How the FRSSE will be changed for the new UK GAAP

Many companies in the UK choose to apply the Financial Reporting Standard for Smaller Entities (the FRSSE) in preparing their financial statements.  Financial reporting is about to undergo the biggest change it has seen for several years with the introduction of a new set of financial reporting standards (FRSs 100, 101, 102 and 103) and a new financial reporting regime brings with it some new practices that accountants must get to grips with.  This article looks at how the FRSSE will be affected with the new regime and considers some key points that will be of interest to practitioners.

The FRSSE was first introduced in 1997 and since its introduction has seen it updated five times.  Companies are currently using the FRSSE (effective April 2008) when preparing their financial statements, however with effect for accounting periods commencing on  or after 1 January 2015, there will be a new version of the FRSSE (effective January 2015).  Early adoption of FRSSE (effective January 2015) is permissible, although it is likely that the majority of companies will not adopt the standard earlier than its effective from date.

The FRSSE is based on current UK GAAP and is a much-loved standard by practitioners because it offers a simplistic financial reporting framework for smaller companies, is very easy to navigate and is very straightforward to apply.  The good news is that there are no immediate proposals to withdraw the FRSSE – however, it is very likely that there will be further changes made to the FRSSE in the future as it is currently based on FRSs and SSAPs which are going to be consigned to the history books from 2015.

So how has the FRSSE been changed to be aligned to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland?

Status of the FRSSE

The Status of the FRSSE has been changed to become the FRSSE (effective January 2015) and paragraph 1 has been changed to remove inapplicable text.

Paragraph 2 has been changed to include reference to FRS 100 Application of Financial Reporting Requirements and also to remove reference to old UK GAAP.

Paragraph 4 has been changed to refer to the new UK GAAP and acknowledges the consequential changes to the FRSSE where it previously referred to standards or Abstracts that are now withdrawn.

Paragraph 5 is amended in respect of transactions and events that are not covered by the FRSSE.  In current UK GAAP, if a transaction or event is not covered by the FRSSE, the accountant will go to mainstream UK GAAP or an alternative financial reporting framework (e.g. IFRS) to decipher the appropriate accounting treatment.  Paragraph 5 is amended so that entities must first have regard to their own existing accounting policies and then go to FRS 102 to develop a new accounting policy.

Public benefit entities are now referred to in paragraph 5A.

Paragraph 6 is amended to refer to the Financial Reporting Council as opposed to the Accounting Standards Board.

Paragraph 10 is amended requiring entities that are not eligible to use the FRSSE to report under EU-adopted IFRS, apply FRS 101 in the individual financial statements of qualifying entities or apply FRS 102 in accordance with the requirements in FRS 100.

Paragraph 11 is amended to remove reference to the first issuance of the FRSSE in November 1997.

Main body of the FRSSE

Changes to the main body of the FRSSE are as follows:

The footnote to paragraph 2.6 is amended to include provisions ‘applicable’ rather than ‘relating’ to small companies.

Capitalised goodwill and intangible assets having a finite useful life is amended so that the useful economic life is now five, rather than 20, years.

Paragraph 6.45 is amended to remove the suggestion of obsolescence or a fall in demand for a product.

Paragraph 6.45 is removed above as we now have paragraph 6.45A which specifically requires an entity applying the FRSSE to undertake an assessment of whether there is any indication of asset impairment and where there is, to write down the asset to recoverable amount.  Paragraphs 6.45B and 6.45C also deal with asset impairment issues.

Paragraph 15.7 is amended so as to include paragraph (d) which says that related party transactions entered into between two or more members of a group, provided that any subsidiary which is a party to the transaction is wholly-owned by such a member, does not require disclosure as a related party transaction.

Changes to Part C Definitions

The definition of ‘close family’ is amended and now includes the person’s children, spouse or domestic partner, children of that person’s spouse or domestic partner and dependents of that person or that person’s spouse or domestic partner.

The definition of ‘key management personnel’ is now included.

The definition of ‘public benefit entities’ is inserted.

The definition of a related party is deleted and replaced as follows:

A related party is a person or entity that is related to the entity that is preparing its financial statements (in this Standard referred to as the ‘reporting entity’).

• A person or a close member of that person’s family is related to a reporting entity if that person:
  • has control or joint control over the reporting entity;
  • has significant influence over the reporting entity; or

Is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.  An entity is related to a reporting entity if any of the following conditions applies:

• The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).
• One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).
• Both entities are joint ventures of the same entity.
• One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
• The entity is a retirement benefit scheme for the benefit of employees of either the reporting entity or an entity related to the reporting entity.  If the reporting entity itself is such a scheme, the sponsoring employers are also related to the reporting entity.
• The entity is controlled or jointly controlled by a person identified in (a).
• A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

The final sentence in paragraph 35 to Appendix IV Development of the FRSSE has been deleted which referred to Appendix V.  Appendix V to the FRSSE (effective April 2008) has also been deleted.

Paragraphs 38 and 39 to Appendix IV have been renumbered paragraphs 41 and 42 which refer to the relationship of the FRSSE with other documents issued by the FRC.  New paragraphs 38, 39 and 40 have been included which makes reference to new UK GAAP and consequential amendments to the FRSSE (effective April 2008).

Paragraphs 41 and 42 have been changed to remove reference to old UK GAAP and replace the word ‘Board’ with ‘FRC’.

Paragraph 42 has been amended to make reference to FS 102 and remove references to ‘auditors’, ‘the board’ and citation of an example of marking to market fixed interest instruments.

Conclusion

Whilst the majority of the above changes will go relatively unnoticed by practitioners, the key points to note are the reduction of the useful economic life of goodwill and intangibles from 20 to five years and the new definition of a related party.  Further changes to the FRSSE are highly likely so that there are no significant disparities between the FRSSE and FRS 102 and it is also likely that disclosure requirements will be changed in light of the new ‘micro entities’ announced in September 2013.

Category: Accounting and standards, Audit