UK financial reporting is going through fundamental change that will have a significant effect on the accounts of most UK entities.
The timing of the changes and the extent to which the changes will impact the accounts and tax position of individual entities is mainly dependent upon the size of the entity or the group to which it belongs.
Assessing the impact of the changes on your accounts and tax position will require detailed consideration of your accounts and of the choices available to you in respect of accounting policies and the transitional exemptions set out in the new rules. Some topics are likely to present much more of an accounting challenge under the new rules than under existing requirements, for example financial instruments and business combinations.
The new rules are set out in a stand-alone Financial Reporting Standard (FRS 102), generally referred to as new UK GAAP, which replaces the previous accounting standards (now referred to as old UK GAAP).
Some of the major changes introduced by new UK GAAP compared to old UK GAAP are as follows:
-Format of the accounts is broadly similar but there are many changes in terminology. For example Profit & Loss Account becomes Income Statement, Balance Sheet becomes Statement of Financial Position and Stock becomes Inventory.
-Disclosure requirements are far more detailed under new UK GAAP leading to much longer sets of accounts.
-Fair value accounting is much more widely required or permitted. For example, Investments (excluding Group companies), Financial Derivative contracts such as Forward Foreign Exchange contracts and Interest Rate swaps, Investment Property let to and occupied by a fellow group company should generally be carried in the accounts at fair value.
-Many of the fair value adjustments are dealt with through Profit and Loss and not direct to Reserves, which potentially leads to greater volatility in reported profits. For example, revaluation surplus or deficit arising on Investment Properties and Investments in Shares (non-group) and fair value adjustments on Financial Derivatives.
-Recognition of assets and liabilities not previously required by old UK GAAP. For example, Financial Derivatives and Accrued Holiday Pay.
-New rules for accounting for long term loans at non-market rates of interest such as Intra-group loans and Directors’ Loans.
-Translation of foreign currency balances must be at year end spot rate in all cases. The previous practice of using a matched forward contract rate is not permitted by FRS 102.
-Lease incentives must now be allocated over the full term of the lease not just to the next review date.
-Under new UK GAAP Deferred Tax is recognised on all differences between taxable profits and total comprehensive income that are not permanent. This includes fair value adjustments which is likely to result in higher deferred tax liabilities than under old UK GAAP. For example deferred tax provisions will now be required on Investment Property revaluation surpluses.
-The useful life of Intangible Fixed Assets and Goodwill is considered to be finite under new UK GAAP. Where a reliable estimate of useful life cannot be made it must not exceed 10 years. This compares with the 20 years generally used under old UK GAAP which will lead to a quicker write-off of goodwill under the new rules.
FRS 102 sets out the requirements that an entity must follow when adopting the standard for the first time, irrespective of the standards or reporting framework previously applied. The general requirement is that FRS 102 be applied retrospectively and therefore the transition balance sheet must be prepared in accordance with the requirements of FRS 102, with some mandatory and optional exceptions. The transition balance sheet is generally two years prior to the year end for which you first adopt FRS 102. For example with a year end of 31 December 2015 the transition balance sheet is 31 December 2013 which provides the opening balances for the 2014 comparative figures that will be shown in the 2015 accounts presented under new UK GAAP. This means that you will need to prepare an FRS 102 balance sheet as at 31 December 2013 and at 31 December 2014 as well as at 31 December 2015.
When do you need to apply the new rules?
For medium and large-size entities (Turnover > £10.2m; Gross Assets > £5.1m; Employees > 50)(1), which must apply full FRS 102, the new rules apply to accounts for years ended 31 December 2015 onwards.
For small entities (Turnover > £632,000; Gross Assets > £316,000; Employees > 10)(2), which must apply a reduced presentation and disclosure version of FRS 102, the new rules apply to accounts for years ending 31 December 2016 onwards.
New rules also apply to micro-entities (Turnover < £632,000; Gross Assets < £316,000; Employees - 10)(3) for years ending 31 December 2016 onwards. These rules are set out in a separate stand-alone standard for micro-entities (FRS 105), which is a much simplified version of FRS 102.
How can we help?
In advising a broad range of businesses in a wide variety of sectors from micro-entities up to medium and large sized corporates we have in depth knowledge of the accounting issues that these businesses will have to face over the coming months. Our teams of audit and accounting specialists have been through an extensive training programme in preparation for the new regime. We have been advising clients on the implications of the changes for their business and are already assisting clients with their transition to FRS 102.
We will be happy to advise and assist you throughout the change, to discuss completing an impact assessment with you and to carry out any work that you may require as a consequence of these changes.
For further information on the changes to UK GAAP and how it will affect your entity please contact me.
(1) An entity is medium or large if it exceeds any two of the three limits shown
(2) An entity is small if it exceeds any two of the three limits shown
(3) An entity is micro if it does not exceed any two of the three limits shown
If the entity is part of a group the size limits are assessed on a group basis with an option to use higher limits on a gross basis. If the entity is a public company or carries on an ineligible activity (mainly in the financial sector) or is a member of an ineligible group it is not eligible for the micro-entities regime or the small companies regime.