Some eight years after consultations began, the UK Financial Reporting Council has published three new standards that replace all UK FRSs, SSAPs and UITFs with a brand new reporting framework loosely based on the IASB’s IFRS for SMEs. The latest an entity can adopt the new regime is for periods beginning on or after 1 January 2015 and, as 2014 comparatives will need to be restated to conform, entities should soon start assessing the impact and begin their preparations. Note that as well as the expected reporting impact, this important development could also affect tax liabilities, debt covenants, plans for staff training and the adequacy of financial reporting systems.Who is affected?
All UK GAAP users, including not-for-profit entities and public benefit entities, must switch to the new UK framework. Entities who voluntarily adopted full IFRS are presented with the opportunity to return to UK GAAP or to continue using IFRS and they may also qualify to take advantage of a new reduced disclosure framework. The FRSSE will undergo some consequential amendments but otherwise will continue to exist for small entities for the immediate future; however more significant changes are expected once the EC introduce their new EU Accounting Directive in 2014.
Outline of the new framework
| ||REPORTING FRAMEWORK ALLOWED / REQUIRED|
| ||FRSSE ||New UK GAAP ||EU-adopted IFRS|
|Small, unlisted entities||√ ||√ ||√|
|Listed groups|| || ||√ |
|All other entities || ||√ ||√|
The new framework comprises just three standards:
A storm in a teacup?
- FRS 100 (issued November 2012): outlines the scope of FRS 101 and FRS 102 in the UK and Republic of Ireland (ROI).
- FRS 101 (issued November 2012): sets out a reduced disclosure framework for entities using full IFRS. Those qualifying are ultimate parent or subsidiaries who are members of a group preparing publicly available consolidated financial statements.
- FRS 102 (issued March 2013): Entities are required to fall-back on sections from the full-IFRS for complex issues, such as insurance contracts, and for certain aspects of financial instruments.
So how significant is this change for the average entity? The current UK standards have not provided the starting point for developing the new Framework; instead it has been based on the International Accounting Standards Board’s “IFRS for SMEs”. This suite of rules has been modified to allow certain existing UK accounting treatments as alternative options which will ease the transition to FRS 102 in these areas. Users will also be permitted in some cases to apply accounting policies from full IFRS which will allow an IFRS group and its FRS 102 parent and subsidiaries to align their accounting policies. Hence an entity may choose to revise some of its policies even if it isn’t required to do so.
The IFRS for SMEs is only updated every 3 years and is currently going through a review so, in order to future-proof FRS 102, the ASB has incorporated some anticipated future changes. For example the sections on financial instruments broadly apply the requirements of the new international standard, IFRS 9Consequently, some accounting requirements will be entirely new and more complex than current UK GAAP.
Significant differences will arise in the presentation of the various financial statements, which include:
- Statement of Financial Position;
- Statement of Comprehensive Income;
- Statement of Changes in Equity; and
- Statement of Cash Flows (containing only three sections)
The accounting for financial instrument will become more onerous and bring changes likely to affect most organisations. The most dramatic of these being the requirement to recognise all derivatives on the balance sheet and to mark them to their market value at each reporting date.
The tax requirements in the IFRS for SMEs were not felt to be appropriate so FRS 102 introduces its own “timing difference plus” approach which allows users to continue to calculate deferred tax in accordance with the principles of FRS 19, but requires the recognition of further deferred tax in three new areas, potentially increasing entities’ deferred tax liabilities.
Other differences from current UK standards include the accounting for investment properties, business combinations and employee benefits, especially in the areas of holiday pay and defined benefit pension schemes. Transitioning to the new UK FRS
The final section of FRS 102 explains how to transition over to the new framework. For an entity adopting in their 31 December 2015 financial statements, the transition process begins on 1 January 2014. On this date the entity must retrospectively restate its existing UK GAAP balance sheet to fully comply with FRS 102 although a number of optional exemptions exist to facilitate this exercise. For example an entity can choose to remeasure any of its tangible and intangible fixed assets at fair value on the transition date; even it currently uses or wants to use the historical cost convention, and then deems this to be the opening balance under FRS 102. This avoids the need for fiddly recalculations of fixed asset numbers using the FRS 102 rules.
Full reconciliations must be presented in the first FRS 102 financial statements to provide a detailed analysis of the changes made and to allow the reader to understand the effect of the transition on performance and position. Let us help you - One day training course
Auditors will expect entities to have considered and documented the transition effect on every accounting area, even if the conclusion is that no accounting change is required. How strong is your knowledge of the existing UK Standards? Will you be able to spot the differences between these and the new Framework? As always the devil is in knowing the detail.
IASeminars offers the following one day workshop that will guide you through the new requirements. Let us help you to consider your reporting options, identify the financial reporting differences, understand the transition process and assess the possible business impacts of moving to this brave new world:
Course 8100: Implementing the New UK GAAP (1 day)