Now the future of UK GAAP is here, what questions does it present for 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 some fundamental changes to this which may affect your business. The new UK GAAP includes Financial Reporting Standard (FRS) 100 and FRS 102 (the key element for most businesses) or FRS 101 (offering reduced disclosures for some EU-IFRS prepares), FRS 105 (for micro-entities) as well as FRS 103 for FRS 102 preparers that issue insurance contracts.
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 your financial statements. The information in these FAQs is based on information available at 6 October 2016.
1. Do I still have a choice of using EU-adopted IFRS or UK GAAP?
2. Can I use different GAAPs for different UK companies within my group?
3. I have a small company (but not a micro-entity) and I do not currently use the FRSSE. I do not intend to apply EU-adopted IFRS or FRS 101 - will I have to switch to FRS 102?
4. I have a very small company. Are there any additional accounting exemptions that I can take advantage of?
5. I voluntarily report under EU-adopted IFRS. Will I be able to switch to FRS 102?
6. I have a subsidiary reporting under EU-adopted IFRS. The reduced disclosure framework sounds attractive. Does it mean I can simply remove disclosures from my accounts?
7. I have 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?
8. Are there many disclosures that I can remove from my accounts if I take the reduced disclosure option?
9. I have a public benefit entity. How will the changes affect me?
10. I have a limited liability partnership. How will the changes affect me?
11. I currently follow a SORP for my accounts. Will this still be required?
12. Will the changes to Company Law to implement the EU Accounting Directive affect FRS 102 or FRS 101?
13. I have a small entity, when do I have to start implementing the changes?
14. I have already prepared my first FRS 102 / FRS 101 accounts, can I just roll them forward next year?
15. I apply FRS 102 in my annual accounts; will my interim accounts also be affected by FRS 102?
The new standards do not affect the requirement for listed entities to apply EU-adopted IFRS in their consolidated accounts and other entities, except charities, 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 (see Q3), and the micro-entity regime may be applied by companies that are eligible to adopt it (see Q4).
However, all previous UK accounting standards and guidance have been, (or in the case of the FRSSE will be), replaced with the requirements of FRS 102 and, for micro-entities, FRS 105 (see Q4).
Qualifying entities have the option of ‘reduced disclosures’ in their individual accounts prepared under FRS 102 if they meet certain conditions. Reduced disclosures are also available to qualifying entities in their individual accounts that otherwise comply with EU-adopted IFRS, by application of 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 (while it is still available) are Companies Act Accounts and, therefore, need to meet the applicable requirements of the Companies Act and associated regulations and changes thereto (see Q12).
To comply with the Companies 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 exceptions to the ‘consistency rule’ in the Companies 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 (while still available), or they can all apply EU-adopted IFRS. FRS 105 will, however, rarely be applied by group companies as the micro-entity provisions do not apply to company accounts that are included in group accounts or to a parent company that prepares 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 Department for Business Innovation and Skills (BIS) (then the Department for Business Enterprise and Regulatory Reform (BERR)) 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.
Yes, if you do not apply EU-adopted IFRS or FRS 101.
If you meet the Companies Act definition of a small company, you must apply the recognition and measurement requirements of FRS 102 for accounting periods beginning on or after 1 January 2016 as the FRSSE has been withdrawn.
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 transition 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.
If you previously applied the FRSSE, you will also have a new requirement to measure share-based payments, such as certain employee share options, at fair value, subject to transition exemptions for share-based payment awards granted in the comparative and prior periods.
Your accounts will have to comply with the presentation and disclosure requirements throughout FRS 102, unless you choose to apply the presentation and disclosures for small entities in Section 1A of FRS 102 and you also adopt the amendments to Company Law (see Q12). If you apply Section 1A you will only need to give the legal disclosures that apply to small companies, which are fewer than those required by FRS 102, unless other information is necessary for your accounts to show a true and fair view. In addition, you need not present a statement of changes in equity.
No small company (whether or not it applies the small companies’ regime) is required to present a statement of cash flows for periods beginning on or after 1 January 2016. This exemption may be adopted for earlier accounting periods if all amendments to FRS 102 and Company Law are also adopted early (see below).
Even if you are a growing business, you may continue to be a small company for some time as the recent changes to the Companies 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 size limits apply from 1 January 2016 but can be applied one year earlier (except to claim small company audit exemption) provided you adopt all the other changes to Company Law at the same time.
Yes; if you are a micro-entity as defined below.
Certain companies are excluded from being micro-entities, such as public companies, charitable 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 that are companies can adopt the micro-entities regime in FRS 105 for periods beginning on or after 1 January 2016 (when the FRSSE is withdrawn) or one year earlier (from 1 January 2015).
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 to account for deferred tax or share-based payments and the accounting for defined benefit pension schemes is less complex. There are also 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 FRS 105
Under company law, companies that have voluntarily prepared their individual accounts under EU-adopted IFRS can change to UK GAAP, i.e. FRS 102, FRS 101 or (where applicable) FRS 105 (see Q4) or the FRSSE, while it is still available, (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 law that permits a company to move from EU-adopted IFRS to UK GAAP following a ‘relevant change of circumstance’ remains. 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.
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. There is a current proposal to remove this requirement to notify shareholders.
Some disclosures can only be omitted if ‘equivalent disclosures’ are included in the consolidated accounts (see Q7 and 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 Companies Act and associated Regulations. This means your accounts must apply Companies Act balance sheet and profit and loss account formats and include disclosures required by the Companies Act and the Regulations.
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 which allow FRS 101 accounts to be presented in accordance with EU-adopted IFRS (see Q12). 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.
In addition, EU-adopted IFRS is amended to comply with the Companies Act, including changes to the presentation and recognition of negative goodwill and the presentation of government grants.
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.
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.
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 Application of Financial Reporting Requirements 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).
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). In addition, for your FRS 101 accounts to comply with Company Law, you may have to add disclosures, change presentations and make other amendments to the EU-IFRS accounts (see Q6).
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.
In addition, some disclosures will be required by Company Law (such as for certain financial instruments measured at fair value) even when there is an exemption from the disclosure requirements of EU-adopted IFRS or FRS 102.
The exemptions available to financial institutions (such as a 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. In addition, you must make a statement in your financial statements that you are a public benefit entity.
As well as applying FRS 102 you must continue to apply any relevant SORP (see Q11).
A draft LLP SORP (2017) has been issued to align the LLP SORP with the revised LLP Regulations and FRS 102 including Section 1A. Under the proposals, for years beginning on or after 1 January 2016:-
- If you are a micro-LLP, you can simply follow FRS 105 and do not need to comply with the draft LLP SORP (2017);
- If you are a small-LLP, you can apply the recognition and measurement requirements of FRS 102 and the draft LLP SORP (2017) together with the disclosure requirements in Section 1A with the additional disclosure required by the draft LLP SORP (2017) about how loans and other debts due to members rank in relation to other unsecured creditors;
- Whilst other disclosures in the draft LLP SORP (2017) will not be mandatory if you are a small LLP, you are encouraged to give the reconciliation of the movement in members’ other interests. Furthermore, your accounts must show a true and fair view, and some or all of the disclosures in the draft LLP SORP (2017) may be necessary to achieve this.
Once issued, the LLP SORP (2017) can be adopted early provided the revised LLP Regulations are also applied in full at the same time
Yes. If you are within the scope of a SORP you will continue to apply the relevant FRS 102 SORP.
However, the position for some charities is more complex.
If you are an unincorporated charity in England and Wales that prepares accounts in accordance with the Charities Act, you must adopt either FRS 102 or the FRSSE 2015 (depending on eligibility) and the related SORP. However, you face a conflict when preparing your accounts for periods commencing on or after 1 January 2015 because the applicable legislation still refers to the extant SORP 2005. This conflict is not an issue if you are a charitable company as you are subject to the accounting requirements of the Companies Act rather than the Charities Act.
It is still unclear when this conflict will be rectified as publication of the revised Charities (Accounts and Reports) Regulations for England and Wales continues to be delayed.
In the meantime, in order to meet the overriding requirement in the Charities Act to prepare ‘true and fair’ accounts, you can adopt either FRS 102 or the FRSSE 2015, as appropriate, by including a true and fair override to the applicable legislation in your accounts. The Charity Commission has published guidance on its website with appropriate true and fair override wording.
If you are a charity that adopts the Charities SORP (FRSSE) for 2015 you will face further changes when the FRSSE is withdrawn (see Q3). From 2016 all charities will move to a single SORP, the Charities SORP (FRS 102), as amended by the SORP Update Bulletin 1. You can adopt the single SORP from 1 January 2015 including the Update Bulletin 1, unless this is prohibited by regulations or charity or company law.
Changes to the Charities SORP itself may be made in the future as there is currently an invitation for you to comment on how the Charities SORP (FRS 102) could be improved. An exposure draft of changes to the Charities SORP (FRS 102) is expected in 2018.
For other SORP users, your SORPs may also be further amended for the July 2015 revisions to FRS 102, and for recent changes in legislation. Currently, a draft LLP SORP (2017) has been issued to align the LLP SORP with the revised LLP Regulations and FRS 102, as amended in July 2015 (see Q10) and guidance has been issued to users of the Pensions SORP in relation to amendments to FRS 102.
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 minimum disclosures about provisions and contingencies, partially removing the “seriously prejudicial” exemption; and
- reflect other minor amendments
FRS 101 is amended to:-
- remove the amendment to the accounting for contingent consideration arising on a business combination; and
- require some minimum disclosures about provisions and contingencies, partially removing the 'seriously prejudicial' exemption
The changes to Company Law also permit more flexible profit and loss account and balance sheet formats which align with the presentation in EU-adopted IFRS. This may be particularly advantageous if you prepare FRS 101 accounts (see Q6).
If you have elected to apply FRS 102 in full, or with early-adoption of the presentation and disclosures in Section 1A, or to apply FRS 101, the preparation of your new UK GAAP accounts should be a ‘now’ issue. If you have a December year-end you will have passed the filing deadline for your first FRS 102, FRS 102 Section 1A, or FRS 101 accounts.
If you are a small company or a micro-entity and are using the FRSSE you should start preparing for your new UK GAAP accounts as soon as practicable.
For periods commencing on or after 1 January 2016, the FRSSE will be withdrawn, so you will have passed the end of your comparative period under new UK GAAP if you have a year-end of 30 September (i.e. 30 September 2016) or earlier (e.g. 31 December 2015 for a December year-end).
If you are a small company, you will have to apply the recognition and measurement requirements of FRS 102. However, if you choose to apply the small company regime, you can use the presentation and disclosures in Section 1A of FRS 102 instead of those in FRS 102, unless additional disclosures are required for your accounts to show a true and fair view (see Q3).
If you are a micro-entity you can adopt the recognition, measurement, presentation and disclosures in FRS 105 (see Q4).
There may be advantages to adopting the small or micro-entity regimes early. For example, if you have started a new business or set 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.
There could be other advantages to adopting the small or micro-entity regimes early, so you could benefit from talking to us as soon as possible
It may not be that simple.
There could be new accounting challenges in your next FRS 102 (or FRS 101) accounts.
You may have entered into arrangements that you have not previously accounted for under new UK GAAP, either because they are new transactions for your business or because you were able to take transition exemptions.
If you chose not to early-adopt the changes to Company Law, these changes and the consequential amendments to FRS 102 (and FRS 101) (see Q12), could change the way you account for certain transactions, change the presentation of your accounts and/or require you to give additional disclosures.
The requirements in FRS 102 and FRS 101 will not remain static. Significant changes to IFRS are on the way with the new requirements for financial instruments (in IFRS 9), revenue (in IFRS 15) and leases (in IFRS 16) and further developments on the horizon. These will apply directly to your FRS 101 accounts once effective, subject to any amendment or exemptions in FRS 101. Whilst the new IFRSs are not yet mandatory, they could have a substantial impact on your reported figures, including your comparative numbers.
As FRS 102 is IFRS-based, it is periodically reviewed to consider whether, and to what extent, it should be updated for changes in IFRS. This is currently being undertaken as part of a wider triennial review of FRS 102 which also invites comments on any aspect of FRS 102 and its implementation.
Like IFRS, changes to FRS 102 will not become mandatory immediately but you will need to consider whether there are advantages to early-adoption (where this is permitted) and plan for any impact on your comparative figures.
So, even though you are over the hurdle of transition, you could still benefit from talking to us about transactions in your second and future years of new UK GAAP accounts.
Your interim accounts will reflect differences between previous UK GAAP and 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 Interim Financial Reporting, otherwise use of FRS 104 is voluntary.
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