30 June 2017

Changes to the Financial Reporting Standard 102: what you need to know

We set out the proposed changes to the Financial Reporting Standard 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland'.

In March 2017, the Financial Reporting Council (FRC) issued FRED 67 which proposes some improvements and clarifications to FRS 102.

Proposed changes

The principal areas where changes have been proposed are:

1. Directors’ loans

Small entities will no longer need to estimate a market rate of interest when measuring loans from a director who is also a shareholder. As it stands, FRS 102 requires such loans to be initially measured at present value, with the discount rate being a market rate of interest for a similar debt instrument.

Subsequent to this, in May 2017, the FRC announced an immediate change to FRS 102 (within its ‘Amendment to FRS 102 (May 2017): Directors’ loans – optional interim relief for small entities’ statement). This amendment exempts small entities from having to implement the current requirement to measure director’s loans at their present value on transition to FRS 102. Instead, they can measure the director’s loan at its transaction price, which is how director’s loans were accounted for under FRSSE 2015 or ‘old UK GAAP’.

This has been achieved by deferring, for small entities only, the implementation of this aspect of FRS 102, pending the finalisation of the proposals in FRED 67. As an optional interim measure, the FRC is therefore amending FRS 102 to insert the following:

1.13A: A small entity, as an exception to paragraph 11.13, may measure a basic financial liability that is a loan from a director who is a natural person and a shareholder in the small entity (or a close member of the family of that person) initially at transaction price. Subsequently, for the same financial liability, a small entity is also exempt from the final sentence of paragraph 11.14(a).

This amendment is effective immediately with retrospective application available; it shall not be applied directly, or by analogy, to any other transaction, event or condition.

Some small entities will have prepared financial statements which comply with FRS 102 prior to this measure being introduced. In these cases, the exemption will be available in any subsequent financial statements, with full retrospective application required. This means that next year, the company will restate the director’s loan to its transaction price retrospectively and then account for it on this basis going forward.

2. Intangible assets acquired in a business combination

Fewer intangible assets will be required to be separately identified from goodwill and valued.

3. Investment property rented to another group entity

Entities will now be able to choose to measure these investment properties at cost less depreciation and impairment instead of fair value. At present, such properties must be measured at fair value, unless the entity can conclude that determining fair value would require ‘undue cost or effort’. The undue cost or effort exemption will be removed for all investment property.

4. Classification of financial instruments

Additional financial instruments will be considered ‘basic’ (and thereby measured on a cost rather than fair value basis) beyond those meeting the prescriptive conditions, if they are consistent with a new principle-based description.

5. Definition of a financial institution

Financial institutions are required to provide additional disclosures about financial instruments. Fewer entities should be financial institutions following changes to the definition, although all entities will need to consider if the risks associated with the financial instruments they hold are significant enough to warrant further disclosure.

The proposed amendments will simplify the preparation of financial statements under FRS 102, which is a positive outcome for preparers and auditors.

When will it be effective?

The FRC expects to finalise the amendments to FRS 102 in December 2017.

The proposals are expected to be effective for accounting periods beginning on or after 1 January 2019. Early application will be permitted if all of the amendments are applied at the same time.

What about incorporating major changes in IFRS?

These proposals do not incorporate into FRS 102 major changes in IFRS. The FRC will consider whether, and if so how, to incorporate elements of the expected loss model of IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases as a separate phase of the triennial review. Any proposals for changes will only be made after consideration of responses received to the Consultation Document issued in September 2016. Any resulting amendments to FRS 102 will not be effective before 1 January 2022.

If you have any questions on these proposed changes to FRS 102, please do not hesitate to get in touch. 

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