Last call of ‘All change, all change’ – all UK businesses must adopt FRS102
Large and medium businesses have already adopted FRS102: The Financial Reporting Standard applicable in the UK and Republic of Ireland.
The rest of businesses in the UK now have to apply this new standard for accounting periods starting on or after 1 January 2016.
FRS102 provides a single standard that replaces all of the previous accounting standards in force. It is now seen as the “Generally Accepted Accounting Practice” (GAAP) that banks, HMRC, investors and stakeholders consider appropriate for the construction of business accounts.
This goes for limited companies, LLP’s, the traditional partnership and also the sole trader – it applies to all businesses.
Some of the changes being introduced are merely cosmetic, changing the terminology used and adding to the disclosures required in the accounts, although for small entities there is a reduced disclosure framework that can be taken advantage of.
The accounting policy notes will be expanded, along with new disclosure required on the significant judgements made by management when preparing the accounts and any key areas of estimation uncertainty. The aim being to provide the reader with a more transparent, true and fair record of what the business has achieved.
FRS102 has introduced new policies to reflect the ‘true and fair’ reporting of certain transactions, with the main changes occurring to the following:
- Accruing for un-used holiday pay of staff. For professional firms, where staff costs represent a significant proportion of expenditure, ascertaining the amount to accrue could represent a significant additional administrative burden.
- Loans carrying no interest or interest is below market rates, although there is some simplification for small businesses.
- Minor changes to the recognition of turnover which do represent a change from the principles outlined in the old standard UITF40, making this an opportune time to revisit your income recognition policy to ensure that it remains appropriate to your circumstances.
- For those businesses that rent the property they occupy, changes to the recognition of lease incentives have been introduced. Similar changes will also affect landlords and the recognition of their rental income.
- Greater recognition of intangible assets acquired on a business combination, such as customer relationships, brands and computer software. Specialist assistance may be required to value such assets for inclusion in the accounts. There are also changes to the way that intangible assets, including goodwill, are amortised.
- Listed investments being reported at market value
- For companies, including deferred tax on any revalued fixed assets
- Changes in the value of investments, including property, will now be recognised in the profit and loss account rather than being taken directly to reserves. Any such gains or losses recognised though will not be exposed to direct taxes until they are realised, so no change from the past.
Retrospective application is usually required, so should any of these changes affect your accounting it is likely to require restatement of your comparative figures and the opening balances used in the preparation of the current year figures.
For professional firms that have not already applied FRS102 they will see changes to the annual accounts that they receive in 2017. Consideration on how these will impact shareholders or partners/members in line with their own Rule Book need careful attention. These may impact key ratios included within covenants the businesses have with their bankers.
For those operating as a company or LLP, abbreviated versions of their accounts (that get published at Companies House) no longer exist, although as highlighted above disclosure exemptions for small entities should mean that significant extra information will not need to be placed on public record. For example certain Related Party Transactions will no longer need to be disclosed by small entities provided that they are considered to have been made on an arms length basis. Careful consideration is required on the approach to be followed, and you should expect more discussion with your accountant in 2017 to ensure that the best disclosures within the accounts are selected that are most appropriate to your business associated with these changes.
For Micro Entities there is another option to consider – whether to adopt FRS105 (very simple accounts). This is where the entity does not exceed two out of three of the following criteria
- Turnover of £632,000
- Balance Sheet total (fixed plus current assets) £316,000
- Number of employees 10
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