FRSSE (effective January 2015) versus FRS 102

Financial reporting is soon to undergo the largest overhaul of its kind in the last 40 years with the disbanding of FRSs/SSAPs and UITF Abstracts and the replacement of these standards with FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland which is to take mandatory effect for accounting periods commencing on or after 1 January 2015 (although earlier adoption is permissible).  In addition, the FRSSE (effective April 2008) has been amended as a result of FRS 102 and this will become the FRSSE (effective January 2015), also mandatory for accounting periods commencing on or after 1 January 2015 (with earlier adoption permissible).

A new financial reporting regime brings with it a host of changes and FRS 102 has introduced new accounting practices which have been covered in previous articles.  However, not all these accounting practices will apply to the FRSSE (effective January 2015) and it is likely that the FRSSE will see further amendments in the future to align it more to FRS 102.  This article considers some of the most notable differences between the FRSSE (effective January 2015) and the new UK standard, FRS 102.  Please note this article does not consider any of the issues relating to the new micro-entities legislation – it only applies to companies which will apply the FRSSE in its entirety.

Investment properties

Under FRS 102 at Section 16 Investment Property, investment property is required to be carried in the balance sheet (statement of financial position) at its fair value at each reporting date. Changes in fair value are taken through profit or loss (rather than directly to a revaluation reserve as is the case under SSAP 19 Accounting for Investment Properties).

Under the FRSSE (effective January 2015), reporting entities will continue to use the revaluation reserve and report fair value changes through the statement of total recognised gains and losses (as per paragraph 6.53).  However, if a deficit (or a reversal of a deficit) on an individual investment property is expected to be permanent, then it will be charged (or credited) to the profit and loss account in the period the impairment or reversal arises.

Intangible assets

In FRS 102, Section 18 Intangible Assets other than Goodwill deals with all intangible assets whilst Section 19 Business Combinations and Goodwill deals with goodwill.  Paragraphs 6.11 to 6.17 in the FRSSE (effective January 2015) deals with other intangible assets and goodwill.

FRS 102 says that all intangible assets will have a finite useful life and there is a default period of amortisation for both goodwill and intangible assets of five years where management of a company cannot reliably estimate the useful economic life.

The FRSSE (effective January 2015) at paragraph 6.13 also considers capitalised goodwill and intangible assets to have a finite useful life and requires such assets to be written off to profit and loss on a straight-line (or more appropriate) basis over their useful economic lives.  Paragraph 6.13 does follow the same stance as FRS 102 in that this useful life will be presumed not to exceed five years where an entity is unable to make a reliable estimate of the useful life of goodwill or intangible assets.  However, paragraph 6.15 does say that useful economic lives shall be reviewed at the end of each reporting period and revised if necessary, subject to the constraint that the revised life shall not exceed 20 years from the date of acquisition.

Also, it is worth pointing out that in the FRSSE (effective January 2015), the period chosen for depreciating goodwill (together with the reasons for choosing that period) must be disclosed by way of a note to the financial statements.

Deferred tax

FRS 102 introduces a timing difference plus approach to the calculation of deferred tax balances which aligns the concept of deferred tax more to an international outcome.  In addition, FRS 102 at Section 29 Income Tax requires the calculation of deferred tax on non-monetary assets that are subjected to the revaluation model (for example investment properties).  The FRSSE (effective January 2015) continues with the same principles as FRS 19 Deferred Tax in that deferred tax is not recognised on:

• Revaluation gains and losses unless, by the balance sheet date, the entity has entered into a binding agreement to sell the asset and has revalued the asset to the selling price; or
• Taxable gains arising on revaluations or sales if it is more likely than not that the gain will be rolled over into a replacement asset.

FRS 102 places a prohibition on entities discounting deferred tax balances to present day values.  The reality is that in practice hardly anyone discounts such balances to take account of the time value of money.  However, the FRSSE (effective January 2015) acknowledges that whilst discounting of deferred tax balances is not required, where an entity does discount deferred tax then all deferred tax balances that have been measured by reference to undiscounted cash flows and for which the impact of discounting is material will also be discounted.

Revenue recognition

FRS 102 at Section 23 Revenue is slightly more relaxed in its wording in that revenue is recognised at the fair value of the consideration ‘received or receivable’.  Under the FRSSE (effective January 2015), the wording continues from the current Application Note G to FRS 5 Reporting the Substance of Transactions (UITF 40) in that a seller recognises revenue when, and to the extent that, it obtains the ‘right to consideration’ in exchange for its performance.

Leases

Section C to the FRSSE (effective January 2015) defines a finance lease.  Within this definition is a presumption that risks and rewards of ownership of the leased asset are transferred to the lessee if, at the inception of a lease, the present value of the minimum lease payments, including any initial payment, amounts to substantially all (normally 90 per cent or more) of the fair value of the leased asset.  Hence reference is made to a 90% benchmark which is also currently in the Guidance Notes to SSAP 21 Accounting for Leases and Hire Purchase Contracts.

There is no reference to a 90% benchmark in FRS 102 and this is where more judgement will be required on the part of the part of the accountant.  FRS 102 refers to ‘substantially all’ of the fair value of the leased asset but does give useful examples of indicators that a lease falls to be classified as a finance lease.

Short-term employee benefits

An accrual will be required for short-term employee benefits (holiday pay, sick pay etc) under Section 28 Employee Benefits whereas in the FRSSE (effective January 2015) there is no specific requirement to make such accruals.

Related parties

Section 33 Related Party Disclosures at paragraph 33.9 does not explicitly require the names of related parties to be disclosed (only the nature of the related party relationship, outstanding balances and commitments necessary for an understanding of the effect on the financial statements).  In addition, Section 33 requires the following to be disclosed:

• The amount of the transactions.
• The amount of outstanding balances and:
  • their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement; and
  • details of any guarantees given or received.
  • Provisions for uncollectible receivables related to the amount of outstanding balances.
  • The expense recognised during the period in respect of bad or doubtful debts due from related parties.

The FRSSE (effective January 2015) does require the names of the transacting related parties at paragraph 15.1(c) (i).

It is also worth noting that paragraph 33.7 to FRS 102 does require key management personnel compensation to be disclosed in total.

Grants

The ‘performance model’ is introduced in FRS 102 at Section 24 Government Grants which says that:

• A grant which imposes specific performance conditions is recognised in income when the performance conditions are met.
• Where a grant does not specify performance conditions, it is recognised in income when the proceeds are received or receivable.
• Grants which are received before the recognition criteria are satisfied are recognised as a liability.

The FRSSE (effective January 2015) does not include the performance model.  Grants will be recognised in profit and loss so as to match them with the expenditure to which they are intended to contribute.  However, grants will not be recognised in income until the conditions for its receipt have been complied with and there is reasonable assurance that the grant will be received.

New introductions to FRSSE (effective January 2015)

Whilst there are still some existing practices that remain in FRSSE (effective January 2015) such as fair value changes in investment property going through a revaluation reserve, the FRSSE (effective January 2015) contains reference to The Financial Reporting Standard applicable in the UK and Republic of Ireland and removes references to FRSs/SSAPs and UITFs.

Where the FRSSE (effective January 2015) does not deal with an accounting policy for a new transaction, it states that entities should have regard to FRS 102, but not as a mandatory document, but as a means of establishing current practice.

The FRC has also removed reference to standards which apply to consolidated financial statements on the grounds that the general requirements in the FRSSE which relate to the development of accounting policies for transactions or events which are not covered in the FRSSE equally apply to consolidated financial statements.

As well as introducing the five-year presumed useful life for goodwill or intangible assets, the FRSSE (effective January 2015) also requires reporting entities to carry out an assessment (at each reporting date) of whether there is any indication that an asset is carried in the balance sheet (statement of financial position) at more than recoverable amount and where such an indication exists, the recoverable amount will be estimated and the asset written down to that recoverable amount.  This is to prevent reporting entities from carrying assets in the balance sheet at inflated values and the paragraphs that users of the FRSSE (effective January 2015) should comply with are 6.45A to 6.45C.

Conclusion

It is anticipated that in the future we will see further amendments to the FRSSE to keep it more in line with that of FRS 102.

Category: Accounting and standards, Audit