UK GAAP – where are we now?

The world of financial reporting is currently experiencing significant amounts of change and the Financial Reporting Council (FRC) continue to deal with the issues surrounding the new UK accounting standards (FRS 102, the FRSSE and micro-entities legislation). In this article I will examine the current status of financial reporting and the future likely developments that could take place in the coming months.

FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland

FRS 102 is going to replace all extant FRSs/SSAPs and UITF Abstracts with effect for accounting periods commencing on or after 1 January 2015 (earlier adoption is permissible).  The FRC have said that it is their intention that FRS 102 will be a ‘stable platform’ and that the standard itself will be reviewed every three years.   However, even before the mandatorily effective date has arrived there have been amendments proposed to FRS 102 and this is mainly because of improvements to the standard in time for first-time adopters.

In February 2014, the FRC issued FRED 54 Draft Amendments to FRS 102 – Classification of Debt Instruments.  This FRED proposed limited amendments to FRS 102 in respect of basic financial instruments.  Concerns were raised by various entities and their advisers about the possibility of unintended accounting consequences in respect of basic debt instruments which had not originally been identified during the consultation process prior to the issuance of FRS 102.  Feedback received by the FRC indicated that the conditions that had to be met to recognise debt instruments at amortised cost were too restrictive and only very simple debt instruments would be measured using amortised cost.  The amendments to Section 11 Basic Financial Instruments achieve the following:

• Allows a wider range of debt instruments to qualify for measurement using amortised cost where this is a relevant measurement basis;
• Aligns the measurement requirements more closely with those of IFRS 9 Financial Instruments which is issued by the IASB; and
• Reduces the cost of compliance with FRS 102.

Charities SORP

On 22 May 2014, the FRC approved the new Charities Statements of Recommended Practice (SORP) which had been revised in light of the new UK GAAP.  Two SORPs had been approved for release by the FRC – one reflecting FRS 102 requirements and the second reflecting FRSSE requirements.  This will allow charities to choose which SORP to follow depending on which accounting standard they adopt.  In addition, having two SORPs will enable changes to the FRSSE framework to be handled more easily within a separate SORP.

LLP SORP

The revised LLP SORP was published as an  Exposure Draft in 2013 and we are expecting a revised LLP SORP to be issued anytime now.  The SORP has been amended to take account of new UK GAAP and whilst many changes in the Exposure Draft are straightforward, there are some more substantive changes that are needed, including:

• Updating the guidance on business combinations and group accounts in recognition of the fact that FRS 102 only allows the use of merger accounting for group reconstructions;
• Updating the guidance on contractual or constructive obligations and annuities to reflect the fact that FRS 102’s requirements relating to financial liabilities differ from current UK GAAP requirements; and
• Updating references throughout the SORP to reflect the introduction of the option to produce a single statement of comprehensive income, including adding an additional exhibit in appendix 1.

Further clarification is offered in the revised SORP, including:

• Comparative figures are to be shown on the reconciliation of members’ interests where this is shown as a primary statement in place of the statement of changes in equity;
• Improving the table which follows paragraph 60 to ensure the recommended format not only provides a reconciliation of members’ interests, but also complies with the Companies Act requirements;
• Offering more guidance on the way the cash flow statement is presented in order to reduce divergent practices; and
• Refining the examples in appendix 2 to focus on more commonly encountered scenarios and eliminate some duplication.

Changes have also been made to some of the wording in SORP 2010 relating to the debt versus equity debate brought about by FRS 25 Financial Instruments: Presentation and the subsequent ‘puttables amendment’ to FRS 25.  In addition, the flowcharts in appendix 3 have been deleted.  This has been done to reflect that the transition has now been completed and what once was controversial is now generally the accepted practice.

The FRSSE

The FRC have announced tentative plans to withdraw the FRSSE in light of the significant changes to the small companies’ accounting regime in the form of the EU Accounting Directive.  The FRC have acknowledged that the FRSSE simply cannot be sustained in its present form in light of this Directive in addition to the fact that the FRSSE is also based on a financial reporting framework which will be redundant for accounting periods commencing on or after 1 January 2015.

An Exposure Draft is due to be issued this Summer with a consultation from the Department for Business, Innovation and Skills which will discuss the proposals for implementing the Accounting Directive in the UK.  The UK has until July 2015 to transpose the Accounting Directive into companies’ legislation.

There is still some way to go at the moment where this issue is concerned and future articles will discuss the way forward for small company financial reporting.

Micro-entities

The micro-entities legislation applies to qualifying entities for financial years ending on or after 30 September 2013 for accounts filed with Companies House on or after 1 December 2013.  Early adoption of the micro-entities regime is not permissible as you cannot early-adopt legislative changes.  An entity qualifies for micro-entity status in a year in which it does not exceed two or more of the following criteria:

• Turnover £632,000
• Gross assets £316,000
• Ten employees

The above conditions must be met for two consecutive years (with the exception of a newly-incorporated company).

The FRC have announced their intention to propose a new Financial Reporting Standard for Micro-Entities (FRSME) which will be based on the micro-entities legislation.  The legislation has been reflected in both FRSSE (effective April 2008) and (effective January 2015) which was published on 29 April 2014.  However, the FRSME may also include further simplifications to recognition and measurement principles appropriate to the very smallest entities.

It will not be possible for the following types of business to adopt the micro-entities legislation:

• Investment undertakings
• Financial holding undertakings
• Credit institutions
• Insurance undertakings
• Charities
• LLPs
• Entities in Ireland (as there is no Irish equivalent of the micro-entities legislation at present)

Conclusion

Life at the FRC is clearly very busy! The world of financial reporting is currently undergoing the most significant amounts of change in a generation and professional bodies are keen to emphasise the importance of firms ensuring they are adequately prepared for the changes.  FRS 102 is to be applied retrospectively to the start of the earliest period reported in the financial statements (ie 1 January 2014 for a December 2015 year-end).  There are no transitional provisions in the FRSSE (effective January 2015) and so there is no requirement to restate comparatives when FRSSE (effective January 2015) comes into effect.

Category: Accounting and standards