FRS 102 Checklist: Are you ready?

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coming-soon[1]Professional bodies have advised member firms who have clients that will be affected by the transition to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland to start to gather data this year to aid the mandatory transition to the FRS for accounting periods commencing on or after 1 January 2015.   My last article on FRS 102 focussed on the theoretical aspects to transition with another article being published in the next couple of weeks on dealing with the numerical aspects.  This intervening article has been produced as a sort of ‘checklist’ to help practitioners to gather some of the main data they will need to help prepare for the transition.

1.            Fixed assets

Do you have any clients that have subjected any of their assets to the revaluation model?

If so, consider whether your clients wish to continue using the revaluation model on transition to FRS 102 or if they would prefer not to.  This is advantageous in the case of buildings subjected to the revaluation model because it would reduce the need to commission valuations to update the carrying amounts to market value.  FRS 102 allows a first-time adopter to elect to measure an item of property, plant and equipment at fair value and then use that fair value as its deemed cost at that date.  Alternatively, a first-time adopter can elect to use a previous GAAP valuation at, or before, the date of transition to FRS 102 as the deemed cost at the revaluation date.

Remember, if a previous GAAP valuation is used which occurred before the date of transition, the deemed cost should be depreciated from the valuation date.  Estimates which have been made to calculate the depreciation rate do not need to be revised.

2.            Investment properties

Do you have any clients that have investment property on the balance sheet?

If so, remember that the accounting treatment for fair value gains and losses is markedly different than in current SSAP 19 Accounting for Investment Properties.  On transition, move any revaluation reserve relating to investment property into P&L reserves in the opening FRS 102 balance sheet (or an alternative component of equity if considered appropriate).

3.              Stock

Do you have any clients that value their stock using last-in first-out (LIFO)?

If so, remember that Section 13 Inventories prohibits such a cost methodology – only FIFO and average cost can be used.  This is going to be fairly significant for those companies using LIFO and it would be advisable to have them change methodologies in 2014 to make the transition easier.  However, keep in mind that if you advise your client to change from LIFO to FIFO/average cost in 2014, it will mean a change in accounting policy and hence retrospective application.

4.            Leasing

Do you have clients that have, or may be considering, finance leases?

If so, remember that lease classifications (finance v operating) are more subjective in Section 20 Leases.  No 90% benchmark exists and the eight indicators of finance lease characteristics are not exhaustive.  Also, Section 20 requires the finance charge (interest) to be calculated using the effective interest method.

5.            Employee benefits

Do you have clients that have unpaid short-term employee benefits which have been accrued at the year-end?

If so, remember that Section 28 Employee Benefits requires such short-term employee benefits to be accrued, which is generally not done by firms under current UK GAAP.  Short-term employee benefits include:

  • Wages, salaries and NIC;
  • Short-term compensated absences, e.g. paid annual leave and paid sick leave;
  • Profit sharing and bonuses; and
  • Non-monetary benefits (medical care, housing, cars and free or subsidised goods or services) for current employees.

6.            Deferred tax

Do you have clients with material amounts of deferred tax balances?

If so, remember that Section 29 Income Taxes introduces additional situations that trigger deferred tax – the most common one being the revaluation of non-monetary assets (e.g. investment property revaluations).  Other considerations include business combinations and unremitted earnings in respect of investment entities.

7.            Additional disclosures

Are you aware of the additional disclosures mandated by FRS 102 in respect of the year of transition and the 2014 financial year?

FRS 102 requires additional disclosures to be made within the first set of FRS 102 financial statements.  You should check that your disclosure checklists are up-to-date, but to clarify, the additional disclosures required by a company (assuming a 31 December year-end) are as follows:

  • A description of the nature of each change in accounting policy.
  • Reconciliations of its equity determined in accordance with its previous financial reporting framework to its equity determined in accordance with FRS 102, for both of the following dates:
    • the date of transition to FRS 102; and
    • the end of the latest period presented in the entity’s most recent annual financial statements determined in accordance with its previous financial reporting framework.
    • A reconciliation of the profit or loss determined in accordance with its previous financial reporting framework for the latest period in the entity’s most recent annual financial statements to its profit or loss determined in accordance with FRS 102 for the same period.
    • Reconciliations of equity (net assets) as at 1 January 2014 and 31 December 2014 and profit for the year to 31 December 2014.

8.            Statement of cash flows (cash flow statement)

Are you aware of the new presentation of the cash flow statement?

FRS 102 is considerably different in the way it presents the cash flow statement as part of the primary statements.  Only three cash flow classifications (operating activities, financing activities and investing activities) are used in Section 7 Statement of Cash Flows as opposed to the nine headings in FRS 1 Cash Flow Statement.  This will impact on transactions such as corporation tax paid (which will, in the vast majority of cases, form part of operating activities).  Section 7 does not specify how dividends and interest cash flows should be classified in the cash flow statement and allows entities a choice which must be consistent.  Interest paid and interest and dividends received might well be classified as operating cash flows because they are included in profit or loss.  For dividends paid to shareholders, these could be classed as operating activities because they are paid out of operating cash flows.  Alternatively interest and dividends paid could be classed as financing cash flows, with interest and dividends received being classed as investing cash flows on the grounds that they represent the costs of obtaining finance or they are returns on an investment.

9.            Do you have clients with a defined benefit pension plan?

Whilst relatively uncommon (defined contribution plans being more common), there are some medium-sized entities which do still have defined benefit pension plans.

FRS 102 does not require entities to present a surplus or a deficit in a defined benefit pension plan on the face of the balance sheet after net assets (as FRS 17 Retirement Benefits does).  A deficit in a defined benefit scheme could therefore be included within ‘provisions’ and a surplus could be included within ‘other assets’.

Also, keep in mind that the accounting requirements for the expected return on plan assets and the interest cost under FRS 102 are based on the revisions to IAS 19 Employee Benefits which happened in 2011.  The annual expense includes the net interest expense (or income) which is arrived at by applying the discount rate to the net defined benefit asset or liability which could increase the annual benefit expense.  Where this is the case, you may wish to forewarn your clients as the revised method could impact on earnings.

10.          Professional body resources

Are you using your professional body’s resources for the new UK GAAP?

The mainstream professional bodies (ICAEW, ACCA, AAT etc) have a vast array of resources available to help members with clients that are affected by FRS 102 to understand and help the move across to the new framework and apply it going forwards.  Such resources include model financial statements, podcasts, seminars, practical issues to consider and contact details to discuss any complex areas.


The Financial Reporting Council are keen to ensure that the move across to FRS 102 is as painless and as cost-effective as possible and there are also many good resources contained in FRS 102 itself (such as how to apply a certain concept or how to calculate things like provisions).  The next article will focus on the transition to FRS 102 and what the numbers may look like, and this article should give firms the basics to help them consider what information they will need to get their clients moved over to the new UK GAAP as swiftly and painlessly as possible.


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 www.accountingweb.co.uk, 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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