With the introduction of FRS 102 well under way for larger entities, it is time for everyone else to catch up. FRS 102 1A is now in place for small companies in the UK. While it promises reduced disclosures in accounts, technology companies still need to comply with the recognition and measurement requirements of the full standard.
The impact of FRS 102 on the tech sector
The adoption of FRS 102 for small entities applies to periods beginning on or after 1st January 2016. A large proportion of tech companies are classified as small companies – those with less than 50 employees – and therefore will only just be applying these standards.
This will see a number of key changes for technology companies that could affect the reporting figures for the current, comparative and future periods.
FRS 102 AND INTANGIBLE ASSETS OTHER THAN GOODWILL
Under old UK GAAP, tech companies are likely to have capitalised intangibles such as patents, licences or development costs. Tech business still have the choice of whether to capitalise development costs if certain criteria are met, or to write these costs off.
The intangible assets should be amortised over their useful life. Where no reliable estimate can be made, the useful life of any assets cannot exceed 10 years (currently 20 years) and no infinite life is allowable.
FRS 102 AND BUSINESS COMBINATIONS
Where tech companies have made acquisitions of other businesses, under FRS 102 intangible assets – if their fair value can be measured reliably – should be recognised separately upon acquisition. Whereas under old UK GAAP rules intangible assets are rarely recognised separately from goodwill, under the new standards more intangible assets are likely to be identified separately from goodwill.
FRS 102 SHARE-BASED PAYMENTS & EXEMPTIONS
Small UK tech companies applying FRS 102 1A for the first time will have to recognise an expense for equity settled share-based payments and apply the recognition criteria to account for the appropriate share option cost. There are exemptions that can be taken on transition for entities previously applying the FRSSE, but care should be taken as there may be increased administrative burden or cost involved in recognising the correct amounts, depending on the grant date of the options.
Where a UK tech company is a subsidiary of an overseas parents who prepares publically available consolidated accounts, there are a number of exemptions that can be taken. One with particular relevance to tech companies is in relation to share-based payment disclosures where the exemption is more generous than old UK GAAP.
FRS 102 AND LEASE ACCOUNTING
Many tech companies will rent their premises under operating leases. Operating lease incentives will now be spread over the whole life of the lease rather than to the rent review date.
FRS 102 AND EMPLOYEE BENEFITS
Whereas old UK GAAP was silent, FRS 102 specifically refers to “compensated absences”. This means any tech companies with a significant a number of employees should ensure holiday pay is accounted for as an accrual or prepayment where necessary.
This can lead to an administrative burden of ensuring that the company is maintaining accurate records of employee’s holiday usage in order for these calculations to be performed on a reliable basis.
FRS 102 AND FOREIGN CURRENCY HEDGING
Many tech companies import or export goods or services outside the UK. Any tech companies using forward contracts to mitigate the risk of unfavourable foreign currency fluctuations, should be aware that FRS102 treats the sale and forward contract as two separate transactions.
There is no option to use the forward rate when recording the purchase or sale of goods and services and therefore these should be accounted for at the spot rate and then translated to the closing rate at the year end. These differences should then be reported in the profit or loss.
Forward currency contracts are treated as ‘other financial instruments’ and recognised at fair value on initial recognition – and again at the balance sheet date – with any changes in fair value, again being reported in the profit or loss.
FRS 102 AND TRANSITIONAL RULES
FRS 102 requires full retrospective treatment on first time adoption, and therefore the above changes will also need to be considered at the transition date, which is typically the start of the comparative accounting period. There are exceptions to this, such as for share options as noted above, and also for goodwill arising business combinations.
Comments provided by Andrew Wooding.
For help or advice on the impact FRS 102 on the tech sector and how best to respond to them, contact our team of technology sector specialists.