Replacement of UK accounting standards – some FAQs

This is an interim update on the replacement of existing UK accounting standards (FRSs and SSAPs). There has since 2009 been a discussion paper and two exposure drafts so far. The intention is that final versions will appear early in 2013. The replacement is still therefore in progress and ACCA will provide more definitive and more extensive information when the final versions are available.

In the meantime as awareness of the impending change increases, it seemed that it might be helpful to have a few fundamental aspects clarified to the extent that they can be at this stage.

There will be 3 new standards to replace most or all of the existing standards FRS and SSAPs together with the related UITFs, except for the FRSSE (Financial Reporting Standard for Smaller Entities). 

• FRS100 will be a general standard setting the scope and application of the new system
• FRS101 will be a reduced disclosure framework for subsidiaries and holding companies that are using IFRS
• FRS102 will be the main standard for use in the UK and Republic of Ireland (ROI) in place of existing FRS and SSAPs. This will be based on the text of the IFRS for SMEs.

Since 2005 when listed companies had to use IFRS for their consolidated accounts, convergence of UK GAAP with IFRS has been seen as desirable in the longer term to avoid there being very different accounting systems in the country. This represents another step on that road of convergence. 

This is not the complete adoption of IFRS by UK/ROI companies. FRS102 is based on IFRS for SMEs (240 pages) not on the full IFRS that listed companies are using (2800 pages). No further entities (for example banks, building societies and insurance companies) will have to use full IFRS as a result of this. The great bulk of UK/ROI companies are small and they will indeed have to make no change as they will be able to continue using the FRSSE. 

All medium-sized or large entities (as defined in the Companies Act) currently using UK standards will have to make the change. Only an entity which exceeds 2 out 3 of the following criteria will be included (current limits):

• Turnover of £6.5 million
• Assets of £3.25 million
• 50 employees 

All UK companies (except charities) have the option to change to apply full IFRS. If a company is eligible to use the FRSSE then they may change to or continue to use that. However current UK standards (apart from the FRSSE) will be withdrawn.

The current date of mandatory application of FRS100-102 is expected to be for accounting periods beginning on or after 1 January 2015. 

There will probably be early application for any accounting period ending after the date of publication of the new standards – so FRS102 unlikely to be available for years ending December 2012 for example.

FRS102 is an adaptation of IFRS for SMEs. IFRS for SMEs is a condensed version of full IFRS, so that the main principles for how items should be accounted for are the same. However there are differences in treatment to eliminate some of the complexity of the full set – for example amortisation of goodwill in the IFRS for SMEs instead of the impairment test approach. There are certainly considerable disclosure reductions and anti-avoidance provisions as compared the requirements of full IFRS.

FRS102 contains significant adaptations to help UK/ROI companies adopt the standard and reduce some of the changes that would otherwise have had to be made. These are mostly to continue to allow alternative treatments that exist in UK GAAP – for example capitalisation or immediate write off of interest and of development costs, and the revaluation of property.

FRS102 will be a new accounting standard and so there will no doubt be some impacts from the detail of the standard and its wording. In particular the new standard will be much less lengthy than current UK standards and so there will be less guidance and example cases provided as compared to the present. It will be important for each company affected to consider the impact as it could vary.

However certain areas stand out as changes including:

• Financial instruments – fair values for all derivative contracts and for investments in shares (where such fair values are reliable);
• Hedge accounting – subject now to an accounting standard;
• Business combinations – merger accounting will no longer be allowed (except for group reconstructions and the like);
• Goodwill amortisation will be mandatory and no indefinite life option allowed;
• Investment property – must be stated at fair value with all changes through profit for the year (and not to the Statement of Total Recognised Gains and Losses as at present);
• Deferred tax will have to be provided on revaluations even where no immediate disposal is intended;
• Holiday pay accruals – FRS102 will require an accrual of cost where holiday entitlements have not been taken by the end of the period and can be carried forward into the next period. Current accounting practice seems variable on this issue.

There are fewer instances where there will be a clear change in treatment than with the proposals in the earlier exposure drafts because options have been added into FRS102 to allow some current practice to continue, for example:

• Cost for agricultural assets
• Revaluation of tangible fixed assets 
• Capitalisation of development costs of new products or services 

Many subsidiaries in groups preparing IFRS accounts have remained with UK standards for their individual company accounts even though they prepare IFRS numbers for consolidation purposes. These companies will have a new option under FRS101 to prepare the individual accounts using the recognition and measurement rules of full IFRS, but with reduced disclosures more appropriate to their status.

SORPs (Statements of Recommended Practice) provide guidance and interpretation about how to apply UK standards in a particular sector or context. Many of the existing SORPs (for example the Charities SORP or social housing SORP) will continue and will be updated to reflect changes from current FRS to FRS102. Where relevant the new SORPs will have also to give guidance on how to apply the FRSSE in addition. The new SORPs are likely to be produced slightly in arrears of FRS102.

So small companies will not have to make any changes to speak of? Yes, for now.

However there is a new EU accounting directive being negotiated at the moment, which will be implemented at some future date in the UK as a new Companies Act. This might:

• Raise the threshold defining medium-sized companies (perhaps to £8 million of turnover);
• Adopt a new highly-simplified reporting for micro companies (a new category of businesses with turnover of less than €700,000 perhaps;
• Remove some of the existing disclosure requirements in the FRSSE and company law.