Company directors and business owners have been faced with a number of significant changes in recent months. Along with the signing into law of The Companies Act 2014 business owners will now need to consider the introduction of FRS 102 – The Financial Reporting Standard applicable in the UK and Republic of Ireland. FRS 102 will replace the existing mix of FRS’s SSAP’s and UITF’s which made up the old Irish/UK GAAP (Generally Accepted Accounting Practice). The purpose of the new standard is to enable users of Financial Statements to receive high-quality, understandable financial reporting, proportionate to the size and complexity of the entity and the users’ information need. Implementation of FRS 102 is required for accounting periods beginning on or after 1st January 2015. For example, companies with December year ends will have to comply with FRS 102 for the year ended 31st December 2015. While this may seem some time away, it must be noted that comparative figures for the year ended 31st December 2014 will also be required to comply with FRS 102. As such, it may be beneficial to consider the implications of FRS 102 when preparing your December 2014 Financial Statements.
Key Differences To Be Considered
While FRS 102 may be similar to old Irish/UK GAAP, there are a number of significant differences which will need to be considered in the coming months. Some of the key differences which will impact on business owners include the following:
1. Investment Property
An investment property is property held for the purpose of earning rentals, capital appreciation or both. Under the old GAAP such property was held at open market value. Under FRS 102 Investment Properties are to be initially recorded at cost and are then to be measured at fair value, assuming fair value can be measured without undue cost. If however fair value cannot be measured reliably, then the asset is to be accounted for as property, plant and equipment and will be subject to depreciation. The treatment of Investment Property under FRS 102 will have an impact on Financial Statements as both gains or losses on the revaluation to fair value will be now be required to be recognised in the profit and loss, as opposed to old GAAP where only losses below cost were recorded in the profit and loss. It must also be noted that deferred tax will be required to be accounted for on any unrealised gains arising from the revaluation to fair value.
2. Cashflow Statement
Under FRS 102 Cashflow Statements will be required to be completed by the majority of companies, with exceptions available for some group structures, which is unlike the old GAAP where an exemption could be claimed by small companies. While the majority of companies will be required to complete a “Statement of Cash Flows” they will now only include three headings, which is reduced from nine headings under old GAAP. The new headings are as follows:
- Operating Activities
- Investing Activities
- Financing Activities
It is expected that the reduction in headings will make it easier to produce a Statement of Cash Flows for smaller entities.
3. Goodwill
Under FRS 102 all intangible assets, including goodwill, are assumed to have finite lives. The new standard states that if an entity is unable to make a reliable estimate of the useful life of goodwill then the life shall not exceed five years. Under Irish/UK GAAP it was possible for intangible assets to have indefinite lives. If a company is currently amortising goodwill over 20 years and is unable to calculate a reliable useful life for the goodwill, then they will be expected to reduce the life of the asset to 5 years. Such a revaluation will have a negative impact on the balance sheet of a company as the distributable reserves will be reduced by the decrease in the carrying value of goodwill.
4. Leases
Under old SSAP 21 only the annual commitment of a non-cancellable operating lease required disclosure. Under FRS 102 companies must now disclose the total amount of non-cancellable operating lease rentals due to the end of the operating lease, for each of the following periods:
- Due within one year;
- Due between one and five years; and
- Due over five years.
In addition to the above disclosure requirements, lease incentives such as a rent free or reduced rent period will now be required to be spread over the full lease term, rather than to the first rent review under Irish/UK GAAP.
5. Employee Benefits
Currently under Irish/UK GAAP employee benefits such as holiday pay are rarely accounted for and are for the most part only recognised when paid. Under FRS 102 the cost of employee benefits due will be required to be accounted for at the year end. For example, if a company’s employees had untaken holiday entitlements at the year end, there is a requirement for the associated costs to be included in the profit and loss, with a corresponding liability in your balance sheet. Such a requirement, in certain circumstances, may give rise to a once off reduction on a company’s profits in the year of implementation.
6. Government Grants
Under old GAAP Government grants are accounted for using the accruals method of accounting. The following are examples of how Government Grants are treated under the old GAAP:
Capital Grants
Included as a liability in the balance sheet and released to the profit and loss account in line with the depreciation of the asset purchased.
Revenue Grant
Income from the grant is matched to related expenditure as it is incurred. While companies do have the option of retaining the accruals method of accounting for Government Grants, they may now also choose the alternative method of the performance model. Under this model grants are to be recognised as follows:
- Grants that do not impose specified future performance-related conditions on the recipient are to be recognised when grant proceeds are received or receivable.
- Grants that do impose specified future performance related conditions are to be recognised only when those conditions are met.
- Grants received before recognition criteria are satisfied are to be recognised as a liability.
7. Financial Instruments
One of the most significant changes to impact companies under FRS 102 will be the treatment of financial instruments, which is not restricted to just complex financial instruments. Under FRS 102 basic financial instruments, such as cash, loans, trade receivable, finance leases and interest rate swaps will be dealt with under Section 11, with all other instruments being dealt with under Section 12. The treatment of the various financial instruments under FRS 102 will require significant consideration for the business owner, so it may be advisable to contact your financial advisor when reviewing these.
Next Steps
Conversion to a new set of accounting standards is a daunting prospect for any business. The changes required under FRS 102 could have either a positive or negative impact on your Financial Statements. It is important to understand these at an early stage and to be prepared for the impact on your business. We recognise this and have in place a knowledgeable team to help you through this transitionary period.
