HomeInsightsNewsFRS-102 Technical Update – January 2016

Insights

News Technical updates // 08/01/2016

FRS-102 Technical Update – January 2016

FRS 102 – Are you ready?

The adoption of FRS 102 is fast approaching – do you know what’s changing and when?

What is FRS 102?

FRS 102 is a new standard entitled “The Financial Reporting Standard applicable in the UK and Republic of Ireland”. It replaces current UK GAAP, and its implementation will have a significant impact on the financial statements of those required to adopt it.

Who has to prepare accounts under FRS 102?

The majority of large and medium sized private companies will be adopting FRS 102, along with other entities preparing accounts under UK GAAP (including those applying the FRSSE a year later).

When will this happen?

For periods beginning on or after 1 January 2015 (which is likely to be December 2015 year ends). The application of FRS 102 requires a restatement of comparatives and the brought forward position for that year as if certain elements of the standard had been in place at the transition date (1 January 2014 or equivalent).

Main areas of change

Property, Plant and Equipment (PPE)

Under FRS 102 companies have the one-off option of changing the value of their PPE to “deemed cost” at transition, meaning there is the option to assign to specific items/classes of asset:

  • Original cost or;
  • Fair value at transition date or;
  • Value under revaluation method

There is also an option to change the method of recognition from original cost to valuation and vice versa from the transition date (although this should be recognised as a change in accounting policy).

Intangible assets and goodwill

Intangible assets follow the same treatment as with PPE with the option to change the cost to “deemed cost” as above.

In exceptional circumstances where no reliable estimate can be made the useful economic life of intangible assets cannot exceed 10 years (under existing UK GAAP the assumed maximum is 20 years). No indefinite useful life is allowable.

Investment Properties

The definition of investment properties now also includes those let to group companies (under existing UK GAAP these were held as PPE). The revaluation of the properties will be recognised in the income statement potentially resulting in more volatile results.

Business Combinations

Under current UK GAAP intangible assets arising on acquisition should be treated as part of goodwill unless they can be sold or transferred separately. Under FRS 102 there is no such restriction and therefore on acquiring another business a company is now required to recognise all the identifiable assets of the acquisition.

Financial Instruments

  • Certain types of loans (including long term intercompany loads without interest) will be required to be held at present value and unwound over the life of the loan.
  • Equity share investments are now required to be included at fair value in the accounts where fair value can be reliably estimated for that investment. Fair value adjustments are recognised in the income statement giving rise to more volatile results.
  • FRS 102 requires all financial instruments of these types to be “on-balance sheet”. Therefore, if they are not hedged they must be recognised as a financial asset or liability at fair value. Any fair value adjustments will be recognised in the income statement.
  • Interest rate swaps, foreign exchange, interest rate forwards/futures etc. now have the option to be designated as a hedge. Under existing UK GAAP you could recognise a sale in $ at a forward contract rate. Under FRS 102 the sale should be accounted for separately unless a hedging relationship is identified.

Leases

The finance lease “90% test” does not exist under FRS 102. When considering if a lease is operating or finance more consideration is placed on other factors such as the length of the lease, transfer of ownership at the end of the lease, or specified nature of the leases item. Operating lease incentives will now be spread over the whole life of the lease rather than to the rent review date.

Government grants

Companies now have a choice between the performance model and the accruals model (existing model). The performance model means that the grant would be recognised in accordance with the performance criteria applicable.

Borrowing costs

The choice of treatment still stands for borrowing costs capitalisation; however a company can choose to retrospectively change the treatment from transition data for an asset.

Defined Benefit Pension Schemes

Rather than actuarial gains and losses being taken to the STRGL, under the FRS 102 re-measurements are taken to Other Comprehensive Income. Group schemes now need to be split out for component companies and recognised in individual company accounts.

Employee benefits

Under FRS 102 companies now specifically need to account for holiday pay accruals.

Deferred Tax

Deferred tax is now required to be recognised on the revaluation of assets, including goodwill, intangible assets, and fair value adjustments on acquisition.

What will the impact be?

A number of changes in accounting policies and treatments detailed above will result in a changed profit and net asset position. This may affect profit related pay (e.g. bonuses/commissions), tax liabilities, and could change the meeting of bank covenants. Consideration of these sooner rather than later will enable a smoother transition to take place.

Download the full Technical Update.

Print Friendly, PDF & Email


RELATED CONTENT
  • management buy-out of leading skincare and beauty distributor

    Our corporate finance team has advised Ken and Maggie Lamacraft on the sale of international skincare and beauty product distributor Ken Lamacraft Marketing LTD (KLM) to the Management team of Fiona Peerless and Kevin Gambrill for an undisclosed sum. KLM is responsible for distributing the popular skincare brand Australian Bodycare in the UK and various […]

    Print Friendly, PDF & Email
    READ MORE >
  • Gatwick Diamond Business Awards 2019 Finalists

    The Finalists have been announced for the Gatwick Diamond Business Awards and we are delighted to be one of the three Finalists in the category: Professional Services Firm of the Year. Our Partner Caroline Milton comments on the great news: “We at Menzies are overjoyed to be announced as one of the final three at […]

    Print Friendly, PDF & Email
    READ MORE >
  • And our survey said…

    As part of Menzies ongoing commitment to delivering quality and value adding services to you, we asked you – our clients – to have your say and tell us how we can continue to improve our service delivery. Asking for your honest and open feedback, the client survey sought to understand what you value most […]

    Print Friendly, PDF & Email
    READ MORE >