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The new company accounting standard, FRS 102, is being introduced for accounting periods commencing on or after 1st January 2015. This standard replaces the currents SSAPs and FRSs for all medium and large companies (as defined by the Companies Act 2006) and brings UK companies in line with other international accounting standards, ensuring greater reporting consistency.
Although the standard becomes mandatory from the start of 2015, some preparatory work may be required in advance of the transition as certain items within financial statements may need to be accounted for or disclosed differently, along with comparative figures.
Who needs to apply FRS 102?
Currently, if your company meets two of the following three criteria, it will need to adopt FRS 102:
- Gross assets in excess of £3.26M recorded on the balance sheet;
- Turnover greater than £6.5M;
- Employs 50 or more staff.
There has been an update suggesting the qualifying criteria could be increased to £5.4M for assets and £10.8M turnover, but no guidance as to when this could take effect has been provided. It’s sensible for any companies who might be affected by this additional development to take steps to comply now and make the accounting changes required to adopt FRS 102.
Setting a transition date
The first aspect of implementing the FRS 102 accounting standard is to understand how the transition date will apply. The first adoption period will commence on 1st January 2015, but for reporting to be effective, comparative data from the first date of the previous accounting period is required. This is the transition date and historical financial data from this date onwards needs to be re-stated according to FRS 102 rules.
For example, if a company’s year end is 31st December 2015, their transition date is 1st January 2014. However if the accounting period was extended, their transition date could also be as early as 1st July 2013. For this reason, action should be taken sooner rather than later as decisions relating to the way affected assets are treated according to FRS 102 need to be made.
Main differences to expect with FRS 102
One of the most important aspects of the FRS 102 accounting standard to understand is the way certain assets are treated. The effects of this are predominantly administrative, for example, a company with property, plant and equipment has the option to revalue these at the transition date, to show them at market value.
The advantage of revaluing an asset, such as freehold property used within the business, through FRS 102 is that it provides a means to re-assign the balance sheet value at a given point in time, without having to make an ongoing commitment to continue revaluing, as was required under the old rules.
Other assets that may need to be re-evaluated include goodwill. In this case the most significant change is that goodwill can no longer be deemed to have an infinite life. Instead a maximum useful lifetime of 5 years is automatically assigned. Although this may accelerate tax relief opportunities in some cases, it will mean there is a negative impact on the company’s reserves.
Impact of FRS 102 on tax
There will inevitably be tax implications to adopting the FRS 102 accounting standard because profits may change according to the way assets, liabilities, revenues and expenses
are measured. Considering the tax impact early is advisable because there may be an impact on cash flow if taxes increase correspondingly and there may also be changes required to tax computations.
Where an asset, for example, investment property, has been revalued for FRS 102 and shows an increase in value, the corresponding profit needs to be recorded. However, tax is not payable until the asset is sold and a monetary gain is realised. Similarly, although a gain is shown in the profit and loss statement, this is not available for distribution to shareholders as a dividend because it is not an actual gain until it is exchanged for cash. This in turn will result in a greater number of situations involving deferred tax and makes the calculations required more complex.
There are many other aspects of FRS 102 for companies to consider and we have just addressed the ones most likely to have an impact in this article. In short, FRS 102 will affect the format of financial reporting and disclosures required. It will change the ways assets and liabilities are recognised and measured and will also affect the way losses and gains can be treated.
In addition to the impacts on investment property and goodwill, other changes include the treatment of hedge investments like foreign currency purchases and company pension funds. The exact impact will vary by company and we recommend you contact us as soon as possible to discuss your transition date and the next steps to take.
