exemptions set out in paragraph 1.12 of the standard. A qualifying entity is defined as A member of a group where the parent of that group prepares publicly available consolidated financial statements which are intended to give a true and fair view (of the assets, liabilities, financial position and profit or loss) and that member is included in the consolidation. These notes do not cover the detailed disclosure exemptions Financial institutions FRS 102 has specific guidance in relation to financial institutions. These are dealt with in chapter 44 below. UK Training (Worldwide) Limited P a g e 12

16 8.3 Structure of the standard The standard is organised by topic with each topic presented in a separate numbered section, which corresponds with the relevant paragraph in IFRS for SME. 10 It is possible to consider FRS 102 under 3 headings: (a) Sections 1 10 which deal with scope, concepts and principles, form and content of accounts and accounting policies, estimates and errors. These sections are dealt with in Part Three below.; (b) Sections which deal with specific accounting subjects e.g. section 13 on inventories. Each section has a separate chapter within Part Four below; (c) Section 34 which deals with specialised activities. This section and other guidance on specialist areas is covered in part Five below; and (d) Section 35 which deals with transition. This is covered in detail in Part Six below. 9 FRSSE It was initially announced that FRSSE would continue for the foreseeable future, and, indeed, an updated version incorporating the changes made by FRS 100 was issued and an exposure draft for changes was also published. The FRC have now announced a review of FRSSE in their newsletter Setting the Standard for financial reporting October 2013 to January 2014 and stated that the tentative view is that FRSSE should be withdrawn and instead small entities and micro-companies brought within the scope of FRS 102 so that a consistent framework and principles apply to all entities. FRS 102 would be revised to include specific requirements for small entities and micro-entities to reflect the differing legal requirements, particularly in relation to disclosure. 10 What should you do? 10.1 Introduction The following table summarises the options available to companies and other entities which are required to prepare true and fair financial statements and, therefore, comply with accounting standards. The black boxes indicate what is expected to be the typical adoption by an individual entity and the notes explain why that particular approach is likely to be adopted. EU adopted IFRS FRS 101 FRS 102 FRS 102 plus reduced disclosure FRSSE Listed Group Must Parent / subsidiary Option Option Option Option Stand-alone (e.g. VCT) Option Option Large or medium sized unlisted Group Option Option Parent / subsidiary Option Option Option Option Stand-alone Option Option Small unlisted Entity / group Option Option Option 10 A list of the sections is given in Appendix 3. UK Training (Worldwide) Limited P a g e 13

17 10.2 Notes to support table comments on accounts EU adopted IFRS Note that FRS 100 does not extend the requirements to any entities which were not required to do so previously. It is not expected that many entities will voluntarily choose to move to EU adopted IFRS primarily because of the volume of disclosures which adoption would require. Indeed much of the criticism aimed at the early exposure drafts was designed to ensure that no additional entities would be required to adopt IFRS FRS 101 This is only available to entities whose parents prepare group accounts under EU adopted IFRS and the conditions outlined in 7.2 above are complied with FRS 102 This is the Financial Reporting Standard for UK and Ireland and is dealt with in detail in the remaining chapters FRS 102 with reduced disclosure option This option is only available to parent companies in their individual accounts and subsidiary companies, where group accounts are prepared under FRS 102 and the conditions in below are complied with. (a) Its shareholders have been notified in writing about, and do not object to, the use of the disclosure exemptions. Objections to the use of the disclosure exemptions may be served on the qualifying entity, in accordance with reasonable specified timeframes and format requirements, by a shareholder that is the immediate parent of the entity, or by a shareholder or shareholders holding in aggregate 5 per cent or more of the total allotted shares in the entity or more than half of the allotted shares in the entity that are not held by the immediate parent. (b) It otherwise applies the recognition, measurement and disclosure requirements of this FRS. (c) It discloses in the notes to its financial statements: (i) a brief narrative summary of the disclosure exemptions adopted; and (ii) the name of the parent of the group in whose consolidated financial statements its financial statements are consolidated, and from where those financial statements may be obtained FRSSE This option is only available if the entity qualifies as small under the Companies Act 2006 criteria (see Appendix 1). As noted above it will probably not be retained, but until the Exposure Draft expected in June has been issued and consultation taken place, the option is shown Notes to table different entities Listed groups group accounts As indicated above CA 2006 requires quoted companies to follow EU adopted IFRS in their group accounts. In addition, AIM rules require IFRS in their group accounts. The new accounting framework does not change this requirement, and indeed this is the only entry in the table which requires a particular framework to be adopted Listed groups parent and subsidiary accounts Anecdotal evidence is that the majority of listed groups have continued to prepare their parent and subsidiary accounts under UK GAAP, and only use IFRS for the group accounts. That option disappears under FRS 100 and the parent, and subsidiaries, need to move away from current UK GAAP. The advantage of moving to IFRS as adopted by the EU is that it simplifies the preparation of group accounts, the disadvantage is that IFRS can require some 3,000 disclosures. UK Training (Worldwide) Limited P a g e 14

18 Accordingly FRS 100 allows the use of a reduced disclosure option for such entities through the introduction of FRS 101 provided that the conditions have been met (see 7.2 above.) Other listed entities Stand-alone listed entities such as Venture Capital Trusts are not required to use IFRS by CA It is anticipated that those which currently follow UK GAAP, and have already chosen not to adopt IFRS in the past, will continue with the non-ifrs option, and will therefore adopt FRS Large and medium sized groups group accounts Since the reduced disclosure options only apply in individual accounts, and these groups are not eligible to use the FRSSE, there are only two options, move to IFRS as adopted by the EU or adopt FRS 102. Given the disclosure burden required by IFRS, it is expected that these accounts will follow FRS Large and medium sized groups parent and subsidiary company accounts Provided that group accounts are prepared, parent and subsidiary companies can use the reduced disclosure options. They therefore have the choice of IFRS or FRS 101, FRS 102 or FRS 102 with reduced disclosure. It is the last option which such companies are expected to adopt as it is the easiest. They need to comply with the conditions for reduced disclosure outlined in above have been complied with Stand-alone large and medium sized companies As in above, such entities only have the two options of IFRS or FRS 102 and it is expected that they will use FRS 102 for the same reason simpler accounting and fewer disclosures Small companies It is expected that small companies will continue to use the FRSSE while it is available. As discussed in chapter 5.2 above, the Accounting Directive may mean that FRSSE no longer applies and the introduction of micro-company accounting may give a further option for a subset of small companies. FRSSE has not been updated since 2007 the 2008 amendment was simply to update for CA 2006 references and requirements. It is anticipated that it will be revised and reissued as FRSSE effective 2015, if the EU developments referred to above have not made it redundant! FRS 100 includes a number of consequential amendments to FRSSE Most of the consequential amendments are simply to cross refer to the new structures e.g. removing references to SSAPs and FRSs etc. and replacing by reference to FRS 100,101 or Entities other than companies Where an entity is required to prepare true and fair accounts, it will be expected to comply with FRS 102, in the same way as it would have been expected to comply with existing accounting standards. Now that FRS 102 includes reference to, and a requirement to comply with, the Companies Act formats (see 13.4 below]) entities which are not companies will have an additional factor to build in, the adoption of the formats! See Part Five below for guidance on specialist areas, including some entities which are not companies. Where the entity is subject to a SORP, any guidance in the SORP on formats should be followed. Guidance is also given in Part Five, chapter 40 below. 11 When and how will we get there? 11.1 Effective date The suite of accounting standards are mandatory for periods commencing on or after 1 January Early adoption is permitted for periods ending on or after 31 December UK Training (Worldwide) Limited P a g e 15

19 11.2 Transition options In practice there are 4 situations most likely to apply: Old GAAP New GAAP Transitional guidance UK GAAP or FRSSE IFRS as adopted by EU Follow requirements of IFRS 1. EU adopted IFRS FRS 101 Consider whether amendments are required to comply with paragraph 5(b) of FRS 101. If no material effect, disclose fact that there has been a transition. If there has been a material effect, disclose (a) Description of each material accounting policy; (b) Reconciliation of equity and profit or loss under UK GAAP FRS 101 Apply requirements of paragraphs 6 to 33 of IFRS 1 as adopted by the EU including the relevant appendices UK GAAP, IFRS as adopted by EU or FRSSE UK GAAP, IFRS as adopted by EU FRS The year of adoption FRS 102 Follow transitional provisions under FRS 102 (see chapter 11.3 and chapter 53 below). FRSSE Follow transitional provisions under FRSSE. IFRS and FRS 102 define the date of transition as the beginning of the earliest period for which an entity presents full comparative information in a given standard in its first financial statements that comply with that standard. For a company with a 31 December year end, this means that the date of transition is 1 January 2014, which is effectively 31 December Note that the financial statements for the years up to and including 31 December 2014 will be prepared under existing UK GAAP. In the year of adoption, preparers and auditors will need to follow section 35 of FRS 102 which deals with transition to the standard. Section 35 requires the entity to prepare an opening statement of financial position at the date of transition which: (a) Recognises all assets and liabilities whose recognition is required by FRS 102; (b) Excludes assets or liabilities which would not be recognised under FRS 102; (c) Reclassifies items under UK GAAP such that they are classified as under FRS 102; (d) Measures all assets and liabilities according to the requirements of FRS 102. The effect of any measurement / valuation changes is reflected in the opening balance on retained earnings or other appropriate category of equity. There is no requirement to present the opening statement of financial position within the financial statements under FRS 102. There would be on the adoption of IFRS. The results for the prior year, and the statement of financial position are restated using FRS 102 measurement, recognition and presentation provisions and the current year prepared on that basis. There are certain exemptions and exceptions which are considered further in chapter 35 below. In addition to the restatement of balances and the preparation of the current year financial statements under FRS 102, section 35 includes a number of disclosure requirements, including reconciliations of equity and profit. In parts three to five we review the detailed requirements of FRS 102 and we return to transition in part six, once we understand the recognition, measurement and classification issues within the standard. UK Training (Worldwide) Limited P a g e 16

20 11.4 The year of adoption tax It is important to appreciate that whenever an entity adopts new accounting policies tax law has provisions designed to ensure that all income is taxed once and once only and that all allowable expenditure is allowed and allowed once only. This is done by taxing the last year under old GAAP and in the year of change computing tax in two components: (a) Tax liability for the year computed under new GAAP, (b) An adjustment for taxable income less expenses which would otherwise have fallen out of tax or not been allowed for tax (or been taxed or allowed for tax twice). These provisions will be applied when an entity moves from current UK GAAP to FRS 102, IFRS as adopted by the EU or FRS 101. The detailed mechanics of this computation are outside the scope of this book and course but you will need to ensure that the tax implications of any changes are identified and dealt with. UK Training (Worldwide) Limited P a g e 17

21 Part Three: What will our accounts look like under FRS 102? 12 Underlying principles, concepts and pervasive principles FRS 102 Section Introduction Before looking at the specific requirements included in section 3 of FRS 102, it is important to consider the Concepts and Pervasive Principles of Section 2. This section replaces the Statement of Principles for Financial Reporting and adopts the terminology of IFRS for SME with some amendments to reflect UK and ROI position. The general principles which underpin accounting standards and are included in the Statement of Principles for Financial Reporting are now explicit within the accounting standard, including definitions of asset, liability and equity and general principles for recognition and measurement in the statement of financial position and the income statements. There is unlikely to be any significant impact in practice Objectives of financial statements The objectives of financial statements to provide information about the financial position, performance and cash flows of an entity and to show the results of the stewardship of management continue Qualitative characteristics The qualitative characteristics are: (a) Understandability; (b) Relevance; (c) Materiality; (d) Reliability; (e) Substance over form; (f) Prudence; (g) Completeness; (h) Comparability; (i) Timeliness; (j) Balance between benefit and cost 12.4 Two important concepts within FRS 102 present value and fair value Introduction As will be seen in the sections which follow, historical cost is not the only basis under which items are measured in FRS 102. There are a number of areas where the use of fair value is required and others where the use of fair value is one of the available options. The definition of fair value within FRS 102 is the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable willing parties in an arm s length transaction. Some sections of FRS 102 give guidance on the assessment of fair value in specific situations. Usually that guidance will be based on the present value of future cash flows. In the absence of specific guidance, the general guidance in FRS 102 section should be followed Fair value general guidance FRS 102 includes a hierarchy as a basis for estimating fair values as follows: UK Training (Worldwide) Limited P a g e 18

22 (a) Tier 1 11 a quoted price for an identical asset in an active market. The quoted bid price is usually the current price. (b) Tier 2 the price of a recent transaction for an identical asset.. as long as there has not been a significant change in economic circumstances or a significant lapse of time since the transaction took place. (c) Tier 3 valuation techniques including using recent arm s length transactions for an identical asset between knowledgeable, willing parties, if available, reference to the current fair value of another asset that is substantially the same as the asset being measured, discounted cash flow analysis and option pricing models. Where there is a valuation technique commonly used by market participants to price the asset, the entity should use it where there is evidence that it produces reliable estimates of prices. Therefore valuations of property using RICS valuation techniques will continue to be used for property valuations, both of investment property and other properties. In addition to using the tiers for valuations, the tier used will trigger additional disclosure requirements. In general, the higher the tier the more disclosures of assumptions, risks and uncertainties will be required Present value The Glossary of terms defines present value as a current estimate of the present discounted value of the future net cash flows in the normal course of business. Present value is used as discussed above in assessing fair value. It is also used in other circumstances where the time effect of a cash flow is material. For example in Section 23.5 dealing with Revenue, FRS 102 requires that where the inflow of cash or cash equivalents in a revenue transaction is deferred, and there is in effect a financing transaction, the fair value of revenue is the present value of all future receipts using an imputed rate of interest. There are similar requirements relating to the purchase of stocks, property plant and equipment etc. Illustration 1 Company A is a dealer in equipment and sells a tractor to company B for 14,000 payable in 3 years. No interest rate is specified in the contracts. The normal cash selling process for this type of vehicle is 9,965. How should the income be recorded under FRS 102? Comments on illustration 1 Section 23.5 of FRS 102 requires the use of an effective interest rate to identify the finance income associated with the contract. This is defined in the Glossary as the rate that exactly discounts estimated future cash payments or receipts through the life of the financial instrument, or when appropriate, a shorter period to the carrying amount of the financial asset or financial liability. In the case of revenue recognition therefore we need to consider the timing of all the cash flows and points of receipt related to the sales contract. In discounted cash flow terms we have 14,000 received at the end of 3 years, being equivalent to 9,965 now. This is an effective interest rate of 12% The terms Tier 1, 2 and 3 are not used but are commonly referred to in practice. They are not the same as in the recently issued IFRS 13 and may be updated in due course to reflect the new definitions included therein. 12 The calculation of the effective rate of return using a trial and error approach is outside the scope of this book. UK Training (Worldwide) Limited P a g e 19