FRS 102: Changes on the Cards

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On 23 March 2017, the Financial Reporting Council (FRC) issued FRED 67 Draft Amendments to FRS 102 – Triennial Review 2017. FRED 67 proposes several amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and also some amendments to FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime.

This is the first triennial review of ‘new’ UK GAAP undertaken by the FRC and the proposals for change have been developed in response to stakeholder feedback, particularly in respect of implementation issues that have been reported to the FRC.  The overall objective of the amendments is to make the standards clearer and easier to use, with additional choices and exemptions where relevant.  The FRC have confirmed that comprehensive reviews of the suite of standards will be undertaken every three years and the triennial process is an opportunity to review the implementation of the standards as well as whether they have achieved their aims and also to make improvements.

The comment period for FRED 67 is open until 30 June 2017 and constructive comments on FRED 67 should be sent to

Overview of the proposed changes

The majority of the changes are editorial and/or intend to clarify certain accounting treatments rather than make changes to those treatments.  To a certain extent, some of the changes, therefore, will be automatically picked up by accounts production software systems, although there are some changes which will have an impact on financial statements as follows:

Undue cost or effort exemptions

FRED 67 proposes to remove some of the undue cost or effort exemptions currently contained in FRS 102.  For example, in the September 2015 edition of FRS 102 paragraph 16.7 says that ‘Investment property whose fair value can be measured reliably without undue cost or effort shall be measured at fair value at each reporting date with changes in fair value recognised in profit or loss.’

FRED 67 proposes to change this paragraph by removing the undue cost or effort exemption so that all investment properties will be measured at fair value at each reporting date.

This treatment will mean that Section 16 Investment Property is similar to the requirements found in previous UK GAAP in the FRSSE and in SSAP 19 Accounting for investment properties.  The FRED does not, however, propose to change the accounting treatment and therefore all fair value gains and losses will continue to pass through the profit and loss account and deferred tax will also still be brought into account.

The FRC have removed some undue cost or effort exemptions because they are not being applied with sufficient rigour (they are not an accounting policy choice).

Other areas where undue cost or effort exemptions have been removed are:

  • Section 14 Investments in Associates – paragraph 14.10
  • Section 15 Investments in Joint Ventures – paragraph 15.15
  • Section 16 Investment Property – paragraph 16.3, 16.4 and 16.10
  • Section 17 Property, Plant and Equipment – paragraph 17.1(a)

Investment properties in a group

Unlike previous SSAP 19, the scope exemption to treat property occupied by, or let to, group members, was not carried over into FRS 102.  This means that groups which rent property out to other group members would have to reclassify the property as investment property in the separate financial statements and then do a consolidation adjustment in the consolidated financial statements to effectively reverse the investment property treatment and treat the property as owned tangible fixed assets.  This is because consolidated financial statements have to show the group in line with its economic substance, which is that of a single reporting entity (i.e. as if the group structure does not exist).

This treatment has proved particularly challenging for some groups and therefore, new paragraphs 16.4A and 16.4B are proposed which deal with investment property rented to another group entity.  Paragraph 16.4A provides an accounting policy choice for group members to either account for such properties at fair value through profit or loss or transfer them to property, plant and equipment and apply the cost model in Section 17 Property, Plant and Equipment in the individual financial statements of a group member.  It is likely that the latter option will be the most popular.

Financial instruments and loans from director-shareholders

Financial instruments have proved to be quite challenging for companies on adoption of FRS 102.  Financial instruments are dealt with in Section 11 Basic Financial Instruments and Section 12 Other Financial Instruments Issues.  Currently, to meet the classification of a ‘basic’ financial instrument, the instrument has to meet detailed conditions in paragraph 11.9.  FRED 67 proposes to introduce a description of a basic financial instrument which is intended to support the detailed conditions.  Introducing a description of a basic financial instrument will mean that a relatively small number of financial instruments that previously breached the detailed conditions in paragraph 11.9 of FRS 102 (and hence were classified as non-basic and accounted for under Section 12), will qualify for treatment as basic and therefore will be able to be measured at amortised cost.

Directors’ loans are also proving to be a challenge; particularly for small companies under FRS 102.  This is because invariably loans from a director-shareholder to a company are often entered into at below market rates or at 0% rates of interest.

To provide relief for a small company only from the requirement to account for loans from a director to the small company at present value, paragraph 11.13A is proposed which will mean that the loan from the director or a ‘close member of the family of that person’ (as defined in the Glossary to FRS 102) can be accounted for at transaction price rather than at present value.  The proposal is only to provide relief for loans FROM a director who is a natural person AND who is also a shareholder in the small entity or a close member of the family of that person.  Therefore, the relief is restricted to director-shareholders and is only available to small companies; thus companies outside the small companies’ regime will not be eligible to apply this exemption.

Intangible assets

The definition of an intangible asset is different under FRS 102 than was the case under previous UK GAAP and hence requires the recognition of more intangible assets on the balance sheet rather than them being subsumed within goodwill.  Paragraph 18.8 is proposed for amendment in FRED 67 in respect of intangible assets acquired in a business combination by enabling entities to recognise fewer intangible assets acquired in a business combination separately from goodwill.

FRED 67 proposes to allow an entity the option, on an asset-by-asset basis, to separately recognise additional intangible assets acquired in a business combination if doing so provides useful information to the entity.  Where this is the case, that policy must be applied consistently to the relevant class of intangible assets.

Financial institutions

The definition of what constitutes a ‘financial institution’ is proposed for change in FRED 67 to remove references to ‘generate wealth’ and ‘manage risk’.  The effect of this change will mean that fewer entities will meet the definition of a financial institution and should also allow for less interpretational difficulties.

Cash flow statement

A net debt reconciliation is proposed as part of the changes to Section 7 Statement of Cash Flows.  This is introduced in paragraph 7.22 and the FRC is suggesting a net debt reconciliation be included in an entity’s cash flow statement on the grounds that it gives users better information as it takes into account both cash balances and borrowings of the entity.  This is a departure from what is required in IFRS, but the FRC believe that a net debt reconciliation meets the overriding objective and as practitioners are already familiar with a net debt reconciliation, including it as part of the cash flow statement will be cost-effective to apply.


A new paragraph 23.3A is inserted into Section 23 Revenue which provides additional clarification relating to recognising revenue arising from each and every separately identifiable good or service in a single transaction.  The exception to this requirement would be where another basis better reflects the substance of the transaction.

Key management personnel compensation

A new paragraph 33.7A is proposed which says that when there is a legal or regulatory requirement to disclose directors’ remuneration (or equivalent), an entity will be exempt from paragraph 33.7 (which requires an entity to disclose key management personnel compensation in totality) if the key management personnel and directors are the same.

Section 1A Small Entities

Some incremental changes made to Section 1A Small Entities are as follows:

  • Paragraph 1A.4A is proposed which requires the financial statements of a small company that applies Section 1A to include a statement in a prominent position on the balance sheet confirming that the financial statements have been prepared in accordance with the provisions applicable to the small companies’ regime.
  • Paragraph 1AC.33 which requires information about employee numbers is contained in its own section.

FRS 105

Some of the notable changes to FRS 105 include:

  • The requirement for a micro-entity’s financial statements to state:
  • the part of the UK in which the micro-entity is registered;
  • the micro-entity’s registered number;
  • whether the micro-entity is a public or private company and whether it is limited by shares or guarantee (this requirement does not apply to micro-entities that are LLPs)
  • the address of the micro-entity’s registered office; and
  • where appropriate, the fact that the LLP is being wound up.

Additional disclosure requirements in respect of:

  • off-balance sheet arrangements (as required by section 410A of the Companies Act 2006); and
  • information about employee numbers (as required by section 411 of the Companies Act 2006).

Effective date

The changes proposed in FRED 67 are planned to be effective for accounting periods beginning on or after 1 January 2019.

Category: Accounting and standards, Audit

About the Author ()

Steve Collings is the audit and technical director at Leavitt Walmsley Associates Ltd and the author of 'Interpretation and Application of International Standards on Auditing'. He is also the author of 'IFRS For Dummies' and 'The AccountingWEB Guide to IFRS'. More about Steve's publications can be found by clicking on the 'Published Work' tab on the homepage. Steve is also a regular contributor of articles to, the UK's largest resource for professional accountants on a free subscription basis and is a member of the Society of Authors. Steve is an Editorial Board member for Wiley Insight IFRS and sits on the AAT's Financial Reporting Technical Panel. In 2011 Steve was named 'Accounting Technician of the Year' at the British Accountancy Awards and won 'Outstanding Contribution to the Accountancy Profession' by the Association of International Accountants in 2013. Follow Steve on Twitter - @stecollings

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