FRS 102 - triennial review – FRED 67 draft amendments

On 23 March 2017, the Financial Reporting Council (FRC) issued FRED 67 Draft Amendments to FRS 102 - Triennial Review 2017 proposing incremental improvements and clarifications to FRS 102. The proposals take account of stakeholder feedback on the implementation of FRS 102.

What are the next steps?

The FRC is inviting comments on its proposed amendments by 30 June 2017 and expects to finalise these by December 2017.

The amendments will be effective for accounting periods beginning on or after 1 January 2019, with earlier application permitted if all of the amendments are applied at the same time.

Main proposals

The principal amendments being proposed are welcome simplifications designed to make FRS 102 more cost-effective to apply and easier to use.

  • Directors’ loans: Small entities will no longer need to take account of notional interest when measuring loans from a natural director who is also a shareholder (or from a close family member of that person). This means that loans that meet the definition of a basic financial instrument will be recorded at the transaction price rather than the present value.
  • Intangible assets acquired in a business combination: Only intangible assets that are separable and arise from contractual or other legal rights will need to be separately identified from goodwill and valued. However entities will have the option to adopt a policy of identifying additional assets and valuing them separately should they wish to do so. (Transitional arrangements will be available).
  • Investment property rented to another group entity: May be measured at cost less depreciation and impairment instead of fair value, transitional arrangements will be available.
  • Classification of financial instruments: There is a new principle-based description of a basic financial instrument. More financial instruments will therefore be considered ‘basic’ and measured at amortised cost even if they fail the general criteria.
  • Revised definition of a financial institution: Fewer entities will be classified as financial institutions and so no longer required to provide the ‘enhanced’ disclosures about financial instruments in section 34.
  • Investment properties and investments in associates and joint ventures: Undue cost or effort exemptions will be removed.

New and improved guidance

Aside from editorial amendments, the FRC is also proposing to provide new guidance and clarify existing guidance whilst retaining the succinct nature of FRS 102.

  • Employee ownership trusts: There is clarification that an entity can be owned by a trust without the entity controlling the trust. An illustrative example has also been included.
  • Classification of financial instruments: The impact of contingent payments on loan classification has been clarified. Three new examples have been included to illustrate this.
  • Transfers to/from investment property: New guidance has been included on measurement at the date of transfer to/from property, plant and equipment.
  • Debt for equity swaps: New explicit guidance has been included.
  • Agent v principal: There is additional guidance based on IAS 18 Revenue.
  • Measurement of deferred tax: There is clarification that the measurement of deferred tax in respect of assets and liabilities recognised in a business combination which is accounted for using the purchase method, shall take into account the manner of recovery by the entity.

Other amendments

  • Net debt reconciliation disclosure: Similar to old UK GAAP, the new disclosure takes into account movements in both cash balances and the borrowings of an entity.
  • Investments in shares: Current FRS 102 defines an investment in non-convertible preference shares and non-puttable ordinary or preference shares as basic financial instruments. The proposals supersede this with a revised definition of a basic financial instrument which now includes an investment in a non-derivative instrument that is equity of the issuer. This amendment will result in investments in ordinary shares and certain preference shares being measured at amortised cost which would previously have been measured at fair value.
  • Macro hedging: Entities will now be able to apply the fair value hedge accounting requirements to a portfolio of financial instruments without having to elect to apply IAS 39.
  • Costs of securing a revenue contract: There is clarification that such costs are included in contract costs if criteria are met ie directly relate to a contract; incurred in securing the contract; separately identifiable; reliably measurable; and it is probable that the contract will be obtained.
  • Disclosing compensation to key management personnel: An exemption is provided when the individuals are the same as the directors and directors’ remuneration is already required to be disclosed by law or other regulations.

Interim measures to address changes to IFRS

As a separate phase of its triennial review, the FRC will be consulting on more significant amendments to FRS 102 to reflect recent changes in IFRS. In the meantime, the FRC is proposing some interim measures.

  • IFRS 9 Financial Instruments: Entities will be able to continue to apply the recognition and measurement requirements of IAS 39 Financial instruments: Recognition and Measurement, even when it is superseded by IFRS 9.
  • IFRS 10 Consolidated Financial Statements: The FRC is proposing a principle-based disclosure derived from IFRS, regarding unconsolidated structured entities (such as special purpose entities).
  • IFRS 13 Fair Value Measurement: The definition of fair value is not being revised for greater consistency with IFRS 13; however, some further practical guidance is being added on the fair value methodology.
  • IFRS 15 Revenue from Contracts with Customers: The FRC has included some guidance in section 23 Revenue on unbundling the price of a single transaction which comprises separately identifiable goods and services.
  • IFRS 16 Leases: There will be no enhancements to lease disclosures.
  • IFRS for SMEs: The FRC is not intending to bring in four new undue cost or effort exemptions that were introduced by the IASB in the 2015: amendments to the IFRS for SMEs. The FRC is proposing to remove this type of exemption altogether. Its preference is instead to look for other proportionate solutions to address cost and benefit considerations such as accounting policy choices or simplifying recognition criteria.

If you have any queries or concerns about the proposed amendments please contact us or speak to your usual RSM contact.