December 2013 Category Course title Author Accounting Transition to the new UK GAAP, FRS 102 Paul Gee Disclaimer and Copyright Whilst every care has been taken in the preparation of this learning material we do not accept any liability resulting from reliance thereon. The material is intended to provide an understanding of a particular subject matter, not as specific advice directly applicable to your own or client's circumstances. This material may be printed out and used by the individual(s) with a subscription to the CCH e-cpd product, for the purpose of education and training. It may not otherwise be distributed, copied sold or used without the express written permission of Wolters Kluwer (UK) Ltd. Content Table 1. Introduction... 2 2. Transition to section 35 FRS 102... 2 2.1. Overview... 2 2.2. Transition date... 2 2.3. Compliance statement... 3 2.4. Procedures for preparing financial statements at transition date... 3 2.5. Adjustments at transition date resulting from the use of different accounting policies compared with UK GAAP... 3 3. Restrictions on retrospective application... 4 3.1. Derecognition of financial assets and financial liabilities... 4 3.2. Hedge accounting... 4 3.3. Accounting estimates... 4 3.4. Discontinued operations... 4 4. Exemptions from full retrospective application... 5 4.1. Introduction... 5 4.2. Business combinations... 5 4.3. Fair value as deemed cost... 5 4.4. Revaluation as deemed cost... 5 4.5. Deferred development costs as deemed cost... 6 4.6. Lease incentives (lessees and lessors)... 6 4.7. More specialised exemption categories... 6 5. Disclosure requirements for the entity s first FRS 102 financial statements... 6 CCH is a trading name of Wolters Kluwer (UK) Ltd. Registered office: 145 London Road, Kingston upon Thames, Surrey, KT2 6SR. Wolters Kluwer (UK) Ltd is authorised and regulated by the Financial Services Authority for general insurance business. CCH Professional Development December 2013 Page 1/7
Transition to the new UK GAAP, FRS 102 1. Introduction This module looks at how companies will make the transition from existing UK Generally Accepted Accounting Principles (GAAP) to the new UK GAAP, Financial Reporting Standard (FRS) 102. In particular it considers the requirements of section 35 of FRS 102. This module covers: Identifying the key differences arising on transition to FRS 102; The relevant recognition and measurement principles at transition date; The transition disclosures in the first set of financial statements under FRS 102; and Making an action plan for what you need to do now. 2. Transition to section 35 FRS 102 2.1. Overview An entity adopting FRS 102 for the first time is required to apply section 35 of the standard in its first financial statements complying with the standard. The first set of FRS 102 accounts will require comparatives restated in accordance with the standard. In general, adoption of FRS 102 requires retrospectively changing the accounting used by the entity under its previous financial reporting framework (i.e. old UK GAAP). This may involve adjustments to retained earnings as at transition date. This requirement is subject to certain restrictions and concessions these are referred to below. FRS 102 requires the financial statements to explain how the transition from previous GAAP to FRS 102 affected the entity s reported financial position and financial performance. Note that paragraph 35.12 no longer refers to cash flows (unlike Financial Reporting Exposure Draft (FRED) 48 and the International Financial Reporting Standards (IFRS) for small & medium sized enterprises (SMEs)). 2.2. Transition date This defined as the beginning of the earliest period for which the entity presents full comparative information in accordance with this FRS in its first financial statements that comply with this FRS. Example Company X has a 31 st December year-end. Assume that its first set of accounts complying with FRS 102 covers the year ending 31 st December 2015. Transition date is 1 st January 2014. CCH Professional Development December 2013 Page 2/7
2.3. Compliance statement Entities whose financial statements comply with the FRS 102 are required to make an explicit and unreserved statement of such compliance in the notes to the financial statements. 2.4. Procedures for preparing financial statements at transition date Except as provided below (sections 5 and 6) the entity should apply the following requirements as at transition date: Recognise all assets and liabilities whose recognition is required by the FRS 102; Not recognise items as assets or liabilities if the FRS 102 does not permit recognition; Reclassify items that it recognised under the entity s previous GAAP as one type of asset, liability or component of equity, but which are regarded under FRS 102 as a different type of asset, liability or component of equity (for example, different groupings in the cash flow statement; and Apply FRS 102 in measuring all recognised assets and liabilities. Example An entity recognised fixed asset investments under UK GAAP but measured them at cost. Assuming the investments are either publicly-traded or their fair value can otherwise be measured reliably, such investments would be recognised at transition date at fair value, with an adjustment to retained earnings (see below). 2.5. Adjustments at transition date resulting from the use of different accounting policies compared with UK GAAP Paragraph 35.8 of section 35 of FRS 102 refers to situations where the accounting policies that an entity uses in its opening balance sheet under FRS 102 differ from the policies used for the same date for its previous reporting framework. The previous reporting framework will usually be old UK GAAP but in some cases could be IFRS following recent changes to Companies Act (CA) 2006 in Statutory Instrument (SI) 2012/ 4301 regarding change of accounting framework. The resulting adjustments should be recognised directly in retained earnings. Examples of where such adjustments might be applicable include: Recognition restrictions (see above); Measurement changes, for example relating to equity investments in other companies (see above); Deferred tax changes resulting from the application of section 29 FRS 102; and Accounting policy choices offered by FRS 102. CCH Professional Development December 2013 Page 3/7
3. Restrictions on retrospective application Paragraph 35.9 states that on first-time adoption of FRS 102, an entity is not permitted to retrospectively change the accounting that it followed under its previous financial reporting framework for any of the following transactions: 3.1. Derecognition of financial assets and financial liabilities Financial assets and liabilities derecognised under the entity s previous reporting framework before the date of transition to FRS 102 should not be recognised on adoption of FRS 102. 3.2. Hedge accounting This is a complex area and only likely to be applicable to larger groups with overseas operations. Hedge accounting cannot be adopted retrospectively - the required hedging relationship must have existed at transition date. 3.3. Accounting estimates Estimates at transition date in accordance with FRS 102 should be consistent with estimates made for the same date in accordance with previous GAAP. However adjustments are required to reflect any differences in accounting policies. Additionally adjustments are required if there is objective evidence that the previous GAAP estimates were in error. Example Consider a company that previously adopted UK GAAP and will adopt FRS 102 for the first time for the year to 31 st December 2015. Transition date is therefore 1 st January 2014. New information received on 8 th July 2014 (after transition date) requires a revision of an estimate made in accordance with UK GAAP for the balance sheet at 31 st December 2014. There is no objective evidence that the estimate was in error. The new information should not be adjusted in the FRS 102 balance sheet at transition date (1 st January 2014). Instead it should be reflected in the FRS 102 restated comparatives for 2014 which accompany the first set of FRS 102 accounts for 2015. Effectively the revision of the estimate is recognised as income or expense in the period when the entity made the revision, i.e. the year to 31 st December 2014. 3.4. Discontinued operations The definitions and criteria for discontinued operations in FRS 102 differ from those in previous UK GAAP FRS 3. For example, an operation might have been reported in the entity s final set of UK GAAP financial statements as discontinued in accordance with FRS 3. This might not have met the criteria in FRS 102. In such cases, the comparatives on first-time adoption should not be restated. CCH Professional Development December 2013 Page 4/7
4. Exemptions from full retrospective application 4.1. Introduction FRS 102 requires retrospective application in most cases, using the latest version of FRS 102. The retrospective application requirement is subject to specific exemptions without which some companies would be required to carry out complex recalculations relating to transactions that took place some years back. There is potentially a long list of possible exemptions, but in practice many of these will apply only in special circumstances or for specialised transactions and companies. The more likely ones are referred to below, and the more specialised ones simply listed in 4.7 below. 4.2. Business combinations A first-time adopter may take this exemption and elect not to apply section 19 of FRS 102 to business combinations that were effected before transition date. In such cases, no adjustment should be made to the carrying amount of goodwill at transition date. This amount should be amortised prospectively over the remaining useful life of the goodwill, assuming this can be determined reliably. In rare cases, a company may not have amortised goodwill under FRS 10, invoking the true and fair over-ride. Note that Paragraph 161 of the Accounting Council s Advice to the Financial Reporting Council (FRC) states that On transition to FRS 102, entities that previously determined that goodwill had an indefinite useful life will need to reassess goodwill to determine its remaining useful life, and subsequently amortise the goodwill over that period. Taking the exemption may be advantageous in complex cases, for example those where the deferred tax adjustment in paragraph 29.11 of section 29 is or could be significant. However, if a first-time adopter does not take this exemption for a pre-transition date business combination, it must restate all subsequent business combinations. 4.3. Fair value as deemed cost A first-time adopter may elect to measure an item of property, plant and equipment or investment property at fair value at transition date and to use that fair value as its deemed cost at that date. 4.4. Revaluation as deemed cost A first-time adopter may elect to use a previous GAAP revaluation of an item of property, plant and equipment or investment property as its deemed cost at the revaluation date. CCH Professional Development December 2013 Page 5/7
4.5. Deferred development costs as deemed cost A first-time adopter may elect to measure the carrying amount at transition date related to development costs capitalised in accordance with previous UK GAAP Statement of Standard Accounting Practice (SSAP) 13 as its deemed cost at transition date. 4.6. Lease incentives (lessees and lessors) This exemption relates to leases whose lease term commenced before transition date. The exemption allows a first-time adopter not to have to apply the requirements of paragraphs 20.15A and 20.25A of FRS102. If the exemption is taken, the first-time adopter shall continue to recognise any residual benefit or cost associated with the lease incentives on the same basis as that applied at the date of transition to FRS 102. (Under previous UK GAAP, operating lease incentives are dealt with under Urgent Issues Task Force (UITF) Abstract 28). 4.7. More specialised exemption categories These include: Share-based payments transactions; Compound financial instruments; Service concession arrangements; Extractive activities; Arrangements containing a lease; Decommissioning liabilities included in the cost of property, plant and equipment; Dormant companies; Borrowing costs; Public benefit entity combinations; and Subsidiaries, associates and joint ventures that become first-time adopters later than the parent. 5. Disclosure requirements for the entity s first FRS 102 financial statements Paragraph 35.12 requires an entity to explain how the transition from its previous reporting framework to FRS 102 affected its reported financial position and financial performance. Assuming that the previous financial reporting framework was UK GAAP, paragraph 35.13 requires the following reconciliations and explanations to be included within the entity s first financial statements prepared using FRS 102: A description of the nature of each change in accounting policy; A reconciliation of its equity determined in accordance with UK GAAP to its equity determined in accordance with FRS 102, in respect of both of the following dates: CCH Professional Development December 2013 Page 6/7
o the date of transition to FRS 102; and o the end of the latest period presented in the entity s most recent annual financial statements prepared in accordance with UK GAAP; and A reconciliation of the profit or loss determined in accordance with UK GAAP for the latest period in the entity s most recent annual financial statements, to its profit or loss determined in accordance with FRS 102. FRS 102 does not specify a particular format. In practice, there are two presentation options: Option 1 A vertical format which lists the various adjustments in a single column. This is a useful method to adopt where there are relatively few adjustments. Option 2 A columnar method which shows the effects of the adjustments on each line item in the income statement and balance sheet. This presentation method is particularly useful if there are a number of adjustments affecting several line items. Presentation examples For examples of presentation, see www.frc.org.uk then click on: Our Work; Accounting and Reporting Policy; the future of UK GAAP; Staff Guidance Papers and Examples; Transition to FRS 102. CCH Professional Development December 2013 Page 7/7