Key changes to FRS 102

By Carol Hislop, Head of Corporate & Financial Reporting, Policy Leadership

6 April 2017

Carol Hislop outlines the results of the triennial review of FRS 102.

The Financial Reporting Council (FRC) has issued Financial Reporting Exposure Draft (FRED) 67 which proposes incremental improvements and clarifications to FRS 102.

The proposed effective date for these amendments is accounting periods beginning on or after 1 January 2019, with early application permitted provided all amendments are applied at the same time.

The principal amendments proposed are:

1. Simplifying accounting for directors’ loans

The accounting for directors’ loans by small entities has been simplified and there is no longer a requirement for a market rate of interest to be estimated.  FRS 102 requires financing transactions to be measured at the present value of the future payments discounted at a market rate of interest for a similar debt instrument. Concerns were raised about the practicalities of this in relation to directors’ loans where, because commercial funding is often unavailable, it is difficult to determine an appropriate market rate.  FRED 67 proposes that a loan from a director who is a shareholder in the small entity can be accounted for at transaction price rather than present value.

2. Revised requirements for separating intangible assets

There are revised requirements for separating intangible assets from goodwill acquired in a business combination. This is a result of feedback on the practical issues arising from applying paragraph 18.8 of FRS 102, in particular, the meaning and purpose of the phrase “immeasurable variables” was highlighted by stakeholders.  FRED 67 has introduced conditions which require the recognition of some, but not all assets acquired in a business combination separately from goodwill and this will result in fewer intangible assets being recognised separately and valued.  The conditions requiring separate recognition are:

(A) They meet the recognition criteria of a “wasting” asset; and

(B) They are separable and arise from contractual or other legal rights.

In addition, an entity may choose to recognise other intangible assets acquired in a business combination. The FRC considers that this is a proportionate solution to providing useful information to the users of financial statements. The decision to separately recognise assets may be exercised on an asset-by-asset basis and, when exercised, must be applied consistently to the relevant class of intangible assets to ensure comparability between years. The nature of the intangible assets separated from goodwill and the reasons why should be disclosed to assist users in drawing comparisons between different entities.

3. Accounting policy choice for investment properties

FRED 67 permits the measurement at cost, rather than fair value, of investment property rented to another group entity.

Currently, FRS 102 states that investment property must be measured at fair value unless the entity can conclude that determining fair value would require “undue cost or effort”.

The FRC notes that, in the UK, all entities should be able to obtain a fair value for an investment property without undue cost or effort and this exemption has been removed from FRED 67. However, feedback was received from stakeholders indicating that the cost of obtaining a fair value for an investment property rented to another group entity outweighs any benefits. To address this, the FRC is proposing that an accounting policy choice should be introduced for entities which rent investment property to another group entity allowing them to choose between measuring those properties at cost or at fair value.

4. Classification of financial instruments

A new principle-based description has been introduced for the classification of financial instruments which will allow more of them to be measured based on cost, rather than fair value.

FRS 102 introduced requirements which split financial instruments into two categories:

  • Basic financial instruments (such as straightforward loans) which are measured at amortised cost; and
  • Other financial instruments (such as derivatives, including interest rate swaps and foreign currency forward contracts and non-basic loans) which are measured at fair value.

Feedback from stakeholders highlighted that this rule-based classification causes significant problems for those applying FRS 102. To address this, FRED 67 advises that a debt instrument can be categorized as “basic” if it is consistent with a principle-based description of a “basic” financial instrument. This means that a debt can be categorized as “basic” if it gives rise to cash flows on specified dates which constitute reasonable compensation for the time value of money, credit risk and other basic lending risks and costs.

5. Definition of a financial institution

Changes have been made to the definition of a financial institution with the result that fewer entities will be classified as such. FRS 102 required financial institutions to comply with additional disclosure requirements. These additional disclosures focused on risks relating to financial instruments recognised on the balance sheet and the entity’s capital management policies and such entities were not permitted to take advantage of reduced disclosure requirements. FRED 67 has amended the definition by removing references to “generate wealth” and “manage risk” and this should reduce the number of entities meeting the definition of a financial institution.

ICAS consulted with members via holding FRS 102 surgeries and by electronic communication prior to sending comments to the FRC in relation to the Consultation Document – Triennial Review of UK and Ireland accounting standards: Approach to changes in IFRS. ICAS’s principal comments were:

  • The need for prioritisation of the principles of stability and proportionality
  • Ensuring FRS 102 is workable across the spectrum of entities applying it

ICAS welcomed this informative feedback and is pleased to note the changes proposed in FRED 67 which address the points raised by members. The amendments relating to directors loans and intangible assets address concerns raised by a number of members and it is expected that FRS 102 will be clearer and easier to use as a result.

The FRC has requested that comments on FRED 67 be received by 30 June 2017. ICAS is happy to receive comments from members by 31 May 2017 for inclusion in our response to the FRC.

Background to the report

When Financial Reporting Standard (FRS) 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland was issued in March 2013, the Financial Reporting Council (FRC) indicated that it would be reviewed every three years.

The first triennial review is now in progress and the FRC has issued Financial Reporting Exposure Draft (FRED) 67 ‘Draft Amendments to FRS 102 Triennial Review’ which proposes incremental improvements and clarifications to FRS 102.

The proposals in FRED 67 have taken account of stakeholder feedback on the implementation of FRS 102 and after considering recent improvements in financial reporting. The aim of the amendments is for FRS 102 to be clearer and easier to use but with no loss of significant information to users of financial statements. To achieve this, some accounting policies have been simplified and additional choices and exemptions are proposed.

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Pension scheme accounting has been subject to significant change following the introduction of FRS 102 and the revised Statement of Recommended Practice (SORP) for financial periods commencing on or after 1 January 2015.

The course will consider the impact of the changes in pension scheme accounting and the experience gained to date on issues arising in complying with FRS 102 and the revised SORP.

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