FRS 102 for small companies versus the FRSSE

The inclusion of the EU Accounting Directive (the Directive) has resulted in changes having to be made to the way that small companies will report their financial information. The Financial Reporting Council (FRC) have issued exposure drafts of how they intend small companies (which are not micro-entities) to report their financial information. Comments closed on the exposure drafts on 30 April 2015 and it is expected that final standards will be issued in the summer which will be mandatorily effective for accounting periods commencing on or after 1 January 2016 with earlier adoption permissible.

Small entity financial reporting

The FRSSE is to be withdrawn and small companies which are not micro-entities (or companies which would qualify to be classed as micro-entities but choose not to report under FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime) will be moved under the scope of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. The FRC are proposing to include a new section in FRS 102 which will be Section 1A Small Entities. Section 1A will outline the presentation and disclosure requirements which will deal with the minimum legal requirements following the revised Companies Act 2006 which applies for accounting periods commencing on or after 1 January 2016 or for financial periods beginning on or after 1 January 2015 but before 1 January 2016 if the company so chooses.

While Section 1A will deal with the presentation and disclosure requirements, the full recognition and measurement principles in FRS 102 will apply. For example, if a client has an investment property that is being carried at fair value through profit or loss, then the full recognition and measurement principles in Section 16 Investment Property will apply.

The new rules are retrospective and must be applied to the date of transition (which is the start date of the comparative period). This is to enable the financial statements to be comparable and consistent.

FRSSE versus FRS 102

FRS 102 is a new financial reporting framework and brings about changes to the way that certain transactions and events are accounted for and disclosed within the financial statements. FRS 102 is being amended so that small companies will still report information which is proportionate to their size (i.e. there will still be no requirement for small companies to prepare a cash flow statement or group accounts). However, there are notable differences between what companies do under the FRSSE as opposed to what they will do under FRS 102 for small entities. Some of these differences are noted as follows:

Agricultural and biological assets

Under FRS 102 for small entities, such assets can be carried at fair value with changes in fair value going through profit or loss.

Under the FRSSE there is no specific accounting treatment outlined.

Contracted rate for foreign currency

Under FRS 102 for small entities, transactions must be translated at spot rate with any changes in fair value of derivative contracts going through profit or loss (unless the entity is applying hedge accounting).

Under the FRSSE the contracted rate can be used instead of spot rate.

Deferred tax

Under Section 29 Income Tax deferred tax is recognised using the timing difference ‘plus’ approach. There are three additional situations which will give rise to deferred tax calculations:

• revaluations of non-monetary assets subject to the revaluation model (including investment properties)
• fair values in business combinations
• unremitted earnings in overseas subsidiaries and associates

Under the FRSSE deferred tax is recognised under the timing difference approach and contains exemptions from deferred tax which are not found in FRS 102 (e.g. deferred tax on non-monetary assets subjected to revaluation).

Defined benefit pension plans

Under Section 28 Employee Benefits, the net liability is recognised as the difference between the present value of the obligation and the fair value of the assets in the scheme.

Under the FRSSE the net obligation or asset is recognised on the balance sheet at actuarial valuation, with assets recognised at fair value.

Derivative financial instruments

Under Section 12 Other Financial Instruments Issues, derivatives are recognised at fair value through profit or loss (unless the entity applies hedge accounting).

Under the FRSSE, such instruments are not recognised on the balance sheet.

Goodwill

Goodwill is amortised over its estimated useful life under Section 19 Business Combinations and Goodwill and goodwill cannot have an indefinite useful life. Where management are unable to arrive at a reliable estimate of the useful economic life of goodwill, the presumed maximum is 10 years (increased from five years following the transposition of the EU Accounting Directive into company law).

Under the FRSSE (effective January 2015), goodwill is amortised over its useful economic life and if an entity is unable to make a reliable estimate of the useful life of goodwill, the life is presumed not to exceed five years (20 years in the 2008 version of the FRSSE).

Grants

Under Section 24 Government Grants, a small company can use the traditional accruals method of accounting for grants, or adopt the performance method which is a new concept introduced into FRS 102. Under the performance method, provided all the conditions attached to the grant have been met, the entity can recognise the grant in profit or loss immediately.

Under the FRSSE, grants are recognised under the accruals method.

Imputed interest rates

Section 11 Basic Financial Instruments requires an entity to calculate an imputed interest rate for a loan which is at rates other than market rates of interest. This is because such transactions are accounted for using the amortised cost method (which uses the effective interest rate).

Under the FRSSE there is no requirement to impute the interest rate where the loan is below market rates of interest.

Related party transactions

Only limited related party transactions require disclosure under Section 1A of FRS 102. This is due to the requirements of the EU Accounting Directive. In addition, any related party transactions which are not entered into in the ordinary course of business must be disclosed.

Under the FRSSE the disclosure requirements are stricter and require more detail than FRS 102 for small entities.

Share-based payment transactions

Under Section 26 Share-based Payment, full recognition of cash or equity-settled share-based payments must be recognised (note there is an exposure draft (FRED 61) which proposes changes to Section 26 to deal with unintended consequences).

Under the FRSSE only cash-settled share-based payment arrangements are recognised. Equity-settled share-based payment transactions are disclosed.

Conclusion

The introduction of the EU Accounting Directive into company law has accelerated the need to move small companies onto the new UK accounting regime. This article has not considered every single difference between the FRSSE and FRS 102 for small companies, but has highlighted some of the most notable changes that preparers of financial statements need to be aware.

Further articles will be published in the summer which will examine the accounting methodologies in the new regime in more detail once the final standards have been issued by the FRC.

Category: Accounting and standards