FRS 102: The transition part 2

This is the second in a two-part series relating to the transition across to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. The first article looked at some of the issues needed to be taken on board in order to prepare the opening balance sheet at the date of transition together with dealing with transitional adjustments in the comparative year. It also looked at the four mandatory exemptions from retrospective application and the 18 optional exemptions from retrospective application.

This article will look at the various disclosures that have to be made in the first set of FRS 102 financial statements prepared for a client.

As an aside, there are some emerging issues being brought about now as FRS 102 is beginning to gather pace – particularly among:

• The treatment of goodwill on transition to FRS 102;
• Intra-group loans (e.g. a loan from parent to subsidiary) where a below market interest rate (or zero rate) is charged; and
• The recognition of derivative instruments (e.g. a forward foreign currency contract) on the balance sheet.

The above subjects will be covered in the next article because there is an emerging pattern of questions all of which surround the above three topics. Practitioners (and company accountants) who will be (or are) working with FRS 102 should not under-estimate the level of judgement required by the preparer. FRS 102 is less prescriptive than old UK GAAP (which is recognised by the sheer reduction in volume of FRS 102) and hence more interpretation of the contents of each section is going to be needed on the part of the practitioner/company accountant.

Statement of compliance

When an entity adopts FRS 102 for the first time it must make an explicit and unreserved statement that the financial statements prepared to FRS 102 conform to the standard. The term ‘explicit and unreserved statement of compliance’ is derived from the requirements of IFRS for SMEs (on which FRS 102 is essentially based), which in turn is based on the principles in IFRS 1 First-time Adoption of International Financial Reporting Standards.

Paragraph 35.4 says that a reporting entity’s FIRST financial statements complying with the principles in FRS 102 are those in which the entity makes this explicit and unreserved statement for the first time. The paragraph then goes on to explain that the first financial statements prepared to FRS 102 are those where, 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; or
• presented its most recent previous financial statements in conformity with EU-adopted IFRS.

In the vast majority of cases, the second bullet is probably going to be the most applicable in the UK and Republic of Ireland where entities switch from old UK GAAP to FRS 102.

The explicit and unreserved statement of compliance will typically be contained within the accounting policies section of the notes under the ‘Basis of preparation’ heading. The following example illustrates how an explicit and unreserved statement of compliance would be worded; however there is no exact text contained in the standard, although most software providers will incorporate the statement in their formats.

Example – Explicit and unreserved statement of compliance

Basis of preparation

These financial statements for the year-ended 31 December 2015 are the first financial statements of Company A Ltd that comply with FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. The date of transition to FRS 102 was 1 January 2014.

The transition to FRS 102 has resulted in a small number of changes in accounting policies compared to those used previously. Note XX to the financial statements describes the effect the transition has had on opening equity and profit for the comparative period.

Where a qualifying entity applies FRS 101 Reduced Disclosure Framework in the preparation of its financial statements it must comply with paragraph 10 of FRS 101 which requires a note in the financial statements stating:

‘These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework.’

Hence a subsidiary of a parent reporting under EU-endorsed IFRS which prepares its own financial statements under EU-adopted IFRS would (prior to adopting FRS 101) include the IFRS 1 equivalent to the explicit and unreserved statement of compliance. However, where the subsidiary is able to apply the provisions in FRS 101 and claim reduced disclosures, the subsidiary’s financial statements should not contain the unreserved statement of compliance which is required by paragraph 3 of IFRS 1 and paragraph 16 of IAS 1 Presentation of Financial Statements. This is because the subsidiary’s financial statements do not comply in full with the requirements of EU-adopted IFRS and hence it would be wrong to say that they do comply in all respects with EU-adopted IFRS.

Reconciliations

A first-time adopter of FRS 102 must explain in its financial statements how the transition from its previous financial reporting framework to FRS 102 has affected the financial position and performance of the company – i.e. what impact the transition has had on opening equity and profit for the comparative year. In addition, the company must also provide the following reconciliations:

• 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.

The idea of the reconciliations is to show a numerical reconciliation of the impact the transition has had on reported equity and profit for the comparative period, bearing in mind that the rules in FRS 102 have to be applied as far back as the date of transition and will affect figures that have already been approved by the directors/shareholders. Because the preparer is going back to the start date of the previous period reported in the accounts (i.e. 1 January 2014 for a 31 December 2015 year-end) the preparer may come across errors that have been made in the previous year’s accounts. Where this is the case the correction of such errors must not be done as transitional adjustments; instead they must be shown separately from those adjustments that have arisen because of changes in the company’s accounting policies.

FRS 102 does not provide a set format for the reconciliations of equity and profit or loss and a judgement call is to be made as to the most suitable format for the entity’s reconciliations taking into consideration the nature and amount of the adjustments. Staff Education Note 13 Transition to FRS 102 does outline two suggested options as follows:

Option 1

Reconciliation of equity

		At 1 January 2014			At 31 December 2014
	Note	As previously stated	Effect of transition	FRS 102 (as restated)	As previously stated	Effect of transition	FRS 102 (as restated)
Fixed assets		X	–	X	X	–	X
Current assets	(i) (ii)	X	X	X	X	X	X
Creditors: amounts falling due within one year	(i) (iii)	(X)	(X)	(X)	(X)	(X)	(X)
Net current assets		X	(X)	X	X	(X)	X
Total assets less current liabilities		X	(X)	X	X	(X)	X
Creditors: amounts falling due after more than one year	(i)	(X)	(X)	(X)	(X)	(X)	(X)
Provisions for liabilities		(X)	–	(X)	(X)	–	(X)
Net assets		X	(X)	X	X	(X)	X
Capital and reserves		X	(X)	X	X	(X)	X

 

Reconciliation of profit or loss for the year

		Year-ended 31 December 2014
	Note	As previously stated	Effect of transition	FRS 102 (as restated)
Turnover		X	–	X
Cost of sales	(i) (ii)	(X)	X	(X)
Gross profit		X	X	X
Administrative expenses	(i) (ii) (iii)	(X)	–	(X)
Other operating income		X	–	X
Operating profit		X	X	X
Interest receivable and similar income		X	–	X
Interest payable and similar charges		(X)	–	(X)
Taxation		(X)	–	(X)
Profit on ordinary activities after taxation and for the financial year		X	X	X

Option 2

Reconciliation of equity

	Note	At 1 January 2014	At 31 December 2014
Capital and reserves (as previously stated)		X	X
Recognition of derivative financial instruments	(i)	(X)	X
Re-measurement of stock using spot exchange rate	(ii)	–	(X)
Short-term compensated absences	(iii)	(X)	(X)
Capital and reserves (as restated)		X	X

Reconciliation of profit or loss for the year

	Note	Year-ended 31 December 2014
Profit for the year (as previously stated)		X
Recognition of derivative financial instruments	(i)	X
Re-measurement of stock using spot exchange rate	(ii)	(X)
Short-term compensated absences	(iii)	(X)
Profit for the year (as restated)		X

 

Conclusion

In practice, option 2 is likely to be used as this is easier to comprehend; however keep in mind that FRS 102 does not prescribe a specific format and the most efficient format to be used will, to all intents and purposes, be left to management to decide based on the nature and amount of the adjustments. Accounts production software systems are likely to produce the relevant formats once the information has been entered into the system but it is also worthwhile putting as much disclosure as possible in the notes to the reconciliations to explain as clearly as possible the transitional adjustments that have been made.