Key differences in old and new UK GAAP

This article features in AccountingWEB.co.uk new financial reporting zone which is sponsored by Bloomsbury Professional.  Some of the content of this article has been taken from Financial Reporting for Unlisted Companies in the United Kingdom and Republic of Ireland – a major new title to be published by Bloomsbury Professional which has been authored by Steve Collings and Paul Gee and is scheduled for publication on 30 October 2013.

Cash flow statement

There is no exemption from preparing a cash flow statement under FRS 102, unless applying the reduced disclosure requirements for subsidiaries and ultimate parent companies either in FRS 102 or FRS 101 Reduced Disclosure Framework.  There are also considerable presentational differences.  A cash flow statement prepared under FRS 102 has three cash flow classifications: operating activities, investing activities and financing activities as opposed to FRS 1’s nine classifications.

Error correction

FRS 3 requires the correction of errors by way of a prior-period adjustment if the error is judged as ‘fundamental’ (i.e. one that destroys the true and fair view).  Under FRS 102, error correction by way of prior-period adjustment will be carried out where the error is ‘material’, hence more errors are expected to be carried out by way of a prior period adjustment.

Stock valuation

SSAP 9 permits the use of the LIFO method of stock valuation, where the directors can demonstrate this method is appropriate in the company’s circumstances.  FRS 102 outlaws the use of the LIFO method and hence companies employing the use of LIFO will have to choose between FIFO or average cost.

Investment property

Under SSAP 19, fair value gains and losses are taken directly to the revaluation reserve (losses are taken there to the extent of a revaluation surplus).  Under FRS 102, gains and losses in respect of fair value fluctuations are taken directly to profit or loss.  It is to be noted that fair value gains under FRS 102 are not distributable as a dividend to shareholders.

Intangible assets and goodwill

Under FRS 10, there is a rebuttable presumption that the useful economic life of intangible assets and goodwill is limited to periods of 20 years or less. This presumption may be rebutted, and a useful economic life regarded as longer or infinite in certain circumstances.  Under FRS 102, the useful economic life of intangible assets and goodwill is limited to periods of five years or less should management not be able to place a reliable estimate of the intangible asset or goodwill’s useful economic life.

Leasing

In the Guidance Notes to SSAP 21, leases are treated as finance leases when the present value of the minimum lease payments equates to 90% or more of the fair value of the leased asset.  This treatment is generally the ‘benchmark’ treatment in practice.  Under FRS 102, there is no 90% guideline; instead a lease is usually indicative of a finance lease when ‘substantially all’ of the present value of the minimum lease payments is equivalent to the fair value of the leased asset.

Employee benefits

There is a specific requirement in FRS 102 for reporting entities to make accruals for unpaid short-term employee benefits at the end of the reporting period (unpaid sick pay and holiday entitlement being the two key examples).  There is currently no specific requirement in UK GAAP to make these accruals (although paragraph 11(b) to FRS 12 does cite an example of holiday pay meeting the qualifying criteria of an accrual).

Deferred tax

FRS 19 does not require deferred tax to be recognised on revalued assets if the reporting entity has not entered into a binding agreement to sell the asset and has already recognised the gain or loss expected to arise on the sale.  However, under FRS 102, deferred tax is recognised on a revalued asset, regardless of whether the entity has entered into a binding agreement to sell or not.  The rate used in the calculation of deferred tax is the rate that would apply to the disposal of the asset.

Grants

SSAP 4 requires income from grants to be matched against the related expense in the profit and loss account.  Under FRS 102, there is an accounting policy choice – entities can recognise grant income when the performance-related conditions have been met (under the performance model), or they can match the income to the related expense (as in SSAP 4 currently and also under the accrual model).

Terminology

FRS 102 uses international terminology (e.g. balance sheet = statement of financial position, profit and loss account = income statement, cash flow statement = statement of cash flows).  It is permissible to use alternative titles to those referred to in FRS 102 (i.e. entities can still call the balance sheet the balance sheet), provided the titles are not misleading.

Category: Accounting and standards, Audit