A summary of the latest incremental improvements and clarifications to (FRS) 102.
As part of continuous improvement and simplification, on 14 December 2017 the Financial Reporting Council (FRC) published incremental improvements and clarifications to (FRS) 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ from their triennial review.
The FRC review takes place every three years to ensure that the implementation of the standards has achieved their aim as well as to make any improvement and provide clarity.
Mandatory effective date
The effective date of all the amendments is for accounting period starting on or after:
Amendments to FRS 102 and FRS 105 – 1 January 2019.
FRS 105 disclosures changes – 1 January 2017.
Early adoption is permitted, provided that all the amendments are applied at the same time. The only exceptions are in respect of the amendments relating to directors’ loans and the gift aid payment amendments for which early adoption was permitted separately as explained here.
Major FRS 102 amendments that will impact on financial statements are:
Investment property in a group
An accounting policy option is included in Section 16 Investment property in paragraph 16.4A. This option allows groups which let property out to other group members to account either at fair value through profit or loss or under the cost model in Section 17 Property, Plant and Equipment. This option should ease the burden and expense of getting the fair value of such investment properties and brings back the same accounting treatment as under the old FRSSE if a majority of the group go for the latter option.
In May 2017, the FRC granted an interim relief for small companies whose director-shareholders (or a close member of the family of that person) have provided the company with a loan at below market rates of interest or at zero rates of interest. The relief is not available if the loans are provided by the small company to a director-shareholder. Additionally this relief is not available on intra-group loans from one group entity to another. Once the entity is out of the small companies’ regime, ie becomes medium-sized, the entity re-measures the liability to present value prospectively from the first reporting date after it ceases to be a small entity.
Intangible assets recognition
Recognition criteria of intangible assets changed from those proposed in FRED 67 by introducing three conditions which have to be met in paragraph 18.8 of FRS 102. Companies will be able to recognise fewer intangible assets that are acquired in a business combination separately from goodwill. These conditions are as follows:
the recognition criteria set out in paragraph 18.4 are met (ie probable expected future benefits and the cost/value of the asset can be reliably measured);
the intangible asset arises from contractual or other legal rights; and
the intangible asset is separable (ie capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged either individually or together with a related contract, asset or liability).
When the reporting entity chooses to recognise additional intangible assets by complying with the conditions, the accounting policy must be applied consistently to all intangible assets in the same class.
Clarity on financial instruments
The FRC has introduced a new clause to paragraph 11.9 to support the definition of basic financial instrument. According to this when a financial instrument does not meet the condition in paragraph 11.9, the instrument is still basic if it gives rise to cash flows on specified dates which constitute repayment of capital together with reasonable compensation for the time value of money, credit risk and other basic lending risks and costs such as liquidity risk, administrative costs and lender’s profit margin.
Financial instruments which contain terms that introduce exposure to unrelated risks or volatility such as commodity prices or changes in equity prices would be inconsistent with this description and will fall out of basic financial instrument definition.
Removal of undue cost or effort exemptions
As the concept of ‘undue cost or effort’ was always to have a balance between benefit and cost, it was mistakenly used by users as an alternative accounting policy to avoid the need to measure certain assets such as investment property at fair value. The following sections included this description in the original standard
Investments in associates (section 14)
Investments in joint ventures (section 15)
Investment properties (section 16)
It is the later section where this was mainly used an accounting policy in error. As it was never the intention of the FRC for this concept to be misinterpreted as an alternative it is removed now to avoid any further confusion.
Changes to FRS 105
The amendments to FRS 105include the following:
Two additional disclosures are required at the foot of the micro-entity’s balance sheet for UK micro-entities:
information about employee numbers as required by s411 of the Act; and
information about off-balance sheet arrangements as required by s410A of the Act.
A new paragraph 3.13A is inserted to provide more information about the UK Company as follows:
The disclosures required by s396(A1) of the Companies Act 2006 are required which require a micro-entity to disclose
the part of the UK in which it is registered
the micro-entity’s registered number
that the micro-entity is a private company (the law refers to both public and private entities but public companies are excluded from the micro-entities’ regime) and whether it is limited by shares or guarantee
the address of the micro-entity’s registered office; and
where appropriate, the fact that the micro-entity is being wound up.
A similar disclosure is required for micro-entities in the Republic of Ireland as per paragraph 3.13B with section 291(3A) of the Companies Act 2014. Irish micro-entities are not required to include the notes to the ﬁnancial statements at the foot of the statement of ﬁnancial position.
While speaking to members, certain leading software providers have already incorporated these changes in their software; members are advised to keep an eye on the updates of the systems they use and maintain a constant assessment/discussion with clients if the early adoption is a better option for them.
The FRC is in the process of revising standards which will be issued in the due course. Until then full details of all amendments can be found here.