Freeze Frame on FRS 102 Changes

Friday, July 28, 2017

Even from its unveiling in 2013, it was anticipated that the new accounting standard, FRS 102, would require some tweaking, clarification and trouble-shooting as it bedded in and new challenges arose. It was duly announced that the Financial Reporting Council (FRC) would review FRS 102 at least every three years to ensure the standard stayed on track with developments to IFRS.

In March of this year the first of these reviews took place, admittedly slightly beyond the three-year mark, and the FRC issued ‘FRED 67 Draft amendments to FRS 102 – Triennial Review 2017’. It proposed an array of amends to the standard and these were planned to come into force in January 2019. It had originally been intended that the first series of amends would to take effect in January 2018, but to give small companies adequate time to familiarise themselves with the new standard, any changes were deferred by a year.

Within FRED 67 was a range of proposed improvements to tackle implementation issues that practitioners had been experiencing with FRS 102. These spanned changes to areas including financial institutions, leases and revenue. The key areas for proposed changes included:

  • Simplification for loans to a small company from a director shareholder, or close family member
  • The removal of some undue cost or effort exemptions
  • Changing the definition of a financial institution
  • A new description of a basic financial instrument
  • Acknowledging fewer intangible assets in a business combination
  • Permitting investment property in a group to be measured under historic cost values.

While the FRS sought to ensure any changes would not be arduous to implement, it entered a consultation period of a few months and received feedback that altered the expected course of action. At the end of June this year the FRC published a feedback statement revising its approach.

It appeared that while respondents to the consultation supported the long-term aim of broad consistency with IFRS, they queried the proposed timetable and felt more IFRS implementation experience would be needed before further elements of it should be incorporated into FRS 102. There are CPAA members that concur, feeling that while such a major new system is bedding in, it would be foolish to make fundamental changes.

The FRS concurred that more analysis would be beneficial before pressing ahead with any changes and deferred any updates to FRS 102 while more work is undertaken. Consequently, a triennial review phase 2 exposure draft will not be issued later this year. This is a summary of the feedback and associated actions:

  • Proposals to reflect any significant IFRS will be considered separately from the triennial review cycle. The FRC will continue to assess emerging issues as they arise to determine what action needs to be taken. This could occur outside regular review cycles.
  • There will be no changes to the requirements in relation to business combinations, as there was no evidence that there are any significant issues arising from the existing requirements in relation to business combination.
  • In relation to the impairment of financial assets, the FRC will gather further evidence before taking a decision on the timetable and approach for reflecting the principles an expected loss model, if at all.
  • The definition of fair value will not be revised at this time, noting that many entities are only just becoming familiar with the fair value guidance in FRS 102.
  • The FRC has proposed strengthening the requirements relating to separating single transactions into component parts in FRED 67, as a clarification of existing requirements. Further evidence-gathering and analysis was determined to be needed before a decision is made on the most appropriate timetable and approach for reflecting the principles of IFRS 15 in FRS 102, if at all.
  • The FRC did not propose to enhance lease disclosures in FRED 67 given the mixed feedback received. Further work needs to be done before deciding on the approach to reflecting the principles of IFRS 16 Leases in FRS 102.
  • Further consideration of whether different approaches are appropriate for financial institutions and other entities within the scope of FRS 102. A different approach could be applied to both the requirements and the timetable for implementation.
  • The FRC does not propose at this stage to revise the requirements for share-based payment given that there is no strong evidence that change is needed. It will revisit this if there are legislative changes such that additional disclosures can be mandated for small entities.
  • The feedback also requested that FRS 102 should track changes in the IFRS for SMEs, and should not get ahead of it.

To its credit, the FRC noted that a period of stability would be beneficial for the industry to fully embrace the new standard and the benefits it is designed to bring. One CPAA member said that while FRS 102 is ultimately not much different to what went before, it has involved significant skilling up, the financial burden of which is either swallowed by the business or passed on to clients, so further changes would likely require extra work or costs.

There are small tweaks to FRS 102 that many practitioners would welcome, especially where guidance is lacking or the lack of clarity is misleading or open to too much interpretation. One accountant suggested that, rather than adding more changes, the industry would benefit from more real-life examples and troubleshooting guides, to provide more clarity on how some of FRS 102’s more ambiguous elements can be applied to real client issues.

The FRC did state that it will continue to assess any emerging issues and intervene and act should it need to, so we can but watch this space to see what the FRC’s next move will be. In the meantime, the CPAA will be hosting a morning briefing on Thursday 2nd November to equip delegates with all they need to know on FRS 102. During this half-day session expert FRS 102 speaker, Valerie Steward, will deliver insight on issues relating to:

  • FRS 102
  • FRS 102 1A
  • FRS 105
  • Changes in the pipeline
  • Legislation changes
  • Small company provisions

This event will start at 9:30am and conclude at 12:20pm and will be held at Stansted airport (full address details issued upon registration). The cost for CPAA members to join this session is £60, with non-members welcome to attend for £70 (feel free to invite colleagues along). To book a place, please email or call 01204 693 988.