FRSSE: The end of the line?

UK GAAP is currently undergoing the most significant overhaul in a generation with the introduction of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland becoming mandatory for accounting periods commencing on or after 1 January 2015.  In addition, there are some consequential amendments to the FRSSE (effective April 2008) which form the FRSSE (effective January 2015) and also the EU Accounting Directive which was introduced at the end of 2013 and significantly revises the small companies regime in terms of a vast amount of reduced disclosures.

So with all this change, what does the future hold for the beloved FRSSE?

It was always the intention of the Financial Reporting Council (FRC) to revisit the FRSSE once FRS 102 had taken effect to ensure that there are no significant variations between the FRSSE and the new UK GAAP.  At present, FRSSE (effective January 2015) has only experienced limited amendments including the reduction of the presumed economic life of goodwill and intangible assets from 20 years to five years where management are unable to reliably assess the useful economic life of such assets; inclusion of revised terminology and removal of references to FRSs/SSAPs/UITFs and FRSSE (effective January 2015) now includes a specific requirement for entities to annually assess whether there are any indicators of asset impairment.

When the new EU Accounting Directive, which was approved in June 2013, is included in companies’ legislation it will introduce major changes to the way in which small companies report their financial information.  This new Directive has been the subject of much debate in the accountancy profession and despite the significant disclosure reductions which the Directive brings, the response to the new regime has been somewhat unsupportive.  Many in the profession argue that the reduced disclosure levels simply do not achieve the true and fair concept due to the ‘deeming provisions’ which essentially state that if the accounts are prepared under the micro-entities regime, the accounts are deemed to give a true and fair view.

Notwithstanding the lack of support the micro-entities regime has received, once it is incorporated into UK company law, it is going to mean the FRSSE will need substantial amendments.  The UK Government has until July 2015 to transpose the new EU Accounting Directive into company law and so the FRC have the task of outlining how small companies in the UK will report financial information.

The tentative view of the FRC is to withdraw the FRSSE in its entirety.  Given the fact that the new EU Accounting Directive brings about substantial reporting changes, withdrawing the FRSSE would be a valid option for the FRC.  The issue that the FRC are faced with is ensuring that financial reporting in the UK remains consistent across all entities so if the FRSSE is withdrawn, small companies would be brought under the scope of FRS 102.  The FRC are considering revising FRS 102 to include specific requirements for small and micro-entities which would reflect differing legal requirements, especially where disclosure issues are concerned.  Under FRS 102, there is currently no option for entities reporting under that standard to not prepare a cash flow statement (as the cash flow statement forms a ‘complete’ set of FRS 102 financial statements and thus is mandatory) and so FRS 102 would include an exemption for small companies from preparing a cash flow statement and group accounts.  Essentially it would seem we may be heading in the direction of an FRS 102 ‘Light’ for small and micro-entities.

The option to bring small companies under the scope of FRS 102 and have separate sections which would stipulate the differing legal requirements for small and micro-entities would result in consistent recognition and measurement requirements but clearly such companies would not make as much disclosure as medium and large companies reporting under FRS 102 which is sensible and so it is likely that if this is the way forward for UK GAAP, this would be the outcome.

The FRC are seeking comments from users of the FRSSE to inform the thinking of the FRC and they have also confirmed that it is likely an exposure draft will be published in June 2014 on the way forward.

FRS 102 – Proposed amendments to basic financial instruments

In February 2014, FRED 54 Draft Amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland Basic financial instruments was issued.  This exposure draft takes into account feedback from entities and their advisers regarding unintended accounting consequences in relation to basic debt instruments.  The responses from entities and their advisers suggested that the conditions which debt instruments have to meet in order to measured at amortised cost are too restrictive and only very simple financial assets and liabilities would be measured using amortised cost and more sophisticated financial instruments would be required to be measured at fair value.

FRED 54 proposes to change the conditions which debt instruments have to meet so as to be accounted for under the provisions in Section 11 Basic Financial Instruments. The proposed amendments affect paragraphs 11.8, 11.9 and 11.11 to Section 11 and the FRC have said that making the conditions less restrictive will achieve the following:

• To allow a wider range of debt instruments to be measured at amortised cost where this is a relevant measurement basis;
• To align the measurement requirements for financial instruments more closely with those of IFRS 9 Financial Instruments issued by the IASB; and
• To reduce the cost of compliance with FRS 102.

The proposals are due to come into effect for financial years ending on or after 1 January 2015 which is the same date that FRS 102 becomes mandatorily effective.  The consultation period on this exposure draft will end on 30 April 2014 which is slightly shorter than the standard consultation period (which is ordinarily three months), but the FRC will require the final amendments to be published by the summer and hence the consultation period for FRED 54 is shorter than normal.

Category: Accounting and standards