The changing face of accounting: FRS 102 Tessa Park and Tim Gonzaga 4 June 2015
What we will be covering An overview of the new Framework Who needs to adopt and when Key differences from current UK GAAP The implications for you and your business Managing the transition What happens with the tax?
Overview of the new framework All existing FRS, UITF, SSAP going Replaced by a small suite of standards: – FRS 100 (an overview standard) – FRS 101 (reduced disclosures for some entities otherwise adopting IFRS) – FRS 103 /104 (don’t worry about these!) FRS 102 – all the accounting and disclosure requirements FRS 105 (draft) same, only for ‘micro entities’
How will this affect me?
Do I need to adopt? Applies to all entities preparing accounts under UK GAAP except FRSSE companies However, FRSSE to be withdrawn with effect from 2016 So unless you elect to use IFRS/ FRS 101 – yes!
When do I need to adopt? Applies for accounting periods beginning on or after 1/1/2015 Small companies: from 1/1/ 2016 Key dates – first accounting period under FRS 102: and Date of transition (point at which everything gets retrospectively restated) Some useful one off exemptions on transition (see later) Can early adopt – but adds time pressure
What do I need to do? Default position is full retrospective restatement This means: – Take account of all differences at date of transition – however far back they go – Restate all balance sheet items where this is necessary – May involve recognition and measurement changes – Changes that affect brought forward P&L – adjust retained earnings at date of transition
What do I need to do? (2) First year of preparing financial statements under FRS 102 – prepare reconciliations: – Balance sheet at date of transition – Balance sheet at date of last financial statements published under old UK GAAP – Profit and loss account ditto Disclose the reconciliations in the notes to the accounts
What will my accounts look like? Some new requirements – statement of changes in equity Statement of comprehensive income – one part or two? Cash flow statement – totally different format Statement of compliance with FRS 102 Disclosure of significant judgements and sources of estimation uncertainty PYA for all material errors in prior year, not just those that are fundamental
What else will I need to think about? The numbers are likely to change – profits may well go down (or possibly up) This may have an effect on – Bonus policy – Dividend policy – Banking covenants – Tax payable Best to think about this now rather than later
Key changes
Key changes Intercompany/ other long term loan balances Media write backs Property Deferred tax Holiday pay accruals Financial instruments & foreign exchange Goodwill and intangible assets Business combinations and other group issues Health warning - these are not the only differences!
Long term loan balances Issues arise where loan balances are at zero or a below market rate of interest and are long term (i.e. more than one year) This is common with intercompany loans or loans from / to related parties FRS 102 requires them to be treated as ‘financing transactions’ Logic – company getting a benefit from not paying a market rate
Long term loans (2) On initial recognition – show at present value of eventual amount of repayment Discount over term of loan using a market rate of interest on a similar debt instrument (need to impute/ estimate/ guess)? Then unwind discount over the term Potentially significant differences between repayment amount and amount initially recognised – how to account for difference?
Issues to consider What is a comparable market rate? What rate could the loan have been obtained from a bank? What is the expected time frame (realistically) for repayment? Is there an agreed term? Should terms of loan be formalised (or changed?) Should a market rate be charged? (possible tax consequences?)
Issues to consider (2) If on demand – no issue However, reclassification as current could have serious effect on liquidity of balance sheet May need to renegotiate covenants with external lenders? If no explicit terms, this would usually be default position
Media write backs Big issue for media where accrual recognised but invoice never received – though could apply to any uninvoiced accrual FRS 102 (unlike old UK GAAP) contains explicit guidance on derecognition of liabilities Liabilities can only be derecognised when settled, released by the creditor, or expires
Media write backs (2) In the case of media write backs – unlikely to either be settled or released by creditor Can be said to have expired when statute of limitations has passed 6 years from date the liability was initially incurred Not permissible to write back any earlier under FRS 102 – so may require accounting policy change/ adjustment at DoT
Property, plant and equipment Major difference is treatment of revaluations – cost model is basically the same Gains on revaluation go through other comprehensive income – again basically same as now Losses go to profit or loss – unless previously recognised gain on same me asset – can no longer offset
Investment property Valued at fair value – unless FV cannot be obtained without ‘undue cost or effort’ Term is not defined – but if were able to obtain sensible valuations in the past, exemption unlikely to be available All gains and losses on investment property are shown in profit t or loss ss Not realis lised ed so so not dist strib ibuta utable ble – need d to keep track ck!
Leases Overall 2 main points of difference No ’90% test’ for determining whether lease is finance or operating Lease incentives spread over lease term rather than period to first rent review Lease term is the non-cancellable period plus any further periods which are highly probable to be entered into at the inception of the lease
Deferred tax Nobody’s favourite area of accounting! Generally – more ‘timing differences’ under FRS 102 than current UK GAAP Therefore – more deferred tax balances recognised – with consequential effects on profits In addition – discounting of deferred tax balances prohibited
Deferred tax (2) Recognised on all revaluation luation gains ns even if no binding agreement to sell BIG differen erence e – main n impact act where e proper erty ty held – consider ider effects ts on b/s ratios/ tios/ covenants? nants? Other big difference - recognised on fair value adjustments on a business combination (with balancing adjustment to goodwill on acquisitions)
Holiday pay accruals Explicit requirement to accrue for ‘accumulating compensated absences’ Holiday pay and any similar entitlements where there is an ability to carry forward Not an issue where policy is ‘use it or lose it’ (and enforced)
Holiday pay accruals (2) If entitlement to c/f holiday – recognise accrual at o/s holiday x average daily rate of pay Particular problem where holiday year not the same as accounting year, or where holiday entitlement depends on when an individual joined May be constructive obligation if in practice allow c/f even though policy doesn’t technically permit Full retrospective restatement required – so best to do DoT calculation ASAP
Financial instruments Key principle – financial instruments are split between ‘basic’ and ‘other’ Most (though not all) basic are at cost or amortised cost This includes bank loans with straightforward terms ‘Other’ are at fair value
Financial instruments (2) Derivatives (forward currency contracts, interest rate swaps taken out separately from loan) – bring on balance sheet at fair value and re-measure at each reporting date Investments in other entities – show at fair value, unless unquoted equity instruments and fair value cannot be reliably measured
Financial instruments (3) Main implications: – Terms of loans will need to be reviewed carefully to determine if basic or not – Cannot just assume bank loan will be basic – Consider renegotiation? (Bank may not agree!) – How do you fair value anyway? (talk to the bank) – Listed, and many unlisted, investments will have to be fair valued (easy if listed, less so if not)
Foreign exchange Need to disclose functional currency – may not always be Sterling Currency of primary economic environment in which company operates Can choose a different presentation currency Use of a contracted rate or closing rate to translate transactions is not permitted – need to use spot rate. FX contracts may be accounted for as hedges Cannot use closing rate to translate P&L of foreign operation
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