FRS 102 – ARE YOU READY?
There has been a fundamental reform of accounting standards which will apply to companies with accounting periods beginning on or after 1 January 2015. This means that companies with a year end of 31 December 2015 will be amongst the first to implement the new rules.
Small companies are able to obtain an extra years grace if they adopt the updated Financial Reporting Standard for Small Entities (FRSSE 2015) for that year. This will then bring them under the new rules for accounting periods commencing on or after 1 January 2016.
The new rules are set out in Financial Reporting Standard (“FRS”) 102. As a result there will be changes in the terminology, format and presentation of financial statements together with changes in accounting treatment of certain items. A large part of FRS 102 is built around the concept of ‘fair value accounting’ and will affect the treatment of items such as investments, fixed assets, financial instruments (including interest free loans and forward exchange contracts) and business combinations and goodwill on a company acquisition.
If your business has been involved with any of these you may be affected.
Investment properties have to be re-valued each year to ‘fair value’ with any change in value taken to the profit loss account (previously such changes were put to a revaluation reserve). The definition of investment properties is now also extended to include properties let to group companies.
Investments are also required to be stated at fair value, if this is available, with any movements again taken to the profit and loss account.
A new regime is introduced for financial instruments. One of the most significant changes is in respect of loans that carry no interest, or interest below market rates, which are not repayable on demand. These will be measured based on ‘net present value’ and the benefit of receiving, or the cost of providing, such a loan will be reflected up front.
One of the most significant changes in this area is a restriction on the useful life of goodwill and other intangible assets. Where the useful economic life cannot be reliably estimated the directors should choose a period not exceeding ten years over which to write off the asset.
There is a requirement to provide for employee benefits including holiday pay where applicable.
Profits may be affected by changes to the spreading of operating lease incentives, such as initial rent-free periods. Historically, such incentives were spread over the initial rent period, but FRS 102 requires them to be spread over the entire lease term.
Corporation Tax and Deferred Tax
As a consequence of the new accounting standards, the basis for calculating the company’s corporation tax will change. Certain adjustments such as those for goodwill, holiday pay, lease incentives and financial instruments could have a direct impact on the amount of tax being paid. Other items such as the revaluation of investments and investment properties will be reflected only in the deferred tax calculation which is effectively a provision in the accounts rather than a liability which is to be settled.
Transition to FRS 102
FRS 102 requires the comparative figures to be restated. Unfortunately this will necessitate additional work in preparing the first financial statements under the new legislation. Where adjustments are required as a result of the new rules a reconciliation will be needed in the notes to the accounts.
On transition companies also have a one-off opportunity to change the value of their property, plant and equipment (“PPE”) to “deemed cost”. The transition rules allow an entity to recognise such assets at revaluation rather than historic cost, without the requirement to regular revaluations in the future. This may be an opportunity a company has been waiting for to boost its balance sheet, however there are potential disadvantages. For example the gain will attract a deferred tax liability in the accounts and the enhanced balance sheet value could cause a company to exceed its relevant size criteria under company law.
This is obviously a very brief outline of some of the more common changes in an extremely complex area. If you require more detailed information or have a question on the above please contact Paul Beaman, Head of Technical Training.
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