First-time adoption of FRS 102

For many practitioners in the UK, the implementation of FRS 102 The Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland spells long working days, stress-induced sleepless nights and a feeling that no sooner has self-assessment season ended, the equivalent financial reporting nightmare has started.  However, with careful planning this need not be the case.

This article is the third in a series of articles which takes a close look at the content of FRS 102 and offers practitioners guidance in its implementation and considers first-time adoption.  FRS 102 becomes mandatory for accounting periods commencing on or after 1 January 2015, however earlier adoption is permitted.

First-time adoption

Upon first-time adoption of FRS 102, users are directed to Section 35 Transition to this FRS.  This particular section applies to first-time adopters of FRS 102 and spells out that it applies to all first-time adopters of FRS 102 regardless of whether the previous accounting framework was EU-adopted IFRS or another set of GAAP.

A reporting entity’s first set of financial statements that comply with FRS 102 are those in which a reporting entity makes an explicit and unreserved statement of compliance with FRS 102.  This explicit and unreserved statement of compliance confirms that the entity’s financial statements complies in all respects with FRS 102 and an illustration of such a disclosure is shown below:

Paragraph 35.4 sets out three examples where FRS 102 will be adopted for the first-time by a reporting entity.  These are if, for example, the entity:

• did not present financial statements for previous periods;
• presented its most recent previous financial statements under previous UK and Republic of Ireland requirements that are therefore not consistent with this FRS in all respects; and
• presented its most recent previous financial statements in conformity with EU-adopted IFRS.

Date of transition

The date of transition to FRS 102 is one of the first, and most important, things first-time adopters need to consider.  There are some accountants who have become confused about the date of transition to FRS 102 and consider this date to be 1 January 2015 – i.e. the date FRS 102 becomes mandatory for accounting periods commencing on or after this date.  The date of transition to FRS 102 is not 1 January 2015 as can be illustrated using an example:

Opening balance sheet

At the date of transition to FRS 102, reporting entity’s are required to prepare an opening balance sheet (or opening statement of financial position as FRS 102 refers).  There are four steps to follow in the preparation of this opening balance sheet:

(a)        recognise all assets and liabilities whose recognition is required by this FRS;

(b)        not recognise items as assets or liabilities if this FRS does not permit such recognition;

(c)        reclassify items that it recognised under its previous financial reporting framework as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity under this FRS; and

(d)        apply this FRS in measuring all recognised assets and liabilities.

Example – reclassification of equity

The opening balances (prepared under old UK GAAP) as at 1 January 2014 for Company A Ltd are as follows:

The revaluation reserve account relates to the investment property carried in the balance sheet as at 31 December 2013 at £200,000. Section 16 to FRS 102 requires all fair value gains and losses in respect of investment property to be taken to the profit and loss account rather than charged to a revaluation reserve account (paragraph 16.7).  Therefore, in preparing the opening balance sheet on transition to FRS 102, the reporting entity will:

DR revaluation reserve account  £40,000

CR profit and loss account          £40,000

This is an example of reclassifying one component of equity to another component of equity (as in the bullet (c) above).

On transition to FRS 102, companies will recognise any transitional adjustments directly in retained earnings, or, if appropriate, another category of equity to accord with paragraph 35.8 of Section 35.

Example – reclassification in the cash flow statement

Company A Ltd has always produced an FRS 1-style cash flow statement which shows corporation tax paid as a separate line item on the face of the cash flow statement.  Since Section 7 Statement of Cash Flows only permits three cash flow classifications (Operating activities, Investing activities and Financing activities), the finance director is unsure where to classify the corporation tax payment made in the year.

This is another example of reclassification.  Under FRS 1, corporation tax was classified as ‘Taxation’ in the cash flow statement.  However, under FRS 102 at Section 7 paragraph 7.4(e), reporting entities report their taxation payments under Operating activities unless they can be specifically attributed to investing or financing activities.

Errors

If errors are noted during the conversion process in respect of the financial statements that were previously issued these must be distinguished separately from any conversion adjustments arising due to accounting policy changes.  This is because reporting entities must include various reconciliations within their first financial statements prepared under FRS 102.

Reconciliations

According to Section 35, the first set of financial statements prepared under FRS 102 must include the following information:

• 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 this FRS for both of the following dates:

– the date of transition to this FRS; 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 this FRS for the same period.

Example disclosure

Reconciliation of Equity

Equity at the date of transition and 31 December 2014 can be reconciled to the amount reported previously under previous UK GAAP as follows:

Reconciliation of profit or loss

The profit or loss for the year ended 31 December 2014 can be reconciled to the amount reported previously under previous UK GAAP as follows:

Conclusion

This article has considered some of the more practical points that practitioners will need to consider on transition to FRS 102.  The steps to take (assuming a December year-end) are:

• Determine the date of transition to FRS 102.
• Consider the appropriateness of the client’s accounting policies.
• Go back to the 2013 trial balance and restate the figures to arrive at an opening balance sheet position as at 1 January 2014 as this will need disclosure.
• Incorporate your adjustments from the 2013 trial balance into your 2014 balances to ensure your opening balances agree to your closing balances (exception reports come in very useful here to identify any errors as a result of the conversion process).
• Reconcile your equity amounts at the date of transition and at the end of the latest period presented in the most recent financial statements determined in accordance with previous UK GAAP.
• Reconcile the profit and loss from old UK GAAP to FRS 102.

If your accounts production software programme has the facility to run exception reports, run one of these at each stage of the conversion process (i.e. once you are happy you have done the adjustments in each year) to identify any posting errors made during the conversion and correct any exceptions before moving on to the next stage.  It is imperative that you attack the conversion process in a logical manner and it is often useful to plan the process of conversion using a ‘checklist’ approach ensuring each stage of the process is complete before moving on to the next.

Category: Accounting and standards, Audit