New UK GAAP is coming: we’re ready, are you?
The UK’s Generally Accepted Accounting Principles (GAAP) includes all accounting standards, company law and other guidance that affect how accounts should be prepared in the UK.
There are about to be some fundamental changes to this, which may affect your business. The new UK GAAP includes Financial Reporting Standard (FRS) 102 (the key element for most businesses), as well as FRS 100, FRS 101 and FRS 103.
Implementing the new accounting standards can be complex and we have answered some key FAQs here, which may be of use.
We have experts across the UK ready to guide you through the transition so contact us to find out how we can help you to implement the changes.
To find out more, you can also visit our FRS 102 Hub.
Browse through our FAQs to find out how the new accounting standards could affect you.
The new standards do not affect the requirement for listed entities to apply EU-adopted IFRS in their consolidated accounts and other entities can still choose to apply EU-adopted IFRS if they want to.
The small company regime can be applied by entities that qualify as small under the Companies Act ('the Act'), (see Q3), and the micro-entity regime may be applied by companies that are eligible to adopt it (see Q4).
However, all current UK accounting standards and guidance will be replaced with the requirements of FRS 102 and, for micro-entities, FRS 105 (see Q4).
Certain qualifying entities will also have a new option of ‘reduced disclosures’. Reduced disclosures (see Q6-Q8) may be taken in individual accounts prepared under FRS 102. They are also available in individual accounts that otherwise comply with EU-adopted IFRS, by adopting FRS 101 (see Q6-Q8).
If you are a member of a group, your choice may be restricted by the ‘consistency rule’ (see Q2).
Accounts prepared using FRS 102, FRS 101, FRS 105 or the FRSSE will be Companies Act Accounts and will, therefore, need to meet the requirements of the Act and associated regulations.
To comply with the Act, a parent company and each of its subsidiaries must apply one of two available frameworks (the ‘consistency rule’). Entities within your group could apply a mixture of FRS 102, FRS 101 and (where applicable) FRS 105 or the FRSSE (see Q3 & Q4) as these all fall within the same framework (known as 'Companies Act Accounts').
Alternatively, all entities within your group could apply EU-adopted IFRS, which is the second framework (known as 'IAS Accounts').
There are two exemptions to the ‘consistency rule’ in the Act:
Firstly, if the parent company’s accounts and the group accounts, are prepared using EU-adopted IFRS. In this instance, (subject to the second exemption noted below), your subsidiaries can either apply a mixture of FRS 102, FRS 101, and (where applicable) FRS 105 or the FRSSE (see Q3 and Q4), or they can all apply EU-adopted IFRS. FRS 105 will, however, rarely be applied by group companies as the micro-entity provisions cannot normally be used in a company’s accounts if those accounts are included in consolidated group accounts.
Secondly, if there are ‘good reasons’ for using different frameworks (e.g. if there was a charity in the group, since they are prohibited from adopting IFRS).
It is up to the directors to form an opinion as to whether there are ‘good reasons’ and the then Department for Business Enterprise and Regulatory Reform (BERR) (now the Department for Business Innovation and Skills (BIS) issued guidance that directors must be able to justify use of inconsistent frameworks to shareholders, regulators or other interested parties. The BERR guidance includes examples of ‘good reasons’ such as:
- it may not be practical for a newly-acquired subsidiary to switch to EU-adopted IFRS in the first year of acquisition;
- some subsidiaries use EU-adopted IFRS because their securities are publicly traded, but this does not necessarily justify use of EU-adopted IFRS by the non-publicly traded subsidiaries;
- a subsidiary or the parent converts to EU-adopted IFRS as it plans to apply for a listing but the rest of the group is not planning to apply for a listing; and
- the costs of switching frameworks for minor or dormant subsidiaries outweigh the benefits.
3. I am a small company (but not a micro-entity) and I do not currently use the FRSSE. I do not intend to adopt EU-adopted IFRS or FRS 101 - will I have to switch to FRS 102?
If you meet the Act’s definition of a small company, you have the option to use the FRSSE but only for a very limited time - two years, at most.
The FRSSE is to be withdrawn, so for any accounting period beginning on or after 1 January 2016 you will be required to apply the recognition and measurement requirements of FRS 102 if you do not intend to adopt EU-adopted IFRS or FRS 101.
If you have interest rate swaps or foreign exchange rate forward contracts, a big change will be that these must be shown in your balance sheet at their fair values, subject to transitional exemptions for periods starting before 1 January 2017. Those fair values are re-measured every year and any increase or decrease will affect your reported profit or loss (see Q16). Other differences between existing UK GAAP and FRS 102 are covered in Q13.
Your accounts will also have to comply with all of the applicable presentation and disclosures required by FRS 102, unless you choose to adopt the new small companies’ regime.
If you adopt the new small companies’ regime, you need not present a statement of cash flows or a statement of changes in equity. In addition, you will only need to give the disclosures required by the Act, which are fewer than those required by FRS 102, unless other information is necessary for the accounts to show a true and fair view.
Even if you are a growing business, you may continue to be a small company for some time as recent changes to the Act significantly increase the size thresholds to qualify as 'small. The turnover limit increases to not more than £10.2m (from £6.5m) and the gross assets limit increases to not more than £5.1m (from £3.26m).
The new small company regime and the new small company size limits apply from 1 January 2016. You can apply both a year earlier (for periods beginning on or after 1 January 2015) if you wish to do so, but you must also adopt all the other associated changes to Company Law at the same time.
If you are a very small company, you may be able to apply some recognition and measurement simplifications (see Q4).
4. I am a very small company. Are there any additional accounting exemptions that I can take advantage of?
Yes; if you are a micro-entity as defined below.
Certain companies are excluded from being micro-entities, such as public companies and companies that undertake certain insurance and finance activities, along with some companies which are part of a group.
Companies that are not excluded must meet two or more of the size criteria for turnover (of not more than £632,000), gross assets (of not more than £316,000) and employees (of not more than 10).
Micro-entities can adopt the micro-entities regime which was originally incorporated into the FRSSE. When the FRSSE is withdrawn (see Q3), the micro-entity regime will be encapsulated in a new dedicated financial reporting standard, FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime (FRS 105). Despite its title, FRS 105 will only be available to companies.
FRS 105 looks very similar to FRS 102 but the recognition and measurement is simplified so financial instruments are not measured at fair value, you do not need account for deferred tax or share-based payments and the accounting for defined benefit pension schemes is less complex. There a number of presentation exemptions in FRS 105, and very limited disclosures, in fact only three.
However, if you apply FRS 105 your assets, including investment properties, cannot be revalued in your accounts and there are no accounting policy choices, so you cannot capitalise development costs or borrowing costs and you must adopt the accruals model to account for grants. If these policies are not appropriate to your business, you may decide not to adopt the micro-entity regime.
FRS 105 applies to periods beginning on or after 1 January 2016, but you can adopt it a year earlier (from 1 January 2015) provided you also adopt the other associated changes to Company Law at the same time.
The law was amended with effect from 1 October 2012 to allow companies that have voluntarily prepared their individual accounts under EU-adopted IFRS to change to UK GAAP, i.e. FRS 102, FRS 101 or (where applicable) FRS 105 (see Q4) or the FRSSE (see Q3), so long as the entity has not changed from reporting under EU-adopted IFRS to report under UK GAAP in the preceding 5 years.
The existing laws that permit a company to move from EU-adopted IFRS to UK GAAP following a ‘relevant change of circumstance’ remain. So, if your company ceases to be a subsidiary, becomes a subsidiary of a parent that does not adopt EU-adopted IFRS in its individual accounts, is no longer listed on a regulated market or ceases to be a subsidiary of such an entity, the law allows you to report under UK GAAP, even if you have previously reported under EU-adopted IFRS.
6. I am a subsidiary reporting under EU-adopted IFRS. The reduced disclosure framework sounds attractive. Does it mean I can simply remove disclosures from my accounts?
It is not quite that simple!
To adopt FRS 101 (the 'reduced disclosure framework'), your results, assets and liabilities must be consolidated in publicly available financial statements that are intended to give a true and fair view and your shareholders must be notiﬁed in writing and not object to the use of the disclosure exemptions.
Some disclosure can only be omitted if ‘equivalent disclosures’ are included in the consolidated accounts (see Q7and Q8 below). Other exemptions, for example share-based payment disclosures, are subject to further conditions.
As explained in Q1, FRS 101 accounts must comply with the Act and associated Regulations. This means that your accounts must apply Companies Act balance sheet and profit and loss account formats and include disclosures required by the Act and the Regulations.
In addition, the EU-adopted IFRS recognition and measurement of certain assets and liabilities (such as negative goodwill) is amended to comply with the Act.
Application of the Companies Act formats will be easier following changes to Company Law that permit more flexible profit and loss account and balance sheet formats. This flexibility will allow FRS 101 accounts to be presented in accordance with EU-adopted IFRS. The new flexible formats apply from 1 January 2016 but you can apply them from 1 January 2015 if you adopt all the other changes to Company Law at the same time.
FRS 101 accounts must include a brief narrative summary of the disclosure exemptions adopted, the name of the parent in whose accounts the entity’s results, assets and liabilities are consolidated and from where those consolidated financial statements may be obtained.
7. I am a subsidiary reporting under EU-adopted IFRS. My parent is listed on the New York Stock Exchange and reports under US GAAP. Can I use the reduced disclosure framework?
You could be eligible to apply the reduced disclosure framework set out in FRS 101 as your parent’s consolidated US GAAP accounts will be publicly available, should be intended to give a true and fair view and should consolidate your results, assets and liabilities.
Although a number of the reduced disclosures are only permitted if your parent’s consolidated US GAAP accounts include equivalent disclosures. Disclosures can be equivalent even if they do not strictly conform to each and every requirement in EU-adopted IFRS. FRS 100 provides further guidance and identiﬁes US GAAP as one of the GAAPs that is equivalent to EU-adopted IFRS.
Disclosures in your parent’s consolidated US GAAP accounts that aggregate the information that would have been provided in your accounts with similar information for other entities may also be equivalent.
However, disclosures not given in the consolidated accounts on the grounds of materiality must be given in your individual accounts if the information is material to your accounts. There are other conditions that must be met to use the reduced disclosure framework (see Q6 & Q8).
8. Are there many disclosures that I can remove from my accounts if I take the reduced disclosure option?
Depending on the circumstances, the disclosure exemptions could be quite significant.
You can choose to take advantage of all or any of the available disclosure exemptions, subject to meeting certain conditions (see Q6 & Q7).
You have the option not to prepare a cash flow statement. However, the other reduced disclosure options in FRS 101 and FRS 102 only apply to certain items (such as share-based payments and financial instruments) and in certain cases only to some of the disclosures for those items.
FRS 101 has more disclosure exemptions than FRS 102 (such as for business combinations, impairments, capital management, comparative tangible and intangible asset reconciliations) because FRS 101 applies to accounts that otherwise comply with EU-adopted IFRS and many of the disclosures required by EU-adopted IFRS are not required under FRS 102.
The exemptions available to financial institutions (bank, building society, stock broker etc.) are restricted, for example, they cannot omit all the financial instrument disclosures.
FRS 102 applies equally to public benefit entities but there are certain paragraphs that are solely applicable to them. These deal with issues relevant and specific to the public benefit sector, including incoming resources from non-exchange transactions, concessionary loans and public benefit entity combinations.
As well as applying FRS 102 you must continue to apply any relevant SORP (see Q11).
FRS 100 applies to limited liability partnerships (LLPs) in the same way as to other entities.
You have the choice of applying EU-adopted IFRS, FRS 101 if you are a qualifying entity, or FRS 102.
Small LLPs can apply the FRSSE until it is withdrawn (see Q3) when they must apply the recognition and measurement requirements of FRS 102, unless EU-adopted IFRS or FRS 101 is adopted. Small LLPs can apply the small entity presentation and disclosure requirements in section 1A of FRS 102 but must also comply with applicable legal requirements, as set out in the Small LLP Regulations. Those Regulations do not currently incorporate the recent changes to Company Law, so small LLPs will have to provide applicable disclosures arising from the Small LLP Regulations, in addition to the disclosures set out in section 1A of FRS 102.
LLPs cannot apply the micro-entity regime as they are not companies so do not meet the definition of a micro-entity (see Q4).
The LLP SORP has been aligned with FRS 102 (See Q11) and applies to LLPs that adopt FRS 102 or the FRSSE. The LLP SORP does not apply to LLPs that comply with IFRS or FRS 101.
Entities within the scope of a SORP will continue to apply the relevant SORP.
However, FRS 102 may not be adopted early if its application would conflict with applicable SORP or legal requirements.
The SORPs for Pension Schemes, Charities, Limited Liability Partnerships (LLPs), Further and Higher Education, Registered Providers of Social Housing, Authorised Funds, and Investment Trust Companies and Venture Capital Trusts have been updated to be consistent with FRS 102.
In addition, the SORP for Insurance is withdrawn for accounting periods beginning on or after 1 January 2015 and replaced with FRS 103 ‘Insurance Contracts’.
In accordance with “SORP information sheet 4: the adoption of FRS 102 by charities reporting under the SORP” charities that report under the Charities Act 2011 should not adopt FRS 102 until the publication of revised regulations which refer to the SORP issued in 2014. The new regulations have not been issued yet, but will replace the extant Charities (Accounts and Reports) Regulations 2008, made under the Charities Act 2011.
Charities that adopted the Charities SORP (FRSSE) also face further changes now that the FRSSE will be withdrawn from 1 January 2016 (see Q3). The joint SORP-making body and the SORP Committee are consulting on the option of moving to a single SORP, the Charities SORP (FRS 102), from 2016. The SORP Committee is also proposing that only larger charities be required to prepare a Statement of Cash Flows. The closing date for comments on the consultation is 18 September 2015.
Other existing SORPs will be withdrawn including SORPs that apply to Banking, Leasing, and Accounting for Oil & Gas.
FRS 102 is based on IFRS but some of the key differences, subject to transition exemptions, are that FRS 102:
- permits but does not require capitalisation of development costs and borrowing costs in some circumstances;
- includes specific provisions on the use of merger accounting for group reorganisations;
- recognises deferred tax on all timing differences, with some additional requirements;
- includes a number of different conditions to determine the measurement of certain financial instruments;
- requires fair value measurement for investment property when this can be obtained reliably without undue cost or effort;
- presumes goodwill and intangible assets have finite useful lives so does not require annual impairment reviews but does require amortisation of goodwill and intangible assets over their useful life;
- requires capitalisation of acquisition costs incurred on a business combination;
- permits additional choices (including for the measurement of biological assets and recognition of government grants);
- includes requirements necessary for compliance with company law (such as the when negative goodwill is recognised in profit or loss and accounting for contingent consideration);
- includes requirements for specific entities and items (such as public benefit entities, heritage assets);
- presents discontinued operations differently;
- has fewer disclosure requirements (e.g. segmental reporting); and
- complies with Companies Act requirements.
These differences may affect your accounting profits depending on your circumstances and may also impact your taxable profits and/or your distributable profits.
That will depend on the items in your accounts and whether you adopt certain transition exemptions. Some of the key differences are that, under FRS 102, subject to transition exemptions:
- more items (such as financial instruments, biological assets) can or must be measured at fair value with changes in fair value taken to profit and loss;
- investment property revaluations affect reported profit and deferred tax;
- the profit and loss impact of defined benefit plans includes interest (not the expected return) on plan assets;
- for group defined benefit pension schemes the net defined benefit asset or liability must be recognised by at least one entity in the group;
- there is a choice of two methods for recognising government grants;
- lease incentives are spread over the lease term;
- exchange differences arising from foreign currency transactions and foreign operations may be measured differently;
- merger accounting is only permitted for group reconstructions; and
- changes in controlling interests in subsidiaries are recognised in other comprehensive income.
The recognition of certain items also changes which may affect reported results. Changes include separate recognition, amortisation and impairment of intangible assets acquired as part of a business combination, and the recognition of intangible assets and/or financial assets under contracts to construct and operate infrastructure for public services.
There may be other changes that affect your accounting profits depending on your circumstances. The above matters may also impact your taxable profits and/or your distributable profits.
The primary statements and notes to your accounts will be different. For example, a Statement of total recognised gains and losses, Note of historical cost profits and losses and Reconciliation of movements in shareholders’ funds, are not required.
FRS 102 still requires items recognised outside of profit or loss to be presented, but they are included within the Statement of comprehensive income (or an equivalent statement) and the Statement of changes in equity.
The presentation of some items will differ, such as the categories of cash flow shown in the Statement of Cash Flows. In addition, software purchased or developed for internal use rather than as part of a commercial project, that has been capitalised as a tangible fixed asset will be recategorised as an intangible asset under FRS 102.
There are also differences in the disclosure requirements, for example, FRS 102 requires disclosure of the aggregate employee benefits for key management and some minimal disclosures about provisions and contingencies that may be 'seriously prejudicial', including particulars of the provisions and contingencies and a reconciliation of the opening and closing provisions, in aggregate.
There have been changes to FRS 101 and FRS 102 as first published in November 2012 and March 2013, respectively, and some of those changes could be significant for your entity.
Some entities could also be affected by FRS 103 Insurance Contracts issued in March 2014.
Changes to FRS 102:
- amended the definition of a ‘basic’ financial instrument to reduce the number of financial instruments measured at fair value;
- changed the principles for hedge accounting to make hedge accounting more readily available;
- clarified the accounting for defined benefit plans when there is a ‘schedule of contributions’ to address a deficit and when a surplus is not recoverable; and
- amended the requirements for share-based payment transactions with cash alternatives.
These changes have the same effective date as FRS 102, ie periods commencing on or after 1 January 2015, although you can choose to adopt the changes early if you wish to.
Early adopters of FRS 102 must retrospectively apply these changes, subject to some transition exemptions for hedge accounting and financial instruments that become ‘basic’ as a result of the changes to the definition of a ‘basic’ financial instrument.
You will need to consider these changes when preparing your first set of FRS 102 accounts and comparatives, including the impact on the opening position at the start of the comparative period. For those with a 31 December year-end that have not adopted FRS 102 early, this will be 1 January 2014.
There have also been some minor editorial amendments to FRS 102 that affect entities applying a SORP, entities applying the recognition and measurement provisions of IAS 39 and/or IFRS 9, hedges of investments in foreign branches, deferred tax on a business combination and transition exemptions for service concession arrangements. These changes took immediate effect when they were issued.
FRS 101 is a voluntary standard that qualifying entities may adopt should they wish to take disclosure exemptions in individual accounts otherwise prepared in accordance with EU-adopted IFRS and subject to compliance with the Companies Act 2006 ('the Act') (see Q6)
Since its issue, there have been changes to FRS 101 to permit exemptions from new EU-adopted IFRS disclosures, including:
- impairments of non-financial assets, applicable to periods commencing on or after 1 January 2014 to align with the effective dates of the EU-adopted IFRS disclosures they relate to; and
- key management personnel services provided by a separate management entity and the presentation of an opening balance sheet at the date of transition, both of which apply to periods beginning on or after 1 January 2015, unless adopted early.
FRS 101 has also been amended to clarify the financial instrument disclosures required to comply with the Act and application of the accounting for investment entities in the parent company’s separate financial statements.
Further changes to FRS 102 and FRS 101 were necessary to reflect changes to Company Law effective from 1 January 2016 (see Q15).
15. Will the changes to Company Law to implement the EU Accounting Directive affect FRS 102 or FRS 101?
Yes; from periods starting on or after 1 January 2016, unless you choose to adopt the changes earlier.
To align with the revisions in Company Law, FRS 102 is amended to:
- prohibit the reversal of past impairment losses for goodwill;
- restrict the useful economic life of intangible assets (including goodwill) to not more than ten years in the exceptional circumstances when the useful economic life cannot be reliably estimated;
- require some minimal disclosures about provisions and contingencies, partially removing the “seriously prejudicial” exemption;
- incorporate requirements, including disclosures, for financial instruments measured at fair value that are aligned with Company Law; and
- reflect other minor amendments.
One of the challenges in adopting FRS 101 was the requirement to apply the proﬁt and loss account and balance sheet formats in the Companies Act. The revisions to Company Law provide greater ﬂexibility in these formats so, if you adopt FRS 101, you have a choice of applying the presentation in EU-adopted IFRS.
Subject to some exemptions from retrospective application, FRS 101 has also been revised to remove the original amendment to EU-adopted IFRS for contingent consideration arising on a business combination, thereby reverting to the measurement in IFRS 3 Business Combinations. Like FRS 102, FRS 101 will also require some minimal disclosures about provisions and contingencies, partially removing the 'seriously prejudicial' exemption in EU-adopted IFRS.
16. My bank recommended that I take out an interest rate swap for 5 years. Will I have to account for this under FRS 102?
FRS 102 requires recognition of financial instruments that are only disclosed under current UK GAAP. Many of these will be measured at fair value with changes in fair value being taken to profit or loss. This may affect your distributable profits.
If conditions are met, it may be possible to adopt hedge accounting for certain financial instruments such as interest rate swaps, to reduce the impact of fair value changes on profit or loss.
You should start planning as soon as practicable.
If you are adopting FRS 102 or FRS 101, the start of your comparative period has already passed so the new standards could affect the way you will account for transactions that have already taken place, not just future transactions.
For example, if you have a 30 September year end, you will have to apply the new standards in your annual accounts to 30 September 2016 with comparatives for the year 1 October 2014 to 30 September 2015.
If you have a 31 December year-end, the impact on your accounts will be even sooner as you will be required to apply the new standards in your annual accounts for 31 December 2015, with comparatives for the year 1 January 2014 to 31 December 2014.
For small and micro-entities that wish to use (or continue using) the small company regime or micro-entity regime, respectively, you have a further year until the new applicable standards become mandatory but you could already be into your comparative period (1 January 2015 to 31 December 2015, if you have a December year-end).
There could be advantages to adopting early. If you are thinking of starting a new business or setting up a new company it may be a good idea to apply the new standards early to avoid changing frameworks within a short time frame. You could be part of a group that can take advantage of the reduced disclosure framework and obtain significant cost savings as a result.
In fact, you could benefit from talking to us as soon as possible.
The FRC has published three finalised XBRL tagging conventions ('taxonomies') for FRS 101, FRS 102 and EU-adopted IFRS for application from 1 January 2015 when FRS 102 becomes effective.
Early adopters of FRS 101 or FRS 102 were previously advised to tag using the existing IFRS taxonomy.
HMRC updated its systems in December 2014 to accept Company Tax returns containing accounts that have been tagged with the new taxonomy and Companies House are expected to adopt the new XBRL taxonomies in due course for filings of accounts.
The new XBRL taxonomies to match FRS 101 and FRS 102 will also be incorporated into accounts preparation software.
19. I will apply FRS 102 in my annual accounts; will my interim accounts also be affected by FRS 102?
Your interim accounts will reflect differences between current UK GAAP and FRS 102 (see Q13).
As you use FRS 102 in your annual accounts, your interim accounts can follow FRS 104 Interim Financial Reporting. FRS 104 has fewer disclosures than FRS 102. It sets out the content of interim reports, including the periods to be presented, and how to apply FRS 102 recognition and measurement requirements in interim accounts.
FRS 104 also provides guidance on interim accounts prepared in accordance with FRS 101, so it can be used by entities that apply FRS 101 in their annual accounts, as well as those that adopt FRS 102.
If you are required by the Disclosure Rules and Transparency Rules (DTR) to make a statement that your interim report has been prepared in accordance with pronouncements on interim reporting issued by the FRC, you must apply FRS 104, otherwise use of FRS 104 is voluntary.