Standing room only at Accountex during Charles' session on FRS 102
Charles Gubbins recaps the popular session on FRS 102 which he delivered in the ACCA theatre at Accountex recently.
It was a pleasure to share the floor with Jonathan Shaw (member of ACCA's Global Forum for Corporate Reporting), Russell Geary (chair of ACCA's Practitioners' Network Panel) and Glenn Collins (ACCA's head of technical advisory) in ACCA’s lecture theatre at Accountex in London earlier this month. Addressing our subject in 45 minutes was a challenge! What we did was highlight just some of the many changes that have arisen.
How has FRS 102 affected financial reporting? We are still very much in the early stages of adoption – we have been talking about it for some time but 31 December 2015 marked the point when change for non-small entities became a reality. Early adoption was available but does not appear to have been widespread, not least due to the challenges of identifying reliable software to assist in the production of FRS 102 compliant accounts and dealing with regulators (HMRC and Companies House).
First cautionary tale – read the Standard! It is not long but it is different to both old UK GAAP and IFRS and so you should assume nothing. Also there are two versions:
the 2014 issue which is the mandatory one for non-small entities for periods commencing 1 January 2015
the 2015 issue which is mandatory for periods commencing 1 January 2016 and includes the section 1A for small companies moving from the FRSSE at that date. This version has been available for early adoption (to further confuse the matter!).
So – the effects of change … we decided to treat the session as a kind of ‘checklist’.
The point is that, for some companies, there have been no material impacts of adoption. So the question raised was, ‘do you have any of these?’ (not by any measure an exhaustive list).
Financial instruments - particularly worth looking at directors’ loans and inter-company loans where the interest rate is ‘off-market’ and where the term is fixed
Derivatives must now be separately accounted for (never really considered in old UK GAAP)
Revenue from the provision of services – UITF 40 and FRS 5 have gone and you may need to reassess the timing and amount of revenue, especially where it is contingent
Acquisitions – a whole new way to calculate goodwill, including the potential recognition of new intangibles and deferred tax …
Investment properties are now measured at fair value through reported profit and you now provide deferred tax on the increase in value (you may even hold more as the exemption for group company lettings has now gone)
Others include: holiday pay (or any other ‘compensated absence’ which may be carried forward in the following year), defined benefit pensions schemes and there is also guidance for public benefit entities.
Good outcomes and impacts of change The process of transition has forced companies to review their accounting policies for completeness and appropriateness (a few have even spotted the fact that they have made errors in the past which transition has allowed them to address – some even have called correction of these errors transition adjustments … wrong!).
Also, from 1 January 2016 (some regard this as good and some do not …), there will be one system of UK GAAP applicable to all entities, irrespective of size. The only exception is for micro-entities, who will be allowed to opt into FRS 105. Although the disclosures will be less for small companies, all the accounting challenges mentioned above will apply to them as well.
Bad outcomes and impacts of change We all know that it is easy to be negative but I just want to mention some issues that have arisen which some might regard as bad:
Reliability of financial information – not a direct impact of FRS 102 but, with the increases to audit limits from 1 January 2016, many sets of FRS 102 accounts going forward will not be subject to mandatory audit. Given the level of technical knowledge required and subjectivity in some valuations, the role of accounting advisors becomes ever more important – some entities might regard this to be an expensive option but I believe it to be essential to have informed individuals involved in the process
What are the distributable profits of a company – still some confusion on this but help is on its way!
Credit reference agencies will potentially have difficulty to providing advice to their clients, especially going forward for smaller companies – this should, in my view, result in companies providing extra information to such organisations to help them in their work.
Conclusion Overall, change was inevitable and, in my view, is a step in the right direction.
Charles Gubbins – head of technical practice & professional development, Kaplan Leadership & Professional