Miriam Hanley – Technical Specialist
In March 2017 the FRC published FRED 67 which contained amendments to FRS 102. These were finalised on the 14 December 2017 and can now be early adopted. If a company chooses to early apply FRED 67 all amendments must be adopted. The effective date is for periods beginning on or after 1 January 2019.
What are the 5 key changes?
There are 5 key changes introduced by FRED 67 which are:
- Small entity directors’ loans can be measured at transaction cost;
- Removal of undue cost and effort exemption- replaced with accounting policy choice;
- Greater flexibility in the number of intangibles that need to be recognised on a business combination;
- Classification of financial instruments; and
- Change in the definition of a financial institution.
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1. Small entity directors’ loans
The exposure draft released in March proposed that for small companies, a loan from a director that is a shareholder and a natural person (or close family member of that person) can be measured at transaction cost. This removes the need for a present value calculation for loans that are not repayable on demand and has a below market rate of interest.
The fact the draft amendments were finalised in December 2017 meant it was too late for small companies to take advantage of the above exemption in December 2016 year ends. In order to avoid small companies measuring directors’ loan at present value for one year only the FRC has amended FRS 102 by inserting a paragraph which said a small entity could measure a loan from a director who is a natural person and a shareholder at transaction price.
The amendment was available immediately and retrospective application is available. This means for December 2016 year ends, and monthly thereafter, small companies adopting FRS 102 Section 1A, do not need to recognise directors’ loan at present value and so no discounting will be required. This is only available if the director is a shareholder and a person.
2. Removal of undue cost or effort exemption
The main area this will impact is investment property rented to another group entity. In FRED 67 the undue cost or effort exemption has been removed and replaced with an accounting policy choice. You can either choose to measure investment property rented to another group company at fair value or transfer to property, plant and equipment and apply the cost model.
If you elect to measure investments property rented to another group entity at cost there is a transitional exemption which allows the use of fair value as the deemed cost on transition to FRED 67.
3. Intangible assets acquired in a business combination
Section 18 of FRS 102 requires the recognition of more intangible assets acquired in a business combination then under old UK GAAP. The changes introduced by FRED 67 means that there will be more flexibility in the number of intangibles that need to be recognised.
The amendments to section 18 cannot be applied to business combinations that happened after the date of transition to FRS 102 and before the date of transition to FRED 67.
4. Classification of financial instruments
Currently, per section 11, the classification of basic financial instruments involves a set of rules. FRED 67 introduces a new paragraph which includes a description of basic financial instruments. This new paragraph means that if a financial instruments does not qualify for the conditions of a basic financial instrument it can still be classified as basic if it meets the description of a basic financial instrument per the new paragraph.
The FRC is encouraging a more principle based approach to classifying financial instruments. When classifying a financial instrument you must first check the detailed condition and then apply the description.
5. Definition of financial institution
There has been a change in the definition of financial institution to remove references to “general wealth” and “manage risk.”