FRS 102: Changes proposed

The Financial Reporting Council (FRC) have issued a Consultation Document Triennial review of UK and Ireland accounting standards – Approach to changes in IFRS and this consultation forms part of the FRC’s triennial review of FRS 102 which is now underway.  The FRC are keen to hear from accountants to help formulate possible improvements to FRS 102 and the consultation considers whether, and to what extent, FRS 102 should be updated for recent changes in IFRS.  The comment period for the consultation closes on 31 December 2016.  This is the first article in a two-part series which considers the impact of the proposed changes.  The second article will focus on the technical impact of the changes.

FRS 102 is built on the provisions in IFRS (specifically IFRS for SMEs) and hence part of the FRC’s work is to consider whether changes in IFRS should be reflected in FRS 102.  It should be noted that following the UK referendum to vote to leave the EU, the overall framework for financial reporting has not changed and the FRC will continue to develop and maintain accounting standards within the boundaries of UK and Ireland legislation.

Companies outside of the small companies’ regime are already under the scope of FRS 102 as the standard is mandatory for such companies for accounting periods starting on or after 1 January 2015.  Small companies (and micro-entities choosing not to report under FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime) are mandatorily required to apply FRS 102 (Section 1A Small Entities) in the preparation of their financial statements for accounting periods starting on or after 1 January 2016, with early-adoption permissible.

The triennial review offers the opportunity to make improvements to FRS 102 and while some amendments to the standard might be incremental, others may be more fundamental.  In all cases, any amendments to accounting standards will be the subject of a public consultation through the release of Financial Reporting Exposure Drafts (FREDs).  In this instance, however, the FRC is seeking the views of stakeholders, via the Consultation Document, in advance of developing detailed proposals for change.

After the consultation period closes, the FRC expects to issue two FREDs which will take account of all feedback received:

• FRED Triennial review 2017 Phase 1 – Incremental improvements and clarifications. This is expected to be issued towards the end of the first quarter of 2017.
• FRED Triennial review 2017 Phase 2 – Expected loss model and leases to be issued towards the end of the third quarter of 2017.

The incremental improvements and clarifications in Phase 1 are expected to be effective for accounting periods commencing on or after 1 January 2019.  Phase 2 amendments are expected to be more significant in nature and hence are expected to be effective for accounting periods beginning on or after 1 January 2022 in order to give entities enough time to prepare for transition.  The FRC do expect that early application of the amendments will be permissible.

New standards and significant changes to IFRS which are not currently reflected in FRS 102 and which form part of the triennial review are:

1. IFRS 3 Business Combinations (revised 2008);
2. IFRS 9 Financial Instruments;
3. IFRS 10 Consolidated Financial Statements;
4. IFRS 11 Joint Arrangements;
5. IFRS 12 Disclosure of Interests in Other Entities;
6. IFRS 13 Fair Value Measurement;
7. IFRS 15 Revenue from Contracts with Customers; and
8. IFRS 16 Leases.

The proposals for change in respect of the above are outlined in the table below (see ‘Amendments to IFRS’ section).

Amendments to IFRS

FRS 102 was developed from IFRS for SMEs which was issued in July 2009.  However, in developing FRS 102, the FRC made several amendments, such as the inclusion of additional policy choices and the content of Section 29 Income Tax to reflect UK-specific issues.  UK and Ireland accounting standards have to be consistent with IFRSs, unless an alternative will better meet the overriding objective.  As a result of this principle, when an IFRS or IFRS for SMEs changes or is revised, it is necessary to consider whether similar changes should be made to FRS 102 so as to maintain consistency.

Recently there have been several changes to IFRS which are not reflected in FRS 102, but conversely there are a number of changes that have been considered but are not reflected in FRS 102 because FRS 102 offers a better alternative and the FRC are not proposing to revisit these areas unless there is evidence that FRS 102 can be improved.

The FRC proposes changes as follows:

The approaches which the FRC is proposing are as follows:

1. Do nothing. There may be restrictions in law and/or it may be unclear that the changes proposed would improve financial reporting by entities under the scope of FRS 102.
2. Make limited amendments to FRS 102 to improve consistency and clarity and either:
3. review the standard at a subsequent triennial review once more implementation experience is available; or
4. do not review the standard again.
5. Make significant amendments to FRS 102 to improve financial reporting by entities under the scope of FRS 102.

Conclusion

The FRC have acknowledged in the consultation that any changes to FRS 102, including those for consistency with IFRS, are to be developed in a proportionate and practical way keeping in mind the types of entities that are under the scope of FRS 102.  The FRC will make changes when the changes for consistency with IFRS are considered to improve financial reporting.

The consultation is only a consultation at this stage; it is not an Exposure Draft and the proposals for change may be modified depending on the comments received before a FRED is issued.  Should you wish to make constructive comments on the consultation, send an email to ukfrs@frc.org.uk no later than 31 December 2016.

Category: Accounting and standards