Friday, March 11, 2016

As covered in our previous article on the introduction of the mandatory new standard, FRS 102, there are some differences to be embraced. While there are certainly variations between the old UK/Irish GAAP and FRS 102, they are reassuringly similar in terms of scope and basic principles.

As covered in our previous article on the introduction of the mandatory new standard, FRS 102, there are some differences to be embraced. While there are certainly variations between the old UK/Irish GAAP and FRS 102, they are reassuringly similar in terms of scope and basic principles.

The major differences between the old UK GAAP and FRS 102 are detailed below. Please note that this is purely an overview and no substitute for getting to grips with the official detail, which you can find here:  But be aware that since the FRS 102 regulations were issued, there have been further amendments, so keep checking for updates.


Financial statements: First to note is the change in terminology when reporting financial performance and preparing financial statements. The language used throughout FRS 102 mirrors the ‘international’ terms found in IFRS for SMEs. For example:


Terminology using the old UK GAAP

FRS 102

Profit and loss account

Income statement

Statement of total recognised gains and losses

Statement of comprehensive income (also referred to as a ‘statement of other comprehensive income’)

Balance sheet

Statement of financial position

Cash flow statement

Statement of cash flows

Reconciliation of movements in shareholders funds

Statement of changes in equity

Notes to the financial statements

Inclusion of an explicit statement that the financial statements have been prepared under FRS 102.


As you would expect, it is specified that financial statements must result in the faithful representation of transactions. Financial statements are required to make clear the name of the reporting entity, the currency, date of the end of the reporting period, whether individual or group accounts are covered and the level of rounding (if any used). And where statements are prepared for periods either longer or shorter than a full year, the reason must be stated. 


Cashflow statements: FRS 102 specifies that the cashflow statement must be prepared using just three classifications: financing activities, operating activities and investing activities. Within the cashflow statement, FRS 102 requires a reconciliation of the amounts of cash and cash equivalents. Cash is defined as cash on hand (physical currency held) and demand deposits. Cash equivalents are defined as short-term, liquid investments readily convertible to known amounts of cash (with a low level of risk of changes in value). Highly liquid investments with a maturity of three months or less also count. Bank overdrafts repayable on demand can be included as cash/a component of cash.


Financial instruments:  Categorised into two groups – ‘basic’ and ‘other’ – and a new form of measurement has been adopted. Understanding the broad scope of what ‘financial instruments’ includes, is important. FRS 102 cites a financial instrument as “a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.” A financial instrument can only arise from a contract.


‘Basic’ financial instruments are those with straightforward terms, for example cash, fixed-term deposits, commercial paper and commercial bills held, loans receivable and payable, bonds and similar debt instruments. These are initially measured at the transaction price. Subsequent measurement, for amounts that settled after more than one year, should be at amortised cost.

‘Other’ financial instruments refer to, as the name implies, all other financial instruments, for example derivatives, foreign currency forward contracts, complicated loans (where non-standard interest rates are used), and investments in convertible debt. These are recognised and measured at fair value in profit or loss - a major change from the old GAAP system, with all derivatives now accounted for on the balance sheet.

Business combinations and goodwill: FRS 102 requires more intangible assets to be recognised separately from goodwill on the balance sheet when there is a business combination. The definition of intangible assets has changed and now includes entities such as brands, customer relationships, trade secrets and patents – and they should be recognised separately upon acquisition, if their fair value can be measured reliably. Retrospective adjustments can only be made within 12 months after the acquisition date and beyond this, adjustments to the initial accounting for a business combination will be recognised only to correct a material error.

FRS 102 requires goodwill to be amortised over its useful life – it can no longer have indefinite life, or one of 20 years as it did under the previous GAAP system. If a practitioner is unable to make a reliable estimate of the useful life of an intangible asset or goodwill, its life shall not exceed five years.

Deferred tax: FRS 102 uses a ‘timing differences plus’ methodology when dealing with deferred tax. The ‘plus’ means recognising deferred tax on business combinations (except for goodwill) and on revaluations of property, plant and equipment and investment properties. Under the old GAAP regulations, revaluing a fixed asset did not necessitate extra deferred tax, until there was a binding commitment to sell the asset. However, FRS 102 provides no special treatment for revaluations; they are treated as giving rise to timing differences.

Pension schemes: New requirements were introduced for defined benefit pension plans, including bringing group plan deficits onto the balance sheet of at least one individual entity or company level, rather than only in consolidated accounts. The finance cost is established by applying the discount rate to the net scheme liabilities. Deferred tax on the pension scheme must be shown separately within deferred tax and not against the pension scheme liability as it would have been under GAAP.

Employee benefits: Possibly one of the bigger changes from the introduction of FRS 102 is the requirement for short-term employee benefits to be accrued in the accounts. Short term employee benefits must be recognised together with the deferred tax impact. These include wages, NICs, paid-for annual leave and sick leave, profit-sharing and bonuses (payable within 12 months), plus  benefits such as medical care, housing, cars and free/subsidised goods or services. FRS 102 explicitly requires that companies provide for unutilised holiday entitlement at the year-end, which was not something covered by the old UK GAAP. Where the holiday calendar differs from a firm’s financial year, the firm should calculate how many holiday days have been taken and make an accrual for any unused accrued holiday.


Investment properties: FRS 102 specifies that fair value is measured reliably and recorded in profit or loss, rather than reserves. A revaluation is required each year. Where fair value cannot be measured reliably for any reason, the cost less depreciation method comes into play. The definition of investment property also includes properties leased to other members of the same group.


Leases: FRS 102 classifies leases into finance and operating leases. Lease incentives are now spread over the entire lease term, which differs to the old UK GAAP where the value of rent-free periods and other incentives are spread over the period to the first rent review. FRS 102 requires the disclosure of the total future minimum lease commitment and the lease incentives are spread over the lease term.


Interest-rate swaps: FRS 102 requires that interest rate swaps and other similar instruments, such as forward contracts, are measured at fair value and reassessed annually. Any changes, additional assets and/or liabilities must be recognised in the income statement.


Merger accounting: FRS 102 permits merger accounting only for group reconstructions and business combinations involving public benefit entities. Otherwise it is not permitted. A partnership converting to an LLP can continue to use merger accounting, providing relevant criteria for a group reconstruction are met.


Investments in shares: Under the old GAAP, investments held in listed shares were measured at cost value. FRS 102 requires the use of fair value for investments in shares, specifically those publicly traded or where the fair value can be measured reliably. The fair value must be recognised in the profit and loss account.


Close family: There were amendments to the definition of ‘close family’ and it is worth reviewing the clarifications.  Close family now includes the person’s children, spouse or domestic partner; children of that person’s spouse or domestic partner; and dependents of that person or that person’s spouse or domestic partner. The definition of a related party would include step-children and the term ‘dependants’ would also include foster children and elderly relatives where they are dependent on the related party.

Please also be aware that since the FRS 102 regulations were issued, there have been further updates and amendments, so keep checking for updates. First time adopters should only refer to the latest version of FRS 102. The FRC plans to carry out regular reviews of FRS 102, with the review set for 2016/17 with a view to the revised FRS 102 being effective in 2018.