May

29

FRS 102: Presentation of financial statements

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pen 2The way FRS 102 will require financial statements to be presented once it has been adopted will largely be the same as the way such statements are produced now.  However, there are some terminology changes contained within FRS 102 that practitioners may need an awareness of as some of the terminology used is quite different than what we are currently using and I will go through those issues later on in the article.

The way financial statements are presented under FRS 102 are dealt with in Section 3 Financial Statement Presentation.  The Scope section outlines the ‘fair presentation of financial statements’ as well as how a reporting entity will confirm that they have complied, in all respects, with FRS 102 and goes on to explain what a ‘complete’ set of financial statements comprises under FRS 102 as well as considering fundamental issues such as going concern.

Fair presentation

Paragraph 3.2 to FRS 102 requires financial statements to present fairly the financial position, performance and cash flows of an entity.  This paragraph refers to the concept of ‘faithful representation’ which is one of the traits found in the qualitative characteristic ‘reliability’ that is dealt with in Section 2 Concepts and Pervasive Principles.  The characteristic ‘reliability’ explains that information is reliable when it is free from material error and bias and represents faithfully that which it either purports to represent or could reasonably be expected to represent.  It therefore follows that where clients apply FRS 102 and make additional disclosures where necessary, the presumption is that it will result in financial statements that fairly present the financial position, performance and cash flow of the entity.

In terms of the requirement to make ‘additional disclosures’, the standard recognises that such additional disclosures will be necessary when merely complying with the requirements in FRS 102 will be insufficient to understand the effect of particular transactions.

Example

Company A Ltd has an investment property that the company owns to earn rentals and for capital appreciation in its balance sheet amounting to £800,000 as at 31 December 2015.  The carrying value of this investment property as at 2014 was £700,000 and the £100,000 gain has been accounted for at fair value through profit or loss with the gain being recognised in profit or loss to comply with the requirements of paragraph 16.7 to Section 16 Investment Property.   Company A currently leases the investment property out to an unconnected third party under a non-cancellable operating lease (accounted for under the provisions in Section 20 Leases) for a period of ten years from the inception of the lease with no options to renew the lease.  This property has also been pledged as security in respect of a loan taken out from the bank to acquire land for investment purposes.  With regards to the acquired land, it is currently undeveloped in a remote location where market transactions for such land are infrequent.  The result of this is that the fair value of such land cannot be determined reliably without undue cost or effort.

The accounting for the investment property fair value gain will be fairly straight forward under Section 16, it is merely:

DR investment property                  £100k

CR profit and loss                             £100k

Being fair value uplift in investment property

To comply with the requirements in paragraph 3.2(a), additional disclosures will be necessary to enable a proper understanding of the full picture concerning the investment property as there is quite a bit going on where the company’s investment property is concerned.  The additional disclosures can be split into three components:

  • Disclosures relating to the fair value of the investment property;
  • The security pledged for the investment property; and
  • The fact that the undeveloped land has not been valued at fair value.

Disclosures relating to the fair value of the investment property

Disclosure should be made as to who determined the fair value, so a typical disclosure could be as follows:

The fair value of the investment property has been determined by an independent, professionally-qualified valuer by reference to recent market prices of similar properties in the area.

The security pledged for the investment property

Disclosure should be made about the fact that the investment property has been pledged as security for the loan and a typical disclosure could be

The company’s investment property has been pledged as security for borrowings.

You would then cross-reference this disclosure to the additional disclosures necessary in relation to secured debt.

The fact that the undeveloped land has not been valued at fair value

This could be disclosed within the accounting policies section of the notes to the financial statements and an example disclosure could be as follows:

The directors consider that the fair value of the undeveloped land cannot be obtained without undue cost or effort to the group on the grounds that market transactions for similar properties in the location are infrequent.  As a result, the land is accounted for as property, plant and equipment and measured at cost less accumulated impairment losses.

All the above additional disclosures go to enable a better understanding of the company’s transactions where their investment properties are concerned to accord with paragraph 3.2 Fair presentation.

The explicit and unreserved statement of compliance

Reporting entities preparing their financial statements under FRS 102 principles are required to make an explicit and unreserved statement of compliance with the FRS within the notes to the financial statements.  This statement can typically be made within the accounting policies of the notes – usually as the first accounting policy.

Paragraph 3.4 to Section 3 Compliance with this FRS recognises that a client would only depart from the requirements of FRS 102 in extremely rare circumstances.  If such rare circumstances are encountered, additional disclosures are required to comply with the requirements of paragraph 3.5 (a) to (c).  This paragraph requires disclosure of the following:

  • that management has concluded that the financial statements present fairly the entity’s financial position, financial performance and cash flows; [FRS 102 para 3.5(a)]
  • that it has complied with this FRS or applicable legislation, except that it has departed from a particular requirement of this FRS or applicable legislation to achieve a fair presentation; [FRS 102 para 3.5(b)] and
  • the nature of the departure, including the treatment that this FRS or applicable legislation would require, the reason why that treatment would be so misleading in the circumstances that it would conflict with the objective of financial statements set out in Section 2, and the treatment adopted. [FRS 102 para 3.5(c)]

The requirement to make an explicit and unreserved statement of compliance follows the same requirements in the IFRS for SMEs, which is based on IAS 1 Presentation of Financial Statements.

Example

Company B Ltd has prepared its first FRS 102 financial statements for the year-ended 31 December 2015 and these are the first financial statements prepared by the company under FRS 102 principles.  The company also carries its freehold land and buildings under the revaluation model as permitted by Section 17 Property, Plant and Equipment.  An example of the accounting convention and statement of compliance could be as follows:

The financial statements have been prepared under the historical cost convention as modified by the revaluation of certain assets.  The financial statements of the company for the year-ended 31 December 2015 have been prepared in accordance with the Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland issued by the Financial Reporting Council.  These are the company’s first set of financial statements prepared in accordance with FRS 102 (see note XX for an explanation of the transition).

There may be some occasions when the reporting entity cannot make the explicit and unreserved statement of compliance with FRS 102 – albeit these situations are likely to be rare.

Example

Company C Ltd has a year-end of 31 December 2015 and has prepared its financial statements for the year then ended.  The auditors have noted that the client has made an explicit and unreserved statement of compliance with FRS 102 in its accounting policies, but the company has failed to prepare a cash flow statement on the grounds that the directors believe preparing such a statement is too time-consuming and uninformative to the users of the financial statements.

In this example, the client is not eligible to make the explicit and unreserved statement of compliance because the financial statements do not comply  with paragraph 3.17(d) to FRS 102 which specifically requires a cash flow statement to be prepared in order to form a ‘complete’ set of financial statements.  Should this breach of FRS 102 not be remedied, there will also be implications for the auditor’s report.

Going concern

There are specific requirements in FRS 102 for management to consider the entity’s ability to continue as a going concern.  There are no changes from current practice contained in FRSSE (effective April 2008), current UK GAAP, EU-adopted IFRS and Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 which was issued by the Financial Reporting Council in October 2009; management must still be satisfied that the company is a going concern in order to prepare financial statements under the going concern presumption.  FRS 102 at paragraph 3.8 makes specific requirements for management to take into consideration all available information concerning the future which is at least, but not limited to, 12 months from the date on which the financial statements are issued.

A quick point for auditors in the UK and Republic of Ireland – auditors of UK and Republic of Ireland companies should beware where this is concerned because there is a difference in the ISA (UK and Ireland) 570 Going Concern and that of ISA 570 Going Concern which was issued by the International Auditing and Assurance Standards Board (IAASB).  ISA (UK and Ireland) 570, paragraph 17-1 and the Application and Other Explanatory Material at paragraph A10-2 requires auditors to consider if those charged with governance have paid particular attention in assessing going concern for a period of less than one year from the date of approval of the financial statements (if this is the case, the shorter period requires disclosure).  However, under the mainstream ISA 570 issued by the IAASB this refers to a going concern assessment of 12 months from the date of the financial statements.  ISA 560 Subsequent Events defines the ‘date of the financial statements’ to be the ‘end of the reporting period’.  UK auditors should be careful because the going concern assessment is more onerous than under the mainstream ISA.

When dealing with going concern issues, if management become aware of material uncertainties which cast significant doubt on the entity’s ability to continue as a going concern, disclosure of those uncertainties must be made.  If management also consider that the going concern basis is not appropriate in the company’s circumstances, management must disclose that fact and the basis on which they have prepared the financial statements.

Example

Company D Ltd is preparing their financial statements to 31 December 2015.  On 4 February 2016, following negotiations, the bank ‘called in’ the overdraft of £500,000 immediately due to the company’s ongoing financial difficulties.  This has had a catastrophic effect on Company D Ltd as they have failed to secure borrowing facilities with other financiers  and the directors have decided they have no alternative but to cease trading with immediate effect and liquidate the company.

The going concern basis is not appropriate in Company D’s situation and therefore the directors may make the following disclosures:

Report of the directors – statement of directors’ responsibilities

The last bullet point regarding the responsibility of the directors to prepare the financial statements on the going concern basis should be amended to make it clear that, despite their responsibilities still remaining the same, the going concern basis is no longer appropriate.  Such a disclosure could be:

As explained in Note X to the financial statements, the directors do not consider the going concern basis to be appropriate and these financial statements have therefore not been prepared on that basis.

Basis of preparation of the financial statements

The basis of preparation should explain the reasons why the going concern basis is no longer appropriate in the circumstances and the effect of this approach. Such a disclosure could be as follows:

The company has failed to reach agreement with its bankers concerning the renewal of the company’s borrowing facilities.  The company has ceased trading with immediate effect and therefore the financial statements have been prepared under the ‘break-up’ basis.  Fixed assets have been reclassified to current assets and restated to recoverable amount on the grounds that the company is no longer trading and are available for sale in their current condition and current assets have been stated at recoverable amounts.  Creditors falling due after more than one year have been reclassified as current. 

Event after the reporting period (post balance sheet event)

This would be relevant in this scenario because the event causing the going concern presumption to be departed from occurred after the year-end.  A disclosure example could be as follows:

As disclosed in the accounting policies note at Note X, the company ceased to trade on 4 February 2016 on the grounds that the directors were unable to source additional finance to enable the business to continue as a going concern.  The going concern basis is not appropriate and the directors have therefore not prepared the financial statements on this basis.

Frequency and presentation of financial reports and comparatives

If a client changes their year-end and reports over a longer, or shorter, period than 12 months, FRS 102 at paragraph 3.10 requires the following disclosures:

  •  that fact;
  • the reason for using a longer or shorter period; and
  • the fact that comparative amounts presented in the financial statements (including the related notes) are not entirely comparable.

The FRS also requires consistency in the way items are presented and classified in the financial statements from one period to the next.  However, it does recognise that there are situations where this might not be the case, for example:

  • Where it becomes apparent after a significant change in the nature of the client’s operations, or following a review of the financial statements, that an alternative way of presenting or classifying items would be more appropriate.  Where this is the case, the provisions contained in Section 10 Accounting Policies, Estimates and Errors would need consideration; or
  • If FRS 102, another applicable standard or Abstract issued by the FRC would require a change in presentation.

Example

Company E Ltd has always charged depreciation of its plant and machinery in administration expenses.  However, the new financial director has expressed concern that this disproportionately increases the company’s gross profit margin because he considers that the plant and machinery is incidental to the way the company generates sales and has therefore obtained Board approval to change the method of presenting depreciation from administration expenses into cost of sales.  Following the finance director’s concerns, the Board were unanimous in their decision to change the basis of presentation on the grounds that this would achieve a more realistic gross profit margin.

This is an example of a change in presentation, which is a change in accounting policy and thus should be applied retrospectively to achieve consistent reporting.  In addition, paragraph 3.12 to FRS 102 would require the following additional disclosures:

  • the nature of the reclassification;
  • the amount of each item or class of items that is reclassified; and
  • the reason for the classification.

If there were reasons why the directors could not reclassify the comparative amounts due to impracticability, they would have to make disclosures as to why reclassification of comparative amounts was not possible.

Comparative financial information is also required in financial statements which also extends to narrative and descriptive disclosures when it is considered relevant to give an understanding of the current period’s financial statements.

A ‘complete’ set of financial statements

Under FRS 102, a complete set of financial statements includes:

  • A profit and loss account and statement of total recognised gains and losses (presented as one statement, or as two separate statements);
  • Balance Sheet;
  • Cash flow statement; and
  • Supporting notes.

Each financial statement above is presented with equal prominence.

Terminology

Throughout this article, I have referred to ‘traditional’ terminology, such as the profit and loss account, balance sheet and cash flow statement.  However, the final section of this article deals with some terminology differences that are apparent in FRS 102, the most notable ones are outlined in the following table:

Traditional terminology (Companies Act)

FRS   102

Balance sheet

Statement of financial position

Profit and loss account

Income statement (under the two-statement approach) or statement of comprehensive income (under the single-statement approach) which would include the income statement and statement of changes in equity being presented as one statement

Statement of total recognised gains and losses

Statement of changes in equity

Cash flow statement

Statement of cash flows

Tangible assets

Property, plant and equipment as well as investment property

Debtors

Trade receivables

Creditors

Trade payables

Minority interests

Non-controlling interests

Capital and reserves

Equity

Net realisable value

Estimated selling price less costs to complete and sell

Stock

Inventories

Interest payable and similar charges

Finance costs

Interest receivable and similar income

Finance income/investment income

Those are some of the most ‘notable’ differences in the terminology and a full comprehensive list of the terminology equivalences can be found in FRS 102 at Appendix III on page 299.  However, don’t despair! Paragraph 3.22 does allow an entity to use alternative titles other than those used in FRS 102, provided they are not misleading, so the chances are that we will still refer to the balance sheet as the balance sheet.

Category: Accounting and standards

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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