This is a WHA article that recently appeared in ABTA’s frequent newsletter, ABTA today, which provides important and relevant information to all of its members:-
FINANCIAL REPORTING STANDARD 102 (“FRS 102”)
The purpose of this guidance note is to advise Companies on the changes in accounting and reporting required by the mandatory adoption of FRS 102.
The ‘face’ of UK GAAP is changing. On 14 March 2013, the Financial Reporting Council (“FRC”) published FRS 102 which will apply to unlisted corporate entities. Based on the International Financial Reporting Standard for Small-Medium Entities (IRFS for SMEs), it is designed to bring a ‘simplified reporting regime’ for entities that will fall under its scope as well as introducing more up-to-date and relevant accounting requirements that have fallen behind in existing UK GAAP. FRS 102 becomes mandatory for entities with accounting periods commencing on or after 1 January 2015.
In reality, this is something Company directors should all be looking at very closely NOW for any company with accounting periods ending on 31 December 2013 or later. This is for a number of reasons, but primarily:
- The first mandatory accounts MUST have comparatives that reflect FRS 102 – and that means closing comparative balances as well as the opening balances in relation to that comparative period.
- Early adoption is allowed.
- FRS 102 does contain areas where choices of treatment are allowed, and adoption of certain treatments could result in ‘one-off’ benefits such as enhanced balance sheets or tax savings. Each company has to be looked at individually but there may certainly be some impact for Members in relation to their CAA Free Asset test and ABTA Net Recoverable Current Asset test.
The following are features of the new Standard:
This is the key date to identify. It is the beginning of the earliest period for which the entity must present full comparative information under the Standard. So, for example, with a 31 December year-end, the transition date is 1 January 2014. For a 30 June year-end, the transition date is 1 July 2014.
As already stated, FRS 102 is based on IFRS for SMEs so a lot of the terminology has also changed to come in line with IFRS.
For example, the P&L account is now known as “the Statement of Comprehensive Income”; the Balance sheet is now referred to as “the Statement of Financial Position (SOFP)”. “Stock” is now called “Inventories”, and “Tangible Fixed Assets” is now “Property, Plant and Equipment (PPE)”. It should be noted however that the Standard states “An entity may use titles …. other than those used in this FRS as long as they are not misleading”. It is therefore possible that some may decide to keep the same terminology as currently.
- Investment property – under FRS 102, this is required to be measured at fair value. If a property cannot be measured reliably, it is then treated as PPE. Hence a company needs to examine assets currently on the balance sheet, to see if they are still qualified under the current category, or required to move to another category or even de-recognised altogether if no longer qualifying.
- Inventory valuation – LIFO (Last in first out) is not permitted under FRS 102.
- Employee benefits – Companies need to check if they have included staff entitled sick leave and annual leave in their staff cost accruals as FRS 102 requires this.
- Lease accounting – operating leases or finance leases need to be reviewed according to FRS 102 criteria. Under FRS 102, incentives are required to be spread over a longer period than the current UK GAAP treatment.
- Goodwill – Goodwill acquired through business combination should be amortised over its useful life. If a lifetime cannot be measured, then it cannot exceed 5 years. This could impact a company’s SOFP (Balance Sheet) significantly if a business has large amounts of goodwill in their accounts. Goodwill reversal is not permitted under IFRS.
- Financial instruments – Fair value is the key concept in IFRS. Different reasons for holding such leads to different accounting treatment, for example, held for sale or held-to-maturity, or held at amortised cost (most popular).
- Deferred Tax – More deferred tax is recognised for the temporary timing differences. For example, a deferred tax liability is recognised on the surplus of Investment Property revaluation. Deferred tax asset and liabilities can only be netted off if they are both related to the same tax authority. This needs to be taken into account when tax planning.
The FRS 102 also affects more than the accounts. For example, companies may need to consider:
- Banking covenants – Bank personnel may need to be ‘educated’ in what the new format and accounting treatments mean, especially if they impact measurements and ratios reflecting significant change;
- Tax – There may be significant one-off benefits or additional liabilities arising – HMRC have also made their own pronouncements on how the changes should be managed;
- Profit related pay – If such arrangements are in place, how will they be affected by the changes and one-off adjustments?;
- Distributable profits – Under FRS 102, there are items that will now be taken to the P&L account (e.g. revaluation of Investment Property) that are not legally distributable even though they are shown in the P&L account. Directors and shareholders will need to understand that dividend streams may significantly alter in the short term;
- Regulators – Companies regulated in the Travel Industry need to understand the net current asset and net asset impact to their balance sheets of implementation of the Standard in relation to CAA ATOL and ABTA membership financial requirements.
This briefing note cannot, nor is it intended to, cover all of the proposed changes under FRS 102. It is produced here to highlight the significant changes in reporting and accounting requirements that will affect a Company’s business. The earliest statutory accounts that will be directly affected will likely be those for the year ended 31 December 2015. Careful planning now will enable companies and their directors to prepare for the impact FRS 102 will have.
This document is intended as a general guide only and cannot be a substitute for specific advice.