Below are some answers to recent questions we have had around the changes to FRS 102.
- Can I use different GAAPs for different UK companies within my group?
- Should I reclassify an item of property, plant or equipment which is expected to be sold post year end as a current asset?
- How should I treat consideration in a business combination that is contingent and the seller remains an employee of the company?
The Companies Act 2006 sets out the requirement for consistency of financial reporting within a group.
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 (including section 1A (see Q3)) and, if eligible, FRS 101 and FRS 105 (see 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 (including section 1A) and, if eligible, FRS 101 and FRS 105, 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).
It is up to the directors to form an opinion as to whether there are ‘good reasons’ and the Department for Business, Energy & Industrial Strategy (BEIS) (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 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.
2. Should I reclassify an item of property, plant and equipment which is expected to be sold post year end as a current asset?
FRS 102 does not have a similar concept to IFRS of assets being classified as ‘held for sale’. Where an entity intends to sell a tangible fixed asset in the near future, the asset should continue to be held in fixed assets in the balance sheet unless that asset is being transferred to stock for sale in the ordinary course of the company’s business. The asset is not reallocated to current assets under FRS 102. The asset will be derecognised at the point of sale or disposal and any profit or loss on disposal recognised accordingly.
This is different to IFRS which requires that a non-current asset be reclassified as ‘held for sale’ if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. Paragraph 4.14 of FRS 102 sets out the disclosure requirements for situations where an entity has a binding sale agreement at the reporting date for a major disposal of assets or a disposal group:
4.14 If, at the reporting date, an entity has a binding sale agreement for a major disposal of assets, or a disposal group, the entity shall disclose the following information:
(a) a description of the asset(s) or the disposal group;
(b) a description of the facts and circumstances of the sale; and
(c) the carrying amount of the assets or, for a disposal group, the carrying amounts of the underlying assets and liabilities.
However, there would still not be a reclassification to current assets if there was a binding agreement for sale at the reporting date.
3. How should I treat consideration in a business combination that is contingent and the seller remains an employee of the company?
This is an area not specifically covered under FRS 102 and therefore the general rule on sources of reference when FRS 102 does not specifically address a topic would need to be followed.
As under old UK GAAP, an assessment is made as to whether the contingent consideration is part of the cost of the business combination ie is it given 'in exchange for control of the acquiree' (FRS 102; 19.11)
In developing and applying its accounting policies, in accordance with FRS 102.10.4, management shall use its judgement and shall reflect the economic substance of transactions, other events and conditions and not merely the legal form. Hence when contingent consideration has linkage to continuing service, with payments automatically forfeited if the selling shareholder/employee leaves, management should consider whether the substance of the payments is more in the nature of remuneration for services than consideration for the business acquired. The factors set out in IFRS 3 on this matter may be useful as a list of factors that may be considered.
For more information please get in touch with Danielle Stewart.