FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland becomes mandatory for small companies from December 2016 year-ends onwards.
This means that 2017 will see lots of transitions taking place where a small company has not chosen to early-adopt FRS 102.
The transition process has to be applied as far back as the date of transition, which is the start date of the comparative year; hence for a 31 December 2016 year-end, the date of transition is 1 January 2015. The opening balance sheet position as at 1 January 2015 has to be restated, where necessary, to be compliant with FRS 102 as well as the end of the comparative year. This is so that the financial statements are both consistent and comparable.
Exemptions available for small companies
Small companies (as defined in the Companies Act 2006) have 21 optional exemptions available to them in Section 35 Transition to this FRS of FRS 102. Three of these exemptions are specific to small companies only, being in respect of:
- share-based payment transactions (paragraph 35.10(b));
- fair value measurement of financial instruments (paragraph 35.10(u)); and
- financing transactions involving related parties (paragraph 35.10(v)).
The aim of the optional exemptions is to save time during the transition and a first-time adopter of FRS 102 can use all, some or none of the optional exemptions available. In reality, a first-time adopter is highly unlikely to be able to use all of the optional exemptions.
The most common type of optional exemption which seems to be popular is the use of a previous revaluation as deemed cost, contained in paragraph 35.10(d) of the standard. This allows a first-time adopter to use a previous GAAP revaluation for a fixed asset as deemed cost at the revaluation date.It is important to emphasise that the revaluation used must be at, or before, the date of transition to FRS 102 (it cannot be after the date of transition). In addition, paragraph 35.10(c) also allows a fair value to be used as deemed cost.
Another common type of exemption which is proving popular relates to lease incentives. Where a company has entered into a lease prior to the date of transition and there is still some of the lease incentive to amortise, the entity can either continue writing the lease incentive off to profit or loss in accordance with outgoing UK GAAP (i.e. up to the point at which lease rentals revert to market rate). Alternatively, the entity can restate the value of the lease incentive to what it would have been under FRS 102. Under FRS 102, lease incentives are not written off up to the point at which lease rentals revert to market rate; instead they are written off over the life of the lease. Therefore, under FRS 102, as the lease incentive is written off over a longer period, the operating lease charge in profit and loss would be higher than what would have been the case under UITF 28 Operating lease incentives. HM Revenue and Customs (HMRC) have recognised that this creates a difference for income recognition purposes in their Overview Paper and hence there may be a slight tax advantage for lessees in this respect if they restate the operating lease charge.
Small companies are encouraged to make disclosure of the impact that the transition has had on the entity’s equity and prior year profit and loss. These disclosures are made in accordance with paragraphs 35.12 to 35.15 of FRS 102.
The disclosures themselves are not legally required, but a small company would be strongly advised to make the disclosures if there have been material transitional and prior year adjustments on first-time adoption of FRS 102. Preparers of small company accounts must keep in mind that directors still have a legal duty to prepare financial statements which give a true and fair view and the mere application of the legally required minimum disclosures may be insufficient in achieving a true and fair view. To that end, preparers should have regard to Appendix D Additional disclosures encouraged for small entities in Section 1A of the standard. In addition, paragraph 1A.17 should also be kept in mind which requires entities to consider and provide any of the disclosures set out in Sections 8 and 35 of FRS 102 which are relevant to material transactions, other events or conditions in order to meet the requirements of paragraphs 1A.5 and 1A.16. Paragraphs 1A.5 and 1A.16 require the financial statements of a small entity to give a true and fair view.
The transition to FRS 102 will undoubtedly cause additional work during the financial statement preparation process when the standard is being used for the first time. Preparers should therefore have regard to the mandatory exceptions contained in paragraph 35.9 which outlines the transactions that must not be retrospectively restated. In addition, a sound understanding of the optional exemptions in paragraph 35.10 should also be gained as these can also save time during the transition process.
AAT members can read further on FRS102 with AAT’s CPD resources.
Steve Collings is the audit and technical partner at Leavitt Walmsley Associates Ltd.