New UK and Irish GAAP micro-site

Getting Help – Accountants in Practice

Intro

If you work in practice, you will need to ensure that you and your team understand the full impact of New UK and Irish GAAP and how it is relevant to your clients.

Mercia have a number of training solutions, practical tools and free resources to help you every step of the way.

Training

Online Transition Library

From £20 per module

This library of 31 practical New UK and Irish GAAP e-learning modules are a great reference tool for you and your entire team, covering topics from accounting formats to hedge accounting.

With unlimited access for your whole firm throughout 2015 the modules are available at a time to suit you and are viewable on all devices.

Each module has some background, practical examples, FAQs, comparisons to current UK GAAP and the chance to test yourself once you’ve taken it all in!

To demonstrate just how great this library is Mercia are giving away one of the modules FREE!

Try for FREE   Find out more

Face-to-face Courses

From £100/€125 per place

Mercia have a variety of courses covering New UK and Irish GAAP and FRS 102 in locations throughout UK and Ireland.

CPD Courses

• FRS 102 – Are You Ready
• FRS 102 – Emerging Issues
• The Interaction between Tax and Accounts Under the New UK GAAP
• FRS 102 Conversion Workshop (ROI only)
• Consolidated Financial Statements under FRS 102 and the New Companies Act (ROI only)

Specialist Courses

• Transition to FRS 102: A Practical Workshop
• Groups and Reorganisations Under New UK GAAP
• Accounting for Tax Under FRS 102: Deferred and Current

Online courses

From £75 per place

Mercia’s online courses are a great way to get up to speed with New UK and Irish GAAP without leaving your desk!

Find out more

Technical Support

FRS 102 financial statements review

Prices start from £250 per hour plus VAT.

Have you prepared your first set of financial statements under FRS 102? Are you concerned over the new formats, disclosures and transition adjustments?

Mercia’s technical team can review those accounts to ensure that they are in accordance with appropriate statutory formats and disclosure requirements of FRS 102.

Find out more

Technical Queries

Prices from £55 plus VAT per query.

Mercia’s technical team can offer practical advice on a FRS 102 matter and not just a repeat of the rules.

Queries can be dealt with by telephone, in writing or via email, whichever is the most convenient for you.  We work to provide the best available practical help and guidance in a professional manner.

Find out more

Manuals

Do you need guidance and work programmes to help you provide audit services to your clients?

Mercia’s New UK and Irish GAAP ready Audit and Audit Exemption Manuals include disclosure checklists written in accordance with FRSSE 2015, FRS 101 and FRS 102.

These are available, along with example financial statements, programmes to help prepare and audit financial statements prepared under new UK GAAP and comprehensive procedures guidance.

Find out more

Marketing Support

Client Seminars

From £395 per seminar pack

Your clients need to be in a position to understand how the changes to UK and Irish GAAP will affect their accounts and will look to you for guidance on application, opportunities and pitfalls.

So why not run a training seminar for them?

Our PowerPoint presentation and accompanying speaker notes will help you run a successful training seminar for your clients and prospective clients.  We even have seminar notes for you to hand out, which can be personalised if you wish.

Find out more

Client Letters

From £55 per letter

Inform your clients about the changes to UK and Irish GAAP and how it will affect them with these letters.

Written in a language your clients will understand, these are a great marketing tool to showcase your UK GAAP knowledge and services.

Find out more

Free Resources

Take a look at our relevant and useful FREE downloads on a number of areas of UK and Irish GAAP.

[all downloads – please wait for updates of these]

For the latest News and Blogs on New UK and irish GAAP, see our News page.

New UK and Irish GAAP micro-site

Getting Help – Accountants in Industry

Intro

If you are an accountant in industry you will need to be up to speed with New UK and Irish GAAP and how it affects your business.

Quorum Training have a number of training solutions to help you understand the changes and prepare you for the challenges.

Face-to-face Courses in London

From £345 per place

Practical and relevant courses covering the core areas under New UK and Irish GAAP.

The courses are presented by highly experienced specialist trainers who are committed to providing a great learning experience.

• New UK GAAP – A Comprehensive Review of FRS 102
• New UK GAAP – Update & First Time Adoption of FRS 102
• FRS 102 – Accounting for Financial Instruments
• FRS 102 – Accounting for Fixed Assets
• FRS 102 – What It Means for Public Benefit Entities
• Tax in Company Accounts – New UK GAAP

Online Transition Library

This library of 31 practical New UK and Irish GAAP e-learning modules are a great reference tool for you, covering topics from accounting formats to hedge accounting.

With unlimited access throughout 2015 the modules are available at a time to suit you and are viewable on all devices.

Each module has some background, practical examples, FAQs, comparisons to current UK GAAP and the chance to test yourself once you’ve taken it all in!

To demonstrate just how great this library is Quorum Training are giving away one of the modules FREE!

Free Module

For more information on the Transition Library please email hannah.howe@quorumtraining.co.uk

Leases

Section 20 of FRS 102 covers accounting for all leases other than:

• leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
• licensing agreements for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights;
• measurement of property held by lessees that is accounted for as investment property and measurement of investment property provided by lessors under operating leases;
• measurement of biological assets held by lessees under finance leases and biological assets provided by lessors under operating leases; and
• leases that could lead to a loss to the lessor or the lessee as a result of non-typical contractual.

What types of leases are covered?

Some arrangements do not take the legal form of a lease but convey rights to use assets in return for payments. Examples of arrangements in which one entity (the supplier) may convey a right to use an asset to another entity (the purchaser), often together with related services, may include outsourcing arrangements, telecommunication contracts that provide rights to capacity and take-or-pay contracts.

As well as more standard leases (with the above exceptions), section 20 also includes agreements that transfer the right to use assets even though substantial services by the lessor may be called for in connection with the operation or maintenance of such assets. But this section does not apply to agreements that are contracts for services that do not transfer the right to use assets from one contracting party to the other.

How are leases classified?

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.

[[[Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract.]]]

Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. FRS 102 includes examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease.

Lease classification is made at the inception of the lease and is not changed during the term of the lease unless the lessee and the lessor agree to change the provisions of the lease (other than simply by renewing the lease), in which case the lease classification shall be re-evaluated.

How are leases recognised and measured?

Finance leases

A lessee shall recognise its rights of use and obligations under finance leases as assets and liabilities in its statement of financial position at amounts equal to the fair value of the leased asset or, if lower, the present value of the minimum lease payments, determined at the inception of the lease.

Operating leases

Lease payments (excluding costs for services such as insurance and maintenance) are recognised as an expense over the lease term on a straight-line basis unless either:

1. another systematic basis is representative of the time pattern of the user’s benefit, even if the payments are not on that basis; or
2. the payments to the lessor are structured to increase in line with expected general inflation (based on published indexes or statistics) to compensate for the lessor’s expected inflationary cost increases.

A lessee shall recognise the aggregate benefit of lease incentives as a reduction to the lease expense over the lease term, on a straight-line basis unless another systematic basis is representative of the time pattern of the lessee’s benefit from the use of the leased asset.

Section 20 also deals with lessors’ treatment of finance leases and sale and leaseback transactions resulting in an operating lease.

What lease disclosures are needed?

A lessee shall disclose the total of future minimum lease payments under non-cancellable operating leases for each of the following periods:

• not later than one year;
• later than one year and not later than five years; and
• later than five years; and

Lease payments recognised as an expense should also be disclosed.

How is this different to ‘old GAAP’?

The overall approach adopted by FRS 102 is very similar to current UK and Irish GAAP. However the following minor differences should be noted:

Finance leases – lessee accounting

Under SSAP 21 the initial measurement of the asset and liability is at the present value of minimum lease payments, discounted at the rate implicit in the lease. Under FRS 102 the assets and liability are recorded at the lower of the fair value of the leased item and the present value of the minimum lease payments using the interest rate implicit in the lease.

Finance leases – lessor accounting

The accounting is very similar, although the detailed definitions of gross investment; net investment; and net cash investment are different.

Operating leases – lessee accounting

SSAP 21 provides no guidance on the treatment of inflationary increases. FRS 102 implies that these increases are expensed as incurred.

Sale and leaseback transactions

The basic treatment currently set out in UK and Irish GAAP is the same as FRS 102, but guidance is also given on ways of deferring and recognising a gain.

Lease incentives

Currently under UK and Irish GAAP the value of the lease incentives are recognised against the value of lease payments to be recognised on a straight line basis up to the point when the lease resets to market rates. FRS 102 recognised lease incentives over the term of the lease.

Are there any exemptions on transition?

Yes – the existing UK and Irish GAAP treatment for operating lease incentives (see above) can be continued for leases whose inception occurred prior to the date of transition. This is important for lessors as it allows them to avoid unfavourable tax cash flows which would arise from the new approach in FRS 102.

Business combinations and intangibles

Section 18 of FRS 102 sets out the accounting treatment and disclosure for all intangible assets other than goodwill. Section 19 does the same for business combinations and goodwill.

What is meant by ‘intangible assets’?

[[[An intangible asset is an identifiable non-monetary asset without physical substance.]]]

An intangible asset is an identifiable non-monetary asset without physical substance. To count as identifiable an intangible asset must be separable or must arise from contractual or other legal rights. To be separable it must be capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged.

Section 18 does not apply to:

• financial assets;
• heritage assets; or
• mineral rights and mineral reserves.

When are intangibles recognised?

An intangible asset is only recognised if it is probable that its expected future economic benefits will flow to the owner and if its cost of value can be measured reliably.

Entities should assess the probability of expected future economic benefits using reasonable and supportable assumptions that represent management’s best estimate of the economic conditions that will exist over the useful life of the asset.

How are intangibles measured?

Intangible assets are initially measured at cost. The cost of a separately acquired intangible asset consists of its purchase price and any directly attributable cost of preparing the asset for its intended use.

• The cost of an intangible asset acquired in a business combination is its fair value at the acquisition date.
• The cost of an internally generated intangible asset is the sum of expenditure from the point when it first meets the recognition criteria. Internally generated goodwill is not recognised as an asset.
• The cost of an intangible asset acquired by way of a grant is its fair value at the date the grant is received or receivable.

Where an intangible asset is acquired in exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets the entity should measure the cost of such an intangible asset at fair value. This applies unless the exchange transaction lacks commercial substance; or the fair value of neither the asset received nor the asset given up is reliably measurable. In these instances, the cost of the asset is measured at the carrying amount of the asset given up.

What about research and development costs?

The process of internally generating an intangible asset is split into a research phase and a development phase. Research costs are always expenses to profit or loss. Where an entity cannot distinguish the research phase from the development phase, it treats the expenditure on that project as if it were incurred in the research phase only.

FRS 102 contains a list of items (such as internally generated goodwill) which should be treated as an expense and not be recognised as intangible assets.

If the conditions set out in FRS 102 for development costs are satisfied, an entity has the choice of capitalising the expenditure (with subsequent amortisation) or writing the expenditure off as incurred.

FRS 102 does not specify how software and website development costs should be treated.  Entities will need to determine and apply a suitable accounting policy to classify such costs as tangible or intangible fixed assets. It is possible that having considered the nature of the asset that it is recognised as an intangible asset (Note: UITF 29 required all such costs to be capitalised as tangible fixed assets).

How are intangibles subsequently measured?

After initial recognition, assets are measured using the cost model or the valuation model.

Whichever model is chosen, assets are systematically amortised. Additionally, appropriate provision should be made for impairment losses.

If the fair value of a revalued intangible asset can no longer be determined by reference to an active market, the carrying amount of the asset shall be its revalued amount at the date of the last revaluation by reference to the active market, less any subsequent accumulated amortisation and any subsequent accumulated impairment losses.

Amortisation over useful life

All intangible assets shall be considered to have a finite useful life. If in exceptional cases an entity is unable to make a reliable estimate of the useful life of an intangible asset, the life shall not exceed ten years.

How are business combinations accounted for?

Section 19 applies to accounting for business combinations. It provides guidance on identifying the acquirer, measuring the cost of the business combination, and allocating that cost to the assets acquired and liabilities and provisions for contingent liabilities assumed. It also addresses accounting for goodwill both at the time of a business combination and subsequently.

[[[Merger accounting is not permitted except for group reconstructions and certain combinations involving public benefit entity combinations.]]]

All business combinations shall be accounted for by applying the purchase method. Merger accounting is not permitted except for group reconstructions and certain combinations involving public benefit entity combinations. Currently under UK and Irish GAAP, FRS 6 permits the use of merger accounting for business combinations when certain conditions are satisfied. In other respects, the approach to combinations is similar to old GAAP.

Intangibles acquired as part of a business combination

An intangible asset acquired in a business combination is normally recognised as an asset if its fair value can be measured with sufficient reliability. However, an intangible asset acquired in a business combination is not recognised when it arises from legal or other contractual rights and there is no history or evidence of exchange transactions for the same or similar assets, and otherwise estimating fair value would be dependent on immeasurable variables.

[[[An intangible asset acquired in a business combination is normally recognised as an asset if its fair value can be measured with sufficient reliability]]]

Under old GAAP (FRS 7), assets (including intangible assets) are only recognised separately from goodwill if they are “capable of being disposed of or settled separately”. In many acquisitions this limits the number of assets which are separately recognised.

Goodwill acquired as part of a business combination

Positive goodwill acquired in a business combination is initially measured at its cost – being the excess of the cost of the business combination over the acquirer’s interest in the net amount of the identifiable assets, liabilities and contingent liabilities recognised. After initial recognition, the acquirer shall measure goodwill acquired in a business combination at cost less accumulated amortisation and accumulated impairment losses.

Goodwill shall be considered to have a finite useful life, and shall be amortised on a systematic basis over its life. As with other intangibles, if in exceptional cases an entity is unable to make a reliable estimate of the useful life of goodwill, the life shall not exceed ten years. Under old UK and Irish GAAP, there is a rebuttable presumption that positive goodwill has a finite life of twenty years or less.

Are there any exemptions on transition?

Yes – business combinations that occurred prior to the transition date can remain as originally accounted for. So combinations effected using merger accounting, where this would now be prohibited, can remain unchanged. In addition, any intangibles that would be separately identified and recognised under FRS 102 can remain subsumed within the amount recognised as goodwill in connection with such combinations.

Financial instruments

Accounting for financial instruments is perhaps the most challenging aspect of FRS 102 for many entities, who have been able to leave many of the more complex arrangements off balance sheet under old GAAP. Even for common instruments such as bank loans and intercompany loans, the new standard may mean more complex accounting.

Section 11 of FRS 102 applies to basic financial instruments and is relevant to all entities. Section 12 applies to other, more complex financial instruments and transactions. Together they deal with recognising, derecognising, measuring and disclosing financial instruments.

[[[Even for common instruments such as bank loans and intercompany loans, the new standard may mean more complex accounting]]]

If an entity enters into only basic financial instrument transactions then Section 12 is not applicable. However, even entities with only basic financial instruments must consider the scope of Section 12 to ensure they are exempt.

To account for all of its financial instruments, an entity shall choose to apply either:

1. the provisions of both Section 11 and Section 12 in full; or
2. the recognition and measurement provisions of IAS 39 Financial Instruments: Recognition and Measurement (as adopted for use in the EU) and the disclosure requirements of Sections 11 and 12; or
3. the recognition and measurement provisions of IFRS 9 Financial Instruments and/ or IAS 39 (as amended following the publication of IFRS 9) and the disclosure requirements of Sections 11 and 12.        

Where an entity chooses (b) or (c) it applies the scope of the relevant standard to its financial instruments. Changing between (a), (b) and (c) is regarded as a change of accounting policy.        

What are financial instruments?

A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. An entity shall recognise a financial asset or a financial liability only when the entity becomes a party to the contractual provisions of the instrument.

Sections 11 and 12 cover a broad range of contracts and arrangements, but some are specifically excluded as they are dealt with elsewhere in the standard. These exclusions are:

• Investments in subsidiaries, associates and joint ventures (these are accounted for in accordance with Sections 9, 14 and 15 of FRS 102 respectively);
• Financial instruments that meet the definition of an entity’s own equity and the equity component of compound financial instruments issued by the reporting entity that contain both a liability and an equity component (Section 22 – Liabilities and Equity applies);        
• Leases (Section 20 applies);
• Employers’ rights and obligations under employee benefit plans (Section 28 Employee Benefits applies);
• Share-based payments (Section 26 applies);
• Insurance contracts and financial instruments issued by an entity with a discretionary participation feature (see FRS 103 Insurance Contracts).
• Reimbursement assets and financial guarantee contracts (Section 21 applies).

How are financial instruments classified between ‘basic’ and ‘other’?

Basic financial instruments typically include the following:

• cash;
• demand and fixed-term deposits when the entity is the depositor, e.g. bank accounts;
• commercial paper and commercial bills held;
• accounts, notes and loans receivable and payable;
• bonds and similar debt instruments;
• investments in non-convertible preference shares and non-puttable ordinary and preference shares; and
• commitments to receive a loan and commitments to make a loan to another entity, that cannot be settled net in cash.

Examples of financial instruments that do not normally satisfy the conditions in Section 11, and are therefore within the scope of Section 12, include:

• asset-backed securities, such as collateralised mortgage obligations, repurchase agreements and securitised packages of receivables;
• options, rights, warrants, futures contracts, forward contracts and interest rate swaps that can be settled in cash or by exchanging another financial instrument;
• financial instruments that qualify and are designated as hedging instruments in accordance with the requirements in Section 12; and
• commitments to make a loan to another entity and commitments to receive a loan, if the commitment can be settled net in cash.

How are ‘basic’ financial instruments accounted for?

Initial recognition and measurement

A basic financial asset or liability is measured initially at the transaction price (including transaction costs except where financial assets and liabilities are measured at fair value through profit or loss) unless the arrangement constitutes, in effect, a financing transaction. A financing transaction may take place in connection with the sale of goods or services, for example, if payment is deferred beyond normal business terms or is financed at a rate of interest that is not a market rate. If the arrangement constitutes a financing transaction, the entity shall measure the financial asset or financial liability at the present value of the future payments discounted at a market rate of interest for a similar debt instrument.

[[[If the arrangement constitutes a financing transaction, the entity shall measure the financial asset or financial liability at the present value of the future payments discounted at a market rate of interest]]]

Section 11 contains a number of examples of such initial measurement.

Subsequent measurement

At the end of each reporting period, an entity shall measure financial instruments as follows, (without any deduction for transaction costs the entity may incur on sale or other disposal):

1. Ordinary and preference shares are measured at fair value (wherever available), or at cost less impairment if no fair value can be found. NB unlisted shares can in many cases be valued at fair value through comparison with recent transactions for identical instruments, or by using a valuation methodology. Guidance on fair value measurement is provided in section 11.
2. Debt instruments are measured at amortised cost using the effective interest method.  However, debt instruments that are payable or receivable within one year shall be measured at the undiscounted amount of the cash or other consideration expected to be paid or received.
3. If the arrangement constitutes a financing transaction, the entity shall measure the debt instrument at the present value of the future payments discounted at a market rate of interest for a similar debt instrument. As an alternative, in some cases debt instruments can instead be valued at fair value through profit or loss.        
4. Commitments to receive a loan and to make a loan to another entity shall be measured at cost (which sometimes is nil) less impairment.

Note that if a reliable measure of fair value becomes unavailable for an asset measured at fair value, its carrying amount at the last date the asset was reliably measurable becomes its new cost (less impairment) until a reliable measure of fair value becomes available.

How are ‘other’ financial instruments accounted for?

Initial measurement

When a financial asset or financial liability is recognised initially, an entity shall measure it at its fair value, which is normally the transaction price (including transaction costs except in the initial measurement of financial assets and liabilities that are measured at fair value through profit or loss). If payment for an asset is deferred beyond normal business terms or is financed at a rate of interest that is not a market rate, the entity shall initially measure the asset at the present value of the future payments discounted at a market rate of interest for a similar debt instrument.        

Subsequent measurement

At the end of each reporting period, an entity shall measure all financial instruments within the scope of Section 12 at fair value and recognise changes in fair value in profit or loss, except as follows:

1. investments in equity instruments that are not publicly traded and whose fair value cannot otherwise be measured reliably and contracts linked to such instruments that, if exercised, will result in delivery of such instruments, shall be measured at cost less impairment; and
2. hedging instruments in a designated hedging relationship (see below).

Hedge accounting

The hedge accounting rules within section 12 allow entities to reduce volatility in profit or loss by accounting for a hedging instrument and a hedged item together. Section 12 outlines the permissible lists of hedging instruments and hedged items.

[[[The hedge accounting rules within section 12 allow entities to reduce volatility in profit or loss by accounting for a hedging instrument and a hedged item together]]]        

There are three types of hedging relationships:

1. fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or a component of any such item, that are attributable to a particular risk and could affect profit or loss;
2. cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of, a recognised asset or liability (such as all or some future interest payments on variable rate debt) or a highly probable forecast transaction, and could affect profit or loss; and
3. hedge of a net investment in a foreign operation.

Section 12 provides guidance on the accounting treatment for each of the three types, with examples.

Employee benefits

Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees, including directors and management. Section 28 applies to all employee benefits, except for share-based payment transactions, which are covered by Section 26 Share-based Payment.

Employee benefits covered by this section will be one of the following four types:        

1. Short-term employee benefits, which are employee benefits (other than termination benefits) that are expected to be settled wholly before twelve months after the end of the reporting period in which the employees render the related service;
2. Post-employment benefits, which are employee benefits (other than termination benefits and short-term employee benefits) that are payable after the completion of employment;
3. Other long-term employee benefits, which are all employee benefits, other than short-term employee benefits, post-employment benefits and termination benefits; or
4. Termination benefits, which are employee benefits provided in exchange for the termination of an employee’s employment as a result of either an entity’s decision to terminate an employee’s employment before the normal retirement date; or an employee’s decision to accept voluntary redundancy in exchange for those benefits.        

How are employee benefits recognised?

Entities must recognise the cost of all employee benefits to which employees have become entitled as a result of service rendered to the entity during the reporting period:        

1. As a liability, after deducting amounts that have been paid either directly to the employees or as a contribution to an employee benefit fund. If the amount paid exceeds the obligation arising from service before the reporting date, an entity shall recognise that excess as an asset to the extent that the prepayment will lead to a reduction in future payments or a cash refund; and
2. As an expense, unless another section of FRS 102 requires the cost to be recognised as part of the cost of an asset such as inventories or property, plant and equipment.        

How are short-term employee benefits measured?

Short-term employee benefits include items such as the following, if expected to be settled wholly before 12 months after the end of the annual reporting period in which the employees render the related service:

• wages, salaries and social security contributions;
• paid annual leave and paid sick leave;
• profit-sharing and bonuses; and
• non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees.

When an employee has rendered service to an entity during the reporting period, the entity shall measure the amounts recognised at the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.

An entity may compensate employees for absence for various reasons including annual leave and sick leave. Some short-term compensated absences accumulate. They can be carried forward and used in future periods if the employee does not use the current period’s entitlement in full. Examples include annual leave and sick leave. Entities must recognise the expected cost of accumulating compensated absences when the employees render service that increases their entitlement to future compensated absences.

[[[Entities must recognise the expected cost of accumulating compensated absences when the employees render service that increases their entitlement to future compensated absences.]]]

An entity shall recognise the cost of other (non-accumulating) compensated absences when the absences occur. The entity shall measure the cost of non-accumulating compensated absences at the undiscounted amount of salaries and wages paid or payable for the period of absence.

An entity shall recognise the expected cost of profit-sharing and bonus payments only when the entity has a present legal or constructive obligation to make such payments as a result of past events (this means that the entity has no realistic alternative but to make the payments); and a reliable estimate of the obligation can be made.

What about post-employment benefits such as pensions?

Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans, depending on their principal terms and conditions (in much the same way as under old GAAP).

Defined contribution accounting is straightforward and is unchanged from old GAAP.

There are more extensive changes to the way in which defined benefit plan assets and liabilities (and the movements in these) are measured and presented, although the principles are largely similar to those set out in FRS 17.

One area of change concerns multi-employer plans. FRS 102 maintains the position (from FRS 17) that where such plans are defined benefit plans but the entity does not have sufficient information to calculate its share of the plan assets and liabilities, it should account as if the plan were a defined contribution plan and make suitable disclosure of this situation. However if the entity has entered into an agreement with the multi-employer plan that determines how the entity will fund a deficit, the entity must now recognise a liability for the contributions payable that arise from the agreement (to the extent that they relate to the deficit) and the resulting expense in profit or loss (whereas previously the entity may have simply increased its annual expense for the additional annual contribution).

Group plans (where the entities are under common control) are now distinguished from other multi-employer plans and are treated differently. If there is a contractual agreement or stated policy for charging the net defined benefit cost of a defined benefit plan as a whole to individual group entities, the entity shall, in its individual financial statements, recognise the net defined benefit cost of a defined benefit plan so charged. If there is no such agreement or policy, the net defined benefit cost of a defined benefit plan shall be recognised in the individual financial statements of the group entity which is legally responsible for the plan. The other group entities instead recognise a cost equal to their contribution payable for the period.

[[[Group plans (where the entities are under common control) are now distinguished from other multi-employer plans and are treated differently.]]]

What about other long-term employee benefits?

Other long-term employee benefits include items such as the following, if not expected to be settled wholly before 12 months after the end of the annual reporting period in which the employees render the related service:

• long-term paid absences such as long-service or sabbatical leave;
• other long-service benefits;
• long-term disability benefits;
• profit-sharing and bonuses; and
• deferred remuneration.

An entity shall recognise a liability for other long-term employee benefits measured at the present value of the benefit obligation at the reporting date; minus the fair value at the reporting date of plan assets (if any) out of which the obligations are to be settled directly.        

An entity shall recognise the change in the liability in profit or loss, except to the extent that FRS 102 requires or permits their inclusion in the cost of an asset.

What about termination benefits?

An entity may be committed, by legislation, by contractual or other agreements with employees or their representatives or by a constructive obligation based on business practice, custom or a desire to act equitably, to make payments (or provide other benefits) to employees when it terminates their employment. Such payments are termination benefits.

Because termination benefits do not provide an entity with future economic benefits, an entity shall recognise them as an expense in profit or loss immediately. When an entity recognises termination benefits, the entity may also have to account for a curtailment of retirement benefits or other employee benefits.

[[[Because termination benefits do not provide an entity with future economic benefits, an entity shall recognise them as an expense in profit or loss immediately.]]]

An entity shall recognise termination benefits as a liability and an expense only when the entity is demonstrably committed either to terminate the employment of an employee or group of employees before the normal retirement date; or to provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

An entity shall measure termination benefits at the best estimate of the expenditure that would be required to settle the obligation at the reporting date.

Investment properties

Section 16 of FRS 102 sets out the accounting treatment for investments in land or buildings provided that they meet the definition of investment property. The treatment extends to property interests held by a lessee under an operating lease that are treated like investment property.

What is an investment property?

Investment property is property (land or a building, or part of a building, or both) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both.

The following are not to be regarded as investment properties:

• Those held for use in the production or supply of goods or services or for administrative purposes;
• Those that are for sale in the ordinary course of business;
• Mixed use property where the fair value of the investment property element cannot be determined reliably;
• Those held primarily for the provision of social benefits.

The definition of an investment property in FRS 102 is wider than that currently used in SSAP 19 as it does not exclude from the definition properties which are owner occupied or let to another group company. Note that International Accounting Standards explicitly exclude from the definition properties let out to another entity under a finance lease.

[[[The definition of an investment property in FRS 102 is wider than that currently used in SSAP 19 as it does not exclude from the definition properties which are owner occupied or let to another group company]]]

Where an entity has mixed use properties, these should be separated between investment property and property, plant and equipment. If the investment component of the mixed used property cannot be measured reliably without undue cost or effort, then the whole property should be accounted for as property, plant and equipment.

Where an entity has properties which are held primarily for the provision of social benefits, such as social housing these should be property, plant and equipment. There is no separate reference to such properties under current UK GAAP and under International Accounting Standards.

Where an entity has a property interest that is held by a lessee under an operating lease it may be classified and accounted for as investment property if the property would otherwise meet the definition of an investment property and the lessee can measure the fair value of the property interest without undue cost or effort on an on-going basis. This classification alternative is available on a property-by-property basis.

How is investment property initially measured?

Investment property should initially be measured at cost. The cost of a purchased investment property consists of:

• its purchase price;
• any directly attributable expenditure such as legal fees;
• property transfer taxes; and
• other transaction costs.

Where payment is deferred beyond normal credit terms, the cost should be the present value of all future payments.

Where an entity constructs an investment property itself it should determine the cost by following the relevant paragraphs in Section 17 – Property, Plant and Equipment.

The initial cost of an interest in property which is held under a lease and classified as an investment property should be determined by following the relevant paragraphs in Section 20 – Leases. This applies even if the lease would otherwise be classified as an operating lease if it was within the scope of Section 20.

How is an investment property subsequently measured?

Where the fair value of investment properties can be “measured reliably without undue cost or effort” on an on-going basis then the property should be held at fair value as set out in Section 16. The movement on fair value is accounted through profit or loss. No depreciation is charged.

Where there is undue cost or effort and the fair value cannot be measured reliably, investment property should be accounted for using the cost model in Section 17 – Property, Plant and Equipment. Any such investment properties should remain within the scope of Section 17 unless a reliable measure of fair value becomes available and that it is envisaged that a fair value will be measurable on an on-going basis.

[[[Where there is undue cost or effort and the fair value cannot be measured reliably, investment property should be accounted for using the cost model]]]

If a leasehold interest in property is classified as investment property, it is the interest which should be accounted for at fair value and not the underlying property. Guidance on obtaining a fair value in this case is set out in Section 11 – Basic Financial Instruments.

How is this different to ‘old GAAP’?

Currently under SSAP 19 changes investment properties are re-valued each year at their open market value. It would appear that the use of fair value under FRS 102 provides the possibility of using the existing use value rather than market value.

Also under SSAP 19, any changes in open market value are recognised in the Statement of Recognised Gains and Losses (STRGL), unless a reduction in value, or its reversal, is expected to be permanent which leads to the movement being charged or credited to the profit and loss account.

There is no ‘undue cost or effort’ opt-out under SSAP 19. Therefore investment properties should always be subsequently measured at open market value. No depreciation is charged under SSAP 19 unless the property is held under a finance lease where it must be depreciated once the remaining lease term is below 20 years.

What if fair value becomes difficult to obtain?

For investment properties which have previously been measured at fair value, it is possible that an entity is subsequently unable to determine a reliable measure of fair value without undue cost or effort. Where this is the case, an investment property is reclassified as property, plant and equipment (PPE) in accordance with Section 17. This will continue to apply in subsequent years until a reliable measure of fair value does become available.

Where investment properties are accounted for under Section 17, the carrying amount of the investment property on the date when the fair value is not available becomes its cost for the purposes of Section 17.

Disclosure of this change is required. However it should be noted that this is a change of circumstances and not a change in accounting policy.

Reclassification is also required where the use of the property changes such that it no longer meets the definition of an investment property.

What about deferred tax?

Deferred tax is chargeable on timing differences that arise from fair value gains on investment properties. Deferred tax is measured using the tax rates and allowances that apply to sale of the asset, except for investment property that has a limited useful life and is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the property over time.

[[[Deferred tax is chargeable on timing differences that arise from fair value gains on investment properties.]]]

Are there any exemptions on transition?

There are no exemptions in general for investment properties on transition. So the changes in FRS 102 will apply to most investment properties. Those which are treated in a similar way to PPE (see the previous question above) can benefit from a ‘deemed cost’ exemption which we’ll cover more fully in the section on PPE.

Who does new UK GAAP apply to?

FRS 100 sets out the financial reporting requirements under new UK GAAP (FRSs 100, 101 and 102) for UK and ROI entities.

Is anyone excluded from using new UK GAAP?

Yes. The consolidated accounts of groups that are listed on a regulated market must apply EU-adopted IFRS (EU-IFRS). This is currently the case, so there is no change for such entities.

[[[The consolidated accounts of groups that are listed on a regulated market must apply EU-adopted IFRS (EU-IFRS).]]]

EU-IFRS remains an option for everyone else, with few exceptions. Subsidiaries who adopt EU-IFRS accounting treatment can reduce their disclosure by adopting FRS 101 (see below).

Small and micro-entities

For companies which qualify as small under company law (and equivalent non-corporate entities) a revised Financial Reporting Standard for Smaller Entities (FRSSE 2015) is currently available and it was originally expected that this will be the standard of choice. However the FRSSE will be replaced by FRS 102 for periods starting on or after 1 January 2016, albeit with reduced disclosures. A new Accounting Directive will require small company disclosures to be further simplified, and this will be implemented in the UK for the same effective date.

[[[FRS 105 will not require any further disclosures above the minimal requirements of the micro-entity regulations.]]]

Micro-entities will have their own separate accounting standard, FRS 105. As micro-entities are prohibited under law from adopting fair value or revaluation accounting, FRS 105 will not contain these treatments. In other respects FRS 105 resembles FRS 102 but with additional simplifications in areas such as deferred tax and pensions. FRS 105 will not require any further disclosures above the minimal requirements of the micro-entity regulations.

Other entities

We expect most non-small entities to apply FRS 102, though EU-IFRS (and possibly FRS 101) remain an option.

Reduced disclosure for members of groups using EU-IFRS

FRS 101 is available to reduce disclosure in individual financial statements of qualifying entities that otherwise apply the recognition, measurement and disclosure requirements of EU-IFRSs.

Qualifying entities are those entities that are members of a group that prepares consolidated financial statements:

• that are publicly available;
• that are intended to give a true and fair view; and
• in which that member is consolidated.

A charity cannot be a qualifying entity for the purposes of FRS 101.

The disclosure exemptions are available irrespective of whether those publicly available consolidated financial statements are prepared under EU-adopted IFRSs, UK GAAP or any other GAAP, provided that they are intended to give a true and fair view. These exemptions may apply not only in subsidiary financial statements but also in the individual financial statements of parent companies.

When does new UK GAAP start?

FRSs 100-103 will apply to accounting periods beginning on or after 1 January 2015, although the standards can be early adopted.

Mandatory adoption – non-small entities

We anticipate that very few entities will choose to early adopt (see section below), therefore 2016 will be when most accounts preparers and auditors will begin to deal with accounts prepared under the new standard.

[[[There is no need to adopt aspects of FRS 102 or to make pre-emptive disclosures ahead of time.]]]

There is no need to adopt aspects of FRS 102 or to make pre-emptive disclosures ahead of time. However the actual date of transition will be two years earlier than the first FRS 102 balance sheet (for a December year-end, this date was 1 January 2014). On adoption of the standard (e.g. for a December 2015 year-end), preparers will need to:

• Restate the comparative (2014) balance sheet in full to comply with the new standard; and
• Recalculate the opening comparative (2013) balance sheet in order to provide transitional adjustments to opening reserves.

The effect will be to present the 2015 accounts as if FRS 102 had always been in use. However, section 35 of FRS 102 lists five accounting issues (including accounting estimates) which must not be restated and also presents a number of transitional options. The ‘In depth’ section explores these in more detail.

Mandatory adoption – small and micro-entities

Small entities will, for the most part, adopt FRSSE 2015 for periods commencing on or after 1 January 2015 – however this regime will only last for a single year. For periods commencing on or after 1 January 2016, small entities will use FRS 102 albeit with simplified presentation and disclosure (as set out in section 1A of the standard).

Companies qualifying as micro-entities will be able to apply FRS 105 in place of FRS 102 should they wish to opt into this regime. Note that currently, the micro-entity regime is only available for companies (not for charities, LLPs and unincorporated entities).

Early adoption

[[[FRS 102 can be adopted for periods ending on or after 31 December 2012]]]

FRS 102 can be adopted for periods ending on or after 31 December 2012 (which would mean a transition date of 1 January 2011!). Small entities can early adopt FRS 102 with the small company simplified presentation and disclosure, set out in section 1A of the standard, for periods commencing on or after 1 January 2015 (in conjunction with early adoption of the associated changes to company law, which will otherwise apply for periods commencing on or after 1 January 2016).

Most entities are unlikely to consider early adoption, but this option will be more feasible for:

• New entities (who will gain little by adopting ‘old’ UK GAAP);
• Entities who can reduce tax (or improve tax cash flow) by early adoption;
• Entities that benefit from some of the changes to accounting treatment (which are explored in the ‘main issues’ section).

Note that entities which are required to comply with a Statement of Recommended Practice (SORP) could not early-adopt FRS 102 if this would have entailed conflicts between the requirements of the FRS and the SORP. However, the relevant SORPs have now been issued and are compatible with new UK GAAP.

What is new UK GAAP?

‘New UK GAAP’ is the term for the new suite of accounting standards (FRSs 100-103) that will shortly replace all existing UK accounting standards. It’s the biggest change in such standards in a generation, and will have far-reaching impacts for preparers and auditors of UK financial statements.

The historical context

Existing UK accounting standards (SSAPs, FRSs and UITF Abstracts) have developed over several decades. However around a decade ago, the UK planned to adopt international accounting standards (IASs and IFRSs) instead. For several years, new UK standards were based heavily on IFRSs (in some cases being identical).

The difficulty with this approach was the size and complexity of the IFRSs, which were aimed at listed companies and similar public interest entities. Since 2005, UK listed groups have been forced to use IFRSs in the group accounts, but a growing consensus suggested that these standards would be unsuitable for the vast majority of UK businesses which are owner-managed and relatively small. As an alternative, the UK regulator decided to consider adopting a new international standard drafted for such businesses, the IFRS for SMEs, with some amendments to ensure it was suitable for the UK and compliant with EU law.

[[[FRS 102 will replace all existing UK GAAP for the majority of UK businesses including small entities]]]

The result of these amendments is FRS 102, the central standard in new UK GAAP. FRS 102 will replace all existing UK GAAP for the majority of UK businesses including small entities.

The new standards

FRS 100

Sets the framework for new UK GAAP (in essence, who does what and when).

FRS 101

Provides reduced disclosure for entities using IFRSs (as adopted in the EU) and who are members of groups, on the basis that the group accounts will include equivalent group-wide disclosures.

FRS 102

The financial reporting standard for the UK and Ireland, FRS 102 is a single standard that will apply to entities who don’t need (or choose) to use IFRSs. The standard contains a section (1A) dealing with simplifications in presentation and disclosure for small entities.

FRS 103

This FRS deals specifically with insurance contracts and is thus broadly relevant to insurers only. Such entities will also follow FRS 102 for all other areas of UK GAAP (or can choose to adopt IFRSs instead of FRSs 102/103).

FRS 104

This FRS applies specifically to interim financial statements and as such will not be directly relevant to most UK entities.

FRS 105

This standard (currently in draft) provides the accounting framework for micro-entities. FRS 105 is based on FRS 102 but with substantial simplifications, resulting in a document less than half the length of the main standard.