The Financial Reporting Council (FRC) has recently made revisions to the Financial Reporting Standards: FRS 102 and 105. It claims that these changes can potentially benefit up to four million business in the United Kingdom and Republic of Ireland, by offering accounting policy choices. Following these changes, some entities will be able to revert to accounting policies permitted by old UK GAAP but were overwritten by FRS 102 or 105.
FRS 102; the Financial Reporting Standard, is the foundation and basis for FRS 105 which has been simplified to accommodate the legal requirements for micro entities. The majority of the changes impact reporting under FRS 102, such as simplifying the definition of financial instruments, as well as drafting and editorial amendments to explain how to apply the standards in more detail; whereas revisions to reporting under FRS 105 mainly encompass the disclosure requirements shown on the balance sheet.
FRS 102: Investment property let to another group company
FRS 102 will have an impact on businesses that have investment properties on their balance sheet. Under the old GAAP, investment properties that were let to another group member were treated as standard tangible fixed assets – at cost minus depreciation over the period, and not required to be included at market value. However with the introduction of the original roll-outs of FRS 102 standards, investment properties are required to be treated as investment property, and should be included in reporting as ‘fair value’.
With the introduction of the latest FRS 102 revisions, accountants now face a choice in how they report for investment properties. Entities which prefer including properties at fair value can continue to do so, but the flexibility is particularly useful for entities who report property under the cost method in group accounts, as they can revert to the cost model, without wasting time and effort calculating valuations.
FRS 102: Recognition of intangible assets arising on business combinations
Under the old UK GAAP, intangible assets could not be recognised separately from goodwill (the value of a company’s brand name, good customer service, employee relations and patents) unless they were separable.
With the introduction of FRS 102, intangible assets are required to be recognised in the same way as UK GAAP, but it is also essential to recognise where they relate to contractual rights.
The revisions to FRS 102 give acquiring entities more options, as they can now recognise both separable and contractual intangibles or either separable or contractual intangibles.
What does FRS 105 allow micro-entities to do?
FRS 105 became the norm for many micro-entities in 2017, as it allows omit certain aspects from disclosures:
- Advances and,
- Credits made to directors.
However the changes to FRS 105 mean that additional disclosure requirements must be shown at the foot of the balance sheet such as:
- Statutory information required by the Companies Act 2006
- Average number of employees
- Information about off-balance sheet agreements
When do the changes for FRS 102 and FRS 105 come into effect?
While accountants have until accounting periods commencing after 1st January 2019 to understand the new flexibility and when to report under FRS 102 and 105, they can early adopt if they prefer, but there are a couple of points to consider:
- Is the company new? Early adoption may avoid further changes later on.
- Have they transitioned to the new UK GAAP yet? Are there any benefits in doing so, could they keep an accounting policy that it prohibited?
The changes to disclosure requirements for micro entities are applicable for accounting periods beginning and after 1st January 2017.
If you’d like to find out more about the new Financial Reporting Standards, download our latest eBook to explore a summary of the key changes to FRS 102 and 105 by clicking the button below