FRS102 – Tearing up the rule book
The replacement of UK accounting standards to create the new accounting framework FRS102 was a radical step, but one that is now fully embedded within our culture. Some medium sized companies have prepared two years of accounts under this regime now and many smaller or micro entities have now gone through the transition too.
The new standards have presented challenges and some were harder than others. The terms profit and loss account and balance sheet, for many of us will be engrained into our brains forever, but the younger generation will know them as the Income Statement and the Statement of Financial Position. Accounting policies appear to have taken a new life of their own and for medium companies the accounts disclosures are more onerous. For small companies the FRSSE has been removed but these companies can now take advantage of the reduced disclosure exemptions of 1A, and whilst they cannot file abbreviated accounts, they can file filleted!
The new standards were issued between 2012 and 2015 and the first effective date was 1 January 2015. The FRC committed to a review after three years, this was extended to four, but this has now taken place. The FRC performed their triennial review based on stakeholder feedback and reported that FRS102 was working well in practice, but there was areas where significant improvement could increase the cost effectiveness without the loss of useful information.
FRED 67 was issued in March 2017 and this 142 page document detailed the changes. If proposed, these will be effective for accounting periods beginning on or after the 1 January 2019 (although early adoption will be permitted). Responses to the consultation were required by 30 June 2017, so now we await with the final amendments which are expected to be issued in December 2017.
The headline amendments are:
Simplifying the treatment of zero coupon loans to ensure small companies no longer need to compute a market rate of interest will be a welcome break to small entities. Currently the common response is to ensure that all zero coupon loans include a term stating they are repayable on demand. Section 12 makes it clear that the fair value of an amount repayable on demand is not less than the face value, but reclassifying substantial loans to current liabilities damages the balance sheet and possibly credit ratings. This (optional) exemption is a step forward, but it has limitations, this doesn’t apply to loans between group entities and is only available for small companies.
Requiring fewer intangibles to be separated from goodwill in a business combination. FRS102 required intangibles to be identified on a business combination and separated from goodwill, examples include customer lists. FRED67 now states that these intangibles now need to be identifiable and separable. The reality of the situation is that most of these cannot be separated from the business and the cost or value can not be measured reliably. The option is still there though if it is achievable.
Permitting investment property rented to another group entity to be measured at cost instead of fair value. Under the old UK GAAP, properties rented by other group entities were treated on the balance sheet as normal tangible fixed investments and not investment properties. FRS102 changed this and the new requirement was to include them at fair value in the individual entity accounts. The proposal now allows a choice of accounting policy in this respect. For companies that have already established a fair value, this can be deemed as cost if reclassified to a normal TFA.