1 January 2015 will mark an important date in UK financial reporting. UK entities not already preparing their financial statements in accordance with International Financial Reporting Standards as adopted by the European Union, or currently preparing their financial statements in accordance with the requirements of the Financial Reporting Standard for Smaller Entities (‘FRSSE’), will need to prepare them in accordance with the new UK accounting regime.
At its centre, the new regime includes Financial Reporting Standard 102 (FRS 102) which is applicable in the UK and Republic of Ireland.
Accounting under FRS 102 has some notable differences to current UK Generally Accepted Accounting Practice (UK GAAP), for example:
• measuring investment properties at fair value at each balance sheet date with changes in fair values being reported in the profit and loss account as opposed to equity;
• no exemption from the recognition of deferred taxation on assets carried at valuation which means deferred taxation must be provided on property revaluations;
• the requirement to recognise, separately from goodwill, at fair value those intangibles such as customer lists and brands that arise on acquisition of a business or an entity;
• the elimination of the option to treat goodwill and intangibles as having indefinite useful economic lives which means that such assets must be amortised over a finite life which cannot exceed five years if a reliable estimate of useful life cannot be made;
• the requirement to record certain financial instruments at amortised cost or fair value;
• spreading lease incentives such as rent free periods over the full term of the lease; and
• recording accruals for staff holiday accrued but untaken at the year-end.
Whilst it may seem some time away, the first financial statements under FRS 102 will be required for the year ending 31 December 2015. These financial statements need to reflect the effect of the new standard as if the entity had always adopted it and the 2014 comparatives will need to reflect the impact of FRS 102. This means starting to evaluate the impact now to gather the required information for the 2015 financial statements.
• perform an impact analysis on financial statements: evaluate where the accounting differences may impact the financial statements and identify the commercial issues that arise (e.g. impact on dividend planning, covenants and profit-related remuneration schemes);
• where choices exist, make accounting policy selections;
• gather accounting data for transition during 2014;
• roll out internal awareness and education training for business operations under the new regime; and
• commence external stakeholder engagement (e.g. bankers, suppliers and key shareholders).
The extent of forward planning and effort needed should not be underestimated. In particular, the implications on loan covenants and potential acquisitions require early dialogue with banks and professional advisors.
Those entities that expect to continue using the FRSSE may see change too. The Financial Reporting Council, as the UK standard-setting body, announced a major project to review the FRSSE in light of the new EU Accounting Directive, which significantly revises the small companies regime, and to consider how the FRSSE is aligned with the new UK GAAP framework. They have indicated that the FRSSE should be withdrawn and instead small entities and micro-entities should be brought within the scope of FRS 102, so that consistent principles apply to all entities. An exposure draft of a revised FRS 102 is expected to be issued in June 2014 for consultation.