When FRS 102 – the Financial Reporting Standard applicable in the UK and the Republic of Ireland – was first introduced in 2015, the Financial Reporting Council (FRC) indicated that it would be reviewed every three years.
The first triennial review was concluded with the publication of the final amendments in December 2017, and a revised FRS 102 was published in March 2018.
These amendments are effective for accounting periods beginning on or after 1 January 2019. The date of transition to the revised FRS 102 is the beginning of the earliest period for which an entity presents full comparative information. For example, if an entity has a 31 December year end, and therefore would apply the amendments for the first time for its year ended 31 December 2019, the date of transition would be 1 January 2018.
For those who have yet to issue accounts for an earlier period, early adoption of the amendments is permitted. This may be an attractive option as many of the changes have been developed in response to stakeholder feedback and, as a result, are designed to make FRS 102 clearer and easier to use.
There is no restriction on early adoption, meaning that the amendments can be applied from the current or next set of accounts being prepared if those accounts have not yet been published. When early adoption is chosen, this must be disclosed. However, for small entities preparing their accounts under Section 1A Small Entities, disclosure is encouraged but not required.
Early adoption can be taken provided all amendments are applied at the same time, with the exception of the amendments noted below in respect of directors’ loans and the tax treatment in respect of gift aid payments, both of which can be applied early in isolation.
What are the most notable amendments?
Removal of undue cost or effort exemptions – the option to not measure investment property at its fair value due to “undue cost or effort” has been removed and therefore all investment property (other than that rented to another group entity) must be measured at fair value, with changes in value recognised in the profit and loss account.
Similarly, for associates and joint ventures for which there was and still is an accounting policy choice to use cost or fair value, the exemption is no longer available. Therefore, an entity may revert to the cost model if establishing fair value is considered too difficult or costly.
Investment property rented to another group entity – entities will be able to choose to measure such properties at cost (less depreciation & impairment) or fair value with changes in value through the profit and loss account. Any investment property rented to another group entity accounted for at fair value is permitted to use the fair value of the property at the date of transition as its deemed cost.
Directors’ loan exemption – a new exemption has been introduced to allow small entities the option to measure loans from a director (or their group of close family members) at transaction price, rather than present value, providing that group of family members contains at least one shareholder. The loan must also be directly to the entity concerned, rather than via another group company.
Intangibles acquired in business combinations – entities are now only required to recognise intangible assets separately from goodwill if they are separable and arise from contractual or other legal rights. The previous requirement was either/or and, whilst this can still be applied by choice, it must be applied consistently to each class of intangible asset and to all business combinations (rather than applied selectively).
Gift aid donations by subsidiaries to charitable parents – when a wholly owned subsidiary makes a gift aid payment to its charitable parent this may be eligible for corporation tax relief under the gift aid rules. The amendments require the subsidiary to take account of the tax effects of such gift aid donations at the reporting date, provided the payment is made within the reporting period or it is probable that it will be paid within the next nine months where a legal obligation to make the payment exists at the year end.
Classification of financial instruments – in addition to those debt instruments that meet the existing conditions set out in section 11, a debt instrument shall be classified as “basic” if it is consistent with a new principle-based description.
Statement of cash flows –a new requirement to also disclose a net debt reconciliation has been introduced. This disclosure is based on, but not identical to, the requirements of FRS 1 Cash Flow Statements which existed prior to FRS 102.
It has also been clarified that any small entity, not just those applying Section 1A of FRS 102 to its accounts, does not need to present a statement of cash flows unless required by other regulation such as an applicable SORP.
Other amendments to be aware of:
- clarification of the classification of spare parts, stand-by and servicing equipment between property, plant and equipment and inventory.
- clarification of the treatment of pre-contract costs in construction contracts
- clarification around the treatment of debt for equity swaps.
- removal of financial instruments note, disclosure is only required if there are fair value assets and/or liabilities;
- disclosure of key management personnel compensation is only required if there are key management personnel other than directors;
- removal of the “amount of inventory recognised as an expense during the period” disclosure.