Interpretation and Application of UK GAAP E-Book

Steven Collings

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Regulatory Reporting
• Sprache: Englisch

Seitenzahl: 1103

Veröffentlichungsjahr: 2015

Beschreibung

Get up to date on the latest UK GAAP, with practical application guidance

Interpretation and Application of UK GAAP is a comprehensive, practical guide to applying UK GAAP at all levels, for accounting periods commencing on or after January 1, 2015. This book examines all of the core principles for every business, from subsidiaries of major listed companies right down to the very small, owner-managed business. Each chapter includes a list of relevant disclosure requirements to facilitate understanding, and real-world examples bring theory to life to provide guidance toward everyday application. Readers gain practical insight into the preparation of accounts under the EU-adopted IFRS, FRSs 100, 101, and 102, the FRSSE, and the Companies Act 2006, with expert guidance as to which requirements apply in which situations, and to which companies, and the type of disclosure each scenario requires. The book also includes detailed analysis of the planned changes to the Small Companies' Regime which are scheduled to take effect in 2016.

With sweeping changes coming into effect from January 1^st 2015, financial statement preparers must have a sound appreciation of how the new UK GAAP works. This book provides a complete guide, with the latest regulations and straightforward advice on usage.

• Understand UK GAAP application at all levels
• Learn how to handle all relevant key accounting treatments
• Refer to complete disclosure requirement lists for each topic
• Get up to date on the latest area-specific practices

With new accounting practices in many broad areas including investment property, inventory valuations, deferred tax, fixed assets, and more, auditors and accountants need an awareness of how the new financial reporting regime will affect them. Interpretation and Application of UK GAAP is the most comprehensive reference, with the latest information and practical guidance.

Leseprobe

Table of Contents

Title Page

Copyright

About the Author

Foreword

Preface

Acknowledgements

Introduction

History of the UK and Republic of Ireland Standard-Setting Body

Issuance of the New UK GAAP

Structure of the New UK GAAP

Smaller Companies and the Financial Reporting Standard for Smaller Entities

Chapter 1: General Requirements of the Companies Act 2006

Introduction

Accounting Requirements under the Companies Act 2006

True and Fair and Adequate Accounting Records

International Financial Reporting Standards

Generally Accepted Accounting Practice

Substance of Transactions

Directors' Reports

Group Accounts

Approval of Financial Statements

Interaction of FRS 102 Terminology with Companies Act 2006 Terminology

Micro-Entities Legislation

Chapter 2: The Statutory Audit Requirement and Accounting Principles

Introduction

The Statutory Audit Requirement

The Reform of Audit in 2012 and the Implications

The Concepts and Pervasive Principles

Qualitative characteristics

The Financial Statement Elements and the Recognition and Measurement of those Elements

Chapter 3: The Primary Financial Statements and Disclosure Notes

Introduction

Presentation of Financial Statements Fair presentation

Compliance with FRS 102

Frequency and consistency

Complete set

Statement of Financial Position

Statement of Comprehensive Income and the Income Statement

Statement of Changes in Equity and Statement of Income and Retained Earnings

Statement of Cash Flows

Notes to the Financial Statements

Going Concern

Chapter 4: Financial Reporting for Smaller Companies

Introduction

Financial Reporting Standard for Smaller Entities versus FRS 102

Consequential Amendments to the FRSSE (effective April 2008) Due to FRS 102

Micro-Entities

Changes to the Small Companies Regime

Chapter 5: Summary of the Key Differences between FRS 102 and ‘Old’ UK GAAP

Introduction

Accounting Policies and Errors

Statement of Cash Flows (Cash Flow Statement)

Consolidated Financial Statements

Deferred Taxation

Defined Benefit Pension Plans

Employee Benefits

Fair Value Accounting

Fixed Assets

Goodwill and Intangible Assets

Investment Properties

Leases

Revenue Recognition

Inventory (Stock) Valuations

Differences between FRS 102 and

IFRS for SMEs

Chapter 6: Consolidated and Separate Financial Statements

Introduction

Identifying a Group

Small Groups

Exemptions from Preparing Group Accounts

Exclusions from Consolidation

Principles of Consolidation

The Purchase Method

Goodwill in a Business Combination

Step Acquisitions

Disposal of a Subsidiary

Deemed Disposals

Merger Accounting

Separate Financial Statements

Disclosure Requirements

Chapter 7: Accounting Policies, Estimates and Errors

Introduction

Adopting Accounting Policies

Changing Accounting Policies

Development of an Accounting Policy in the Absence of Specific Direction in FRS 102

Accounting Estimates

Changes in Accounting Estimates

Correction of Errors

Disclosure Requirements

Chapter 8: Revenue Recognition

Introduction

Deferred Payment

Specific Considerations

Exchanges and Sales of Goods

Rendering of Services

Interest, Royalties and Dividends

HM Revenue and Customs Requirements

Disclosure Requirements

Chapter 9: Assets Held for Sale and Discontinued Operations

Introduction

Major Disposals of Assets

Asset Impairment

Discontinued Operations

Restatement of Comparatives

Chapter 10: Employee Benefits

Introduction

Recognition of Short-Term Employee Benefits

Defined Contribution Pension Plans

Defined Benefit Pension Plans

Deferred Tax Issues on Pensions

Disclosure Requirements

Chapter 11: Income Tax

Introduction

Value Added Tax (VAT)

Income Tax

Deferred Taxation

Measurement of deferred tax

Discounting deferred tax balances

Disclosure Requirements

Chapter 12: Intangible Assets

Introduction

Categories of Intangible Assets

Recognition and Measurement

Research and Development

Amortisation

Derecognition

Disclosure Requirements

Chapter 13: Property, Plant and Equipment and Investment Properties

Introduction

Recognition of an Item of Property, Plant and Equipment

Subsequent Measurement of Property, Plant and Equipment

Revaluation of Property, Plant and Equipment

Depreciation of Property, Plant and Equipment

Asset Construction

Subsequent Expenditure on Property, Plant and Equipment

Qualifying Criteria for Investment Property

Accounting Treatment for Investment Property

Investment Property Subject to Leasing Arrangements

Deferred Tax Issues Relating to Investment Property

Reclassification of Investment Property to Property, Plant and Equipment

Transitional Issues

Disclosure Issues

Chapter 14: Borrowing Costs

Introduction

Definition and Recognition of Borrowing Costs

Capitalisation Rate

Suspension of Asset Construction

Transitional Issues

Disclosure Issues

Chapter 15: Impairment of Assets

Introduction

Indicators that an Asset is Impaired

Internal sources

Impairment of Inventories

Impairment of Other Assets

Impairment of Cash-Generating Units

Goodwill Impairment

Reversal of Impairments

Disclosures

Chapter 16: Government Grants

Introduction

The Performance Model

The Accrual Model

Small Companies

Interaction with the Companies Act 2006

Disclosure Requirements

Chapter 17: Financial Instruments

Introduction

Basic Financial Instruments

Derecognition of basic financial instruments

Other Financial Instrument Issues

Hedge accounting

Disclosure Requirements: Financial Instruments

Disclosure Requirements: Hedge Accounting

Chapter 18: Inventories and Work-in-Progress

Introduction

Measurement of Inventories

Cost of Inventories and Work-in-Progress

Cost Methodologies

Consignment Inventories

Disclosure Requirements

Chapter 19: Share-based Payment

Introduction

Recognition of a Share-based Payment Transaction

Amendments to a Share-based Payment Arrangement

Cancelling a Share-based Payment Arrangement

Group Plans

Disclosure Requirements

Chapter 20: Leases

Introduction

Finance Leases

Operating Leases

Manufacturer/Dealer Lessors

Sale and Leaseback Transactions

Potential Changes to Lease Accounting

Small Companies

Chapter 21: Provisions and Contingencies

Introduction

Meaning of a Provision

Recognition and Measurement of a Provision

Onerous Contracts

Meaning of a Contingent Liability and a Contingent Asset

Events after the Reporting Period Relating to Contingencies

Disclosure Issues

Chapter 22: Statement of Cash Flows

Introduction

Objective of the Statement of Cash Flows

Format of the Statement of Cash Flows

Dividends and Interest

Material Non-Cash Transactions

Small Companies

Consolidated Financial Statements

Disclosure Issues

Chapter 23: Investments in Associates and Joint Ventures

Introduction

Identifying an Investment in an Associate

Significant Influence

Initial Measurement and Equity Accounting

Joint Ventures: Definitions and Classifications

Joint Ventures: Other Issues

Disclosure Requirements

Chapter 24: Related Parties

Introduction

Issues Relating to Directors

Definition and Identification of a Related Party

Transactions with Related Parties

Exemption from Disclosure of Related Party Transactions

Controlling Parties

Companies Act 2006

Directors' Remuneration and Other Benefits

Directors' Advances, Credits and Guarantees

Chapter 25: Specialised Activities

Introduction

Agriculture

Extractive Industries

Service Concession Arrangements

Financial Institutions

Retirement Benefit Plans: Financial Statements

Heritage Assets

Funding Commitments

Incoming Resources from Non-Exchange Transactions

Public Benefit Entity Issues

Chapter 26: Liabilities and Equity

Introduction

Interaction of Financial Liabilities and Equity

Ordinary Share Capital

Preference Share Capital

Revaluation Reserve

Dividends

Convertible Debt

Share Splits

Bonus Share Issues

Rights Issues

Share Premium Account

Share Buybacks

Treasury Shares

Distributable Profit

Distributions

Chapter 27: Events after the Reporting Period

Introduction

Adjusting Events

Non-Adjusting Events

Payment of Dividends

Going Concern

Authorising the Financial Statements for Issue

Disclosure Requirements

Chapter 28: Foreign Currency Translation

Introduction

Functional Currency

Presentation Currency

Monetary and Non-Monetary Items

Net Investment in a Foreign Operation

Disclosure Requirements

Chapter 29: Small Company Abbreviated Financial Statements

Introduction

Content of Abbreviated Financial Statements

The Strategic Report

Micro-Entity Issues

Appendix – Small company abbreviated financial statements

Chapter 30: Reduced Disclosure Framework

Introduction

Reduced Disclosures for Subsidiaries and Ultimate Parents

Statement of Compliance

Options Available for UK Subsidiaries

Chapter 31: First-Time Adoption of FRS 102

Introduction

Identifying the Date of Transition

Accounting Policy Alignments

Statement of Compliance

Disclosure Requirements

Index

End User License Agreement

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Guide

Cover

Table of Contents

Foreword

Preface

Introduction

Begin Reading

Interpretation and Application of UK GAAP for Accounting Periods Commencing on or After 1 January 2015

Steven Collings

This edition first published 2015

© 2015 Steven Collings

Registered office

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About the Author

Steve Collings FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd, a firm of Chartered Certified Accountants based in Sale, Cheshire, in the United Kingdom, where Steve trained and qualified. Steve was admitted as a member of the Association of Accounting Technicians (AAT) in 2001 and went on to qualify as a Chartered Certified Accountant (ACCA) in 2005. He was admitted as a Fellow Member of the AAT in 2006 and became a Fellow Member of ACCA in 2010. Steve also holds ACCA's Diploma in International Financial Reporting Standards, Diploma in International Financial Reporting Standards for Small–Medium Entities as well as ACCA's Certificates in IFRS and International Auditing Standards and holds Senior Statutory Auditor status in the UK.

Steve is the author of several books on the subjects of accounting and auditing, including Interpretation and Application of International Standards on Auditing (Wiley, March 2011), IFRS For Dummies (Wiley, March 2012), Frequently Asked Questions in IFRS (Wiley, April 2013), Financial Accounting for Dummies (Wiley, April 2013) and Corporate Finance for Dummies (Wiley, October 2013). He has had many articles published in the professional accounting media, most notably AccountingWEB.co.uk and much of Steve's work can be seen on his website at www.stevecollings.co.uk.

Steve lectures professionally qualified accountants on the areas of accounting, auditing and Solicitors Accounts Rules and was named Accounting Technician of the Year at the British Accountancy Awards in 2011. He was also awarded Outstanding Contribution to the Accountancy Profession by the Association of International Accountants in 2013. In 2014 he was shortlisted for Practitioner of the Year at the 2014 British Accountancy Awards.

Foreword

When thinking about new UK GAAP the Chinese curse comes to mind, ‘May you live in interesting times’, because applying new UK GAAP will be interesting times. Many people will underestimate the size of the learning curve ahead of them. Yes, the standards are much shorter, easier to read and there are many exemptions but that does not mean that there are not many differences from the previous UK standards.

In my professional career there have been lots of changes to the UK accounting standards; indeed I trained under SSAP 2! The difference this time is that everything is changing at the same time. This is a ‘big bang’ move to a new you approach. There are lots of exciting headline changes in areas such as financial instruments and investment properties but perhaps more importantly there is plenty of ‘devil in the detail’.

Ultimately, this is not a change to old UK GAAP, it is a move to something completely different, based upon standards written by a standard setting committee based outside of the UK. The new standards are not a ‘copy and paste’ job from what went before, so concentrating on what has changed can be futile. Instead, focus on the new standards in their entirety.

I say all of this not to spread doom and gloom but to calibrate your expectations of the journey ahead.

However, having said that, I have assumed that you are only familiar with old UK GAAP. If you are a child of IFRS then your learning curve will be much shorter and less steep. After all, new UK GAAP is based upon IFRS. Luckily for you, your author is an IFRS man. Because new UK GAAP is so brief, knowledge of full IFRS is very useful indeed to interpret standards like FRS 102. Sometimes the standard in new UK GAAP only gives you half the story and in this book Steve uses his understanding of IFRS to fill in the GAAPs (excuse the accounting pun).

I always tell accountants to ‘read the standards’ and this remains true for new UK GAAP. However, the aforementioned brevity of the standards means that this will sometimes raise as many questions as it answers. That is why books like this will be more essential than ever under new UK GAAP. Sometimes people use textbooks as a short cut to find out what the standard says. This book does more than that. It does what the standard sometimes does not do; it helps you understand what the standard means and how it applies in practice.

I have admired the clarity of Steve's writing for some time, particularly on the subject of IFRS, where many writers assume that the only business that exists is big business. More recently I have had the pleasure of working with Steve on joint projects writing on new UK GAAP and I was honoured to be asked to write this foreword. I like the way that Steve starts with the basics and uses clear examples to build on this and illustrate how new UK GAAP works.

I hope that you find Steve's wisdom useful on your journey up the new UK GAAP learning curve. I have been speaking about and writing about new UK GAAP for what seems like a long time now and as I write this I think I am starting to get towards the top of that learning curve, but I am not there yet. So as a fellow traveller on the journey to understanding new UK GAAP, I wish you the best of luck and I finish as I started with a Chinese proverb, albeit this time a more positive one. ‘Be not afraid of going slowly, be only afraid of standing still.’

John Selwood ACALecturer and writer

Preface

This is the first edition of Interpretation and Application of UK GAAP for Accounting Periods Commencing on or After 1 January 2015. The focus of this book is to provide preparers of financial statements in the UK and Republic of Ireland with concise and transparent information that will allow a clear understanding of how the UK GAAP works.

The publication of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland was the biggest change that the UK GAAP has seen in its history. Previous UK GAAP had become overly complex and voluminous and the issuance of FRS 102 marked the end of a long process of consultation by the Financial Reporting Council (FRC). FRS 102 replaces all Financial Reporting Standards (FRSs), Statements of Standard Accounting Practice (SSAPs) and Urgent Issues Task Force Abstracts (UITFs) for accounting periods commencing on or after 1 January 2015 (although earlier adoption is permissible).

The FRC are to be commended on their efforts in scaling down the UK GAAP from some 3,000+ pages down to approximately 360. FRS 102 brings with it a much more user-friendly set of standards, organised by Section numbers as opposed to FRS/SSAP/UITF numbers, as was previously the case in the UK GAAP. Certain accounting treatments have been modernised, reflecting the ways in which businesses operate in today's climate as well as serving to reduce diversity in the ways in which preparers will account for, and disclose, certain items within the financial statements.

At the time of writing the small companies regime had been exposed for consultation by both the Department for Business Innovation and Skills and the FRC following the introduction of the EU Accounting Directive (Chapter 4 looks in more detail about this issue). Relevant chapters in this publication have incorporated the consultations but no decision had been made as to how the small companies regime will take effect in the UK at the time this book went to print and hence readers are encouraged to keep up to date with developments in this area by regularly reviewing the Department for Business Innovation and Skills website and the FRC website.

Most chapters in this book contain real-life practical examples in order to aid understanding.

My wish is that readers find this book informative and helpful in their day-to-day dealing with the new UK GAAP. As a practitioner myself, I recognise the needs of accountants and appreciate the complexities that we face within the profession. Financial reporting has evolved considerably over recent years and more emphasis is placed on producing high-quality financial information that meets users' needs. I hope that this book serves to meet those needs and feedback is welcome via the publishers that can be incorporated in any future editions.

Steve Collings, FMAAT FCCASeptember 2014

Acknowledgements

Writing a book is a huge project and one in which an author needs to have a strong and supportive team behind them. I would like to offer my sincere thanks to Gemma Valler, the commissioning editor for this title, for the support offered during the writing process and also extending the deadline so I could take account of sweeping changes currently taking place with the small companies regime.

I would also like to thank my technical editor Caroline Fox, BA FCA, who has, once again, done a remarkable job on ensuring the technical accuracy of this publication.

Finally, I would like to thank you the reader, who has picked up this book, and I hope that it offers a helpful insight into the world of the UK GAAP and aids in the application of the new reporting regime.

Introduction

History of the UK and Republic of Ireland Standard-Setting Body

Issuance of the New UK GAAP

Structure of the New UK GAAP

Smaller Companies and the Financial Reporting Standard for Smaller Entities

Interpretation and Application of UK GAAP for Accounting Periods Commencing on or After 1 January 2015 is aimed at providing preparers of financial statements with comprehensive guidance and information that will allow financial statements prepared under the new UK GAAP to conform to the new regime. This publication brings to life much of the theory contained in UK GAAP and offers a practical approach to understanding the requirements of UK GAAP from a real-life perspective.

Standard-setting around the world has evolved considerably over recent years and International Financial Reporting Standards (IFRS) have gathered faster pace, with many countries adopting an international-based framework. At the time of writing the introduction of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland was part of a significant overhaul of UK GAAP. At the time of going to print, the UK and Republic of Ireland were about to have a four-tiered structure to financial reporting, which is shown in the following table:

Class of entity

EU-endorsed IFRS

Mainstream UK GAAP (FRS 102)

Small companies regime (the FRSSE)

*

Micro-entities regime (the FRSME)

Listed andAIM listed

Medium and unlisted

Small

* At the time of writing the FRSSE was being tentatively withdrawn by the Financial Reporting Council (FRC) for accounting periods commencing on or after 1 January 2016 and companies reporting under the small companies regime are to be brought under the scope of FRS 102 (as amended for smaller companies). Consultations issued by the Department for Business Innovation and Skills and the FRC on 29 August 2014 outline the proposed new structure. The way forward for the small companies regime was to be outlined in Exposure Drafts to be issued towards the end of 2014/early 2015, with final standards expected in the summer of 2015. For ‘micro-entities’, which are dealt with in Chapter 4, such entities can apply the micro-entities legislation if they so wish.

The main objective of standard-setters around the globe is to enhance transparency. Adopting an international-based financial reporting framework has the intended objective of producing financial statements that are based on high-quality financial reporting standards, which, in turn, strengthens understandability and transparency across all entities. Accounting has evolved considerably over the years, with the concept of fair value accounting moving higher up the ranks and as such there was a need to introduce a new UK GAAP.

History of the UK and Republic of Ireland Standard-Setting Body

The Financial Reporting Council (FRC) was established by the government back in 1990 and was charged with the promotion of good-quality financial reporting. This objective was to be achieved through two subsidiary bodies:

Accounting Standards Board (ASB) and

The Financial Reporting Review Panel (FRRP).

Prior to the establishment of the ASB, standards were issued by the Accounting Standards Council (ASC). The standards issued by the ASC were known as Statements of Standard Accounting Practice (SSAPs) and between 1971 and 1990, 34 SSAPs were issued by the ASC. A number of these SSAPs were adopted by the newly formed ASB in 1990, although going forward the ASB would not issue further SSAPs; rather they would be charged with issuing Financial Reporting Standards (FRSs).

In 1991, a new department was formed to assist the ASB in carrying out their work, known as the Urgent Issues Task Force (UITF). This department was set up to undertake investigations in areas where conflicts with accounting standards existed or where interpretative guidance was needed following ambiguous points, or clarification was sought by financial statement preparers. The first UITF Abstract was issued on 24 July 1991 titled Convertible bonds – supplemental interest/premium.

Due to well-publicised corporate collapses in the United States, the government decided in 2004 that the regulatory system in the UK needed to be further strengthened in an attempt to restore confidence. This resulted in the FRC becoming the UK's single independent regulator of the accounting and auditing profession, which would be solely responsible for issuing accounting standards and enforcing their application.

The ASB survived a 22-year lifespan that ended on 2 July 2012 when it was integrated with the FRC's new Codes and Standards Division. This restructuring was brought about because of the need for enhanced independence and the need to ensure effective governance of the regulatory activities under the responsibility of the FRC board. During this 22-year lifespan, the ASB issued 29 FRSs; however, it had become clear that due to the intention by the ASB to aid a smooth transition to an international-based financial reporting framework, the ASB had essentially become more of an advisory body as opposed to a standard-setting body. This was due to the fact that many of the later FRSs were merely IFRSs/IASs that had been rebadged in the UK. For example, FRS 20 Share-based Payment was a UK version of IFRS 2 Share-based Payment, FRS 21 Events after the Balance Sheet Date was IAS 10 Events after the Reporting Period and FRS 22 Earnings per Share was essentially IAS 33 Earnings per Share. In addition to this, many of the later FRSs had hardly any impact on private companies that make up the vast majority of the UK and Republic of Ireland business market (such as FRS 24 Financial Reporting in Hyperinflationary Economies, FRS 27 Life Assurance, FRS 29 Financial Instruments: Disclosures and FRS 30 Heritage Assets).

The Codes and Standards Committee was formed during this restructuring exercise and the objective of this committee was to advise the board of the FRC on the maintenance of an effective framework of UK codes and standards. The ASB was replaced with the Accounting Council, which provides an advisory role to the Codes and Standards Committee and the board of the FRC. In addition, the UITF was disbanded as a result of the reforms. Accounting standards previously issued by the ASB became the responsibility of the board of the FRC on 2 July 2012 when the restructuring was finalised.

Issuance of the New UK GAAP

The process of modernising the old UK GAAP was a long and arduous one. The ASB had already acknowledged prior to the issuance of Exposure Drafts that the UK GAAP in its old form had become overly complex and voluminous. They had also expressed a desire for the UK and Republic of Ireland to adopt an international-based financial reporting framework to provide consistency in the way financial reporting works but within a high-quality and ‘fit for purpose’ framework. This intention was further accentuated in 2009 when the ASB announced that to essentially dispose of old FRSs/SSAPs and UITF Abstracts would be a significant task, but they viewed the project as an opportunity to simplify UK GAAP with the intention of ensuring that UK GAAP produced more relevant, comparable and understandable information.

FREDs 43 to 45 were published outlining the proposed changes to UK GAAP and these FREDs were based on the International Accounting Standard Board's IFRS for SMEs that was planned to become (and was exposed as) the Financial Reporting Standard for Mid-Sized Entities in the UK. The name of the proposals was coined the ‘FRSME’.

This Exposure Draft caused a significant amount of outcry amongst the accountancy profession as it was based around the concept of ‘public accountability’, which was a very difficult concept to apply or define in the UK and Republic of Ireland. In addition, the Exposure Draft eliminated some of the more common accounting practices that have become established in the UK and Republic of Ireland (such as the withdrawal of the revaluation method for fixed assets, the writing-off of borrowing costs directly to profit or loss with no option to capitalise such costs and the requirement to calculate deferred tax using a ‘temporary difference’ approach rather than a ‘timing difference’ approach, as was the case in FRS 19 Deferred Tax).

Having listened to feedback on FREDs 43 to 45, the ASB went back and redrafted the proposals that became FREDs 46 to 48 and were exposed for comment. The revised Exposure Drafts:

Eliminated the tier system for large, small–medium and micro-companies,

Introduced accounting treatments permitted under the old UK GAAP and

Incorporated guidance for public benefit entities into FRED 48.

FREDs 46 to 48 were to become FRSs 100, 101 and 102 respectively. FRS 103 Insurance Contracts is an industry-specific FRS, which was published in March 2014 and which deals with insurance contracts. Due to its specialist nature, FRS 103 is outside the scope of this book.

FRS 102 is part of a ‘family’ of standards, with the others being:

FRS 100

Application of Financial Reporting Requirements

,

FRS 101

Reduced Disclosure Framework

and

FRS 103

Insurance Contracts

.

FRS 100 and FRS 101 were both issued on 22 November 2012. FRS 100 outlines which entities can use which standard. Smaller companies will still continue to use the FRSSE (or the relevant small companies regime following the changes to small company financial reporting in 2015/16). The FRSSE (effective April 2008) was updated for the consequential effects of FRS 102 (see later in the chapter) and therefore the FRSSE was re-issued as the FRSSE (effective January 2015), which is effective for accounting periods commencing on or after 1 January 2015, with earlier adoption permissible.

FRS 101 is basically EU-endorsed IFRS, but with reduced disclosure requirements for qualifying entities. The standard outlines the reduced disclosure framework, which is available for qualifying entities that report under EU-adopted IFRS. When FRS 100 and 101 were both issued, they were set with an effective from date for accounting periods commencing on or after 1 January 2015, although earlier adoption is permissible. Legislation was introduced in the UK for year-ends ending on or after 1 October 2012, which allowed companies that are not required to apply IFRS by the ‘IAS Regulation’ more flexibility to change their accounting framework to FRS 101 or FRS 102. The advantage here was in relation to groups with a 31 December 2012 year-end who were being encouraged to adopt the standard early and take advantage of the reduced disclosures available, given that the disclosure requirements in EU-adopted IFRS are fairly vast.

In the press release, the FRC announced that they planned for FRS 102 to become effective for accounting periods commencing on or after 1 January 2015, with earlier adoption permissible (which did occur). There were two limited amendments that the FRC had recognised which related to:

Accounting for multi-employer pensions and

Service concession arrangements.

In relation to the accounting for multi-employer pensions, the amendments related to the situations where there was an agreement to fund a deficit in a multi-employer pension plan. The FRC issued the proposed amendment following them, obtaining evidence of diversity in practice where the previous FRS 17 Retirement Benefits was applied.

FRS 17 permitted entities who were not able to identify their share of the underlying assets and liabilities of a multi-employer pension plan on a ‘consistent and reasonable basis’ to account for such a scheme as if it were a defined contribution scheme and make additional disclosures within the financial statements. Where the scheme was a defined contribution scheme, FRS 17 required contributions to be recognised as an expense in the profit and loss account. As a consequence, FRS 17 did not explicitly require entities that were involved in a multi-employer scheme, which was accounted for as a defined contribution scheme and which had not entered into a funding agreement for future payments, to recognise a liability on the balance sheet (statement of financial position) that represented obligations to pay pension benefits in their financial statements.

The FRC took the decision not to amend FRS 17 to require entities that accounted for a multi-employer scheme as a defined contribution scheme to recognise a liability to pay pension benefits in their financial statements on the grounds that FRS 17 was to have a very short life going forward. Instead, the FRC decided to amend draft FRS 102 in order to clarify that a liability should be recognised in such situations to represent a requirement to make payments to fund a deficit relating to past service where the entity has entered into an agreement to make those payments.

In addition, the FRC also acknowledged that paragraph 9(b) (v) in FRS 17 will be applicable in the period prior to FRS 102 becoming effective. This paragraph requires disclosure of any implications for an employer of a deficit in a multi-employer scheme. The FRC said that where a reporting entity has an agreed schedule for the funding of a deficit, they will need to give careful consideration to this requirement and that they consider that information about an agreement with the multi-employer scheme that determines how it will fund a deficit should be disclosed with this requirement and would more than likely include:

The existence of the agreement,

The period over which the payments will be made and

Any available information about the expected amount of the payments.

The FRC clarified in the Exposure Draft that the above will not apply to individual employers that participate in a group scheme due to the fact that different accounting requirements apply to the recognition of a surplus or deficit in a group scheme.

The second amendment related to service concession arrangements and the accounting, by grantors, for service concession arrangements. Draft FRS 102 only included requirements for operators of service concessions and it was flagged that grantors may also be within the scope of FRS 102. As a result, the amendment requires grantors to recognise the infrastructure assets and liabilities for service concession arrangements, with the accounting requirements based on a finance lease liability model.

Following this Exposure Draft containing the two limited amendments, FRS 102 was finally issued as a standard by the FRC on 5 March 2013 and marked the end of a long and arduous project to overhaul accounting standards in the UK. The end result was a standard that was clear, transparent and much less voluminous (a total of 335 pages including the Appendices as opposed to 3,000+ in old UK GAAP).

FRS 102 was re-published in August 2014 to take account of the changes in relation to financial instruments and hedge accounting as well as dealing with some typographical issues.

Structure of the New UK GAAP

The old UK GAAP was structured by FRS number order – for example, FRS 1 Cash Flow Statements, FRS 2 Accounting for Subsidiary Undertakings, FRS 3 Reporting Financial Performance and so forth. SSAPs and UITF Abstracts also followed a numerical sequence.

The structure of the new UK GAAP is markedly different in that it is structured as a series of FRSs (FRS 100, 101, 102 and 103).

FRS 100 Application of Financial Reporting Requirements

This is structured as follows:

Summary

Financial Reporting Standard 100

Application of Financial Reporting Requirements

Objective

Scope

Abbreviations and definitions

Basis of preparation of financial statements

Application of statements of recommended practice

Statement of compliance

Date from which effective and transitional arrangements

Withdrawal of current accounting standards

Consequential amendments to the FRSSE

Application Guidance

The interpretation of equivalence

Approval by the FRC

The Accounting Council's Advice to the FRC to Issue FRS 100

Appendices

Glossary

Note on legal requirements

Previous consultations

Republic of Ireland (RoI) legal references

FRS 101 Reduced Disclosure Framework

Summary

Financial Reporting Standard 101

Reduced Disclosure Framework

Objective

Scope

Abbreviations and definitions

Reduced disclosures for subsidiaries and ultimate parents

Statement of compliance

Date from which effective and transitional arrangements

Application Guidance

Amendments to International Financial Reporting Standards as adopted in the European Union for compliance with the Act and the Regulations

Approval by the FRC

The Accounting Council's Advice to the FRC to Issue FRS 101

Appendices

Glossary

Note on legal requirements

Previous consultations

Republic of Ireland (RoI) legal references

FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland

Summary

Financial Reporting Standard 102

Financial Reporting Standard applicable in the UK and Republic of Ireland

Scope

Concepts and Pervasive Principles

Financial Statement Presentation

Statement of Financial Position

Statement of Comprehensive Income and Income Statement

Appendix: Example showing presentation of discontinued operations

Statement of Changes in Equity and Statement of Income and Retained Earnings

Statement of Cash Flows

Notes to the Financial Statements

Consolidated and Separate Financial Statements

Accounting Policies, Estimates and Errors

Basic Financial Instruments

Other Financial Instruments Issues

Inventories

Investments in Associates

Investments in Joint Ventures

Investment Property

Property, Plant and Equipment

Intangible Assets other than Goodwill

Business Combinations and Goodwill

Leases

Provisions and Contingencies

Appendix: Examples of recognising and measuring provisions

Liabilities and Equity

Appendix: Example of the issuer's accounting for convertible debt

Revenue

Appendix: Examples of revenue recognition

Government Grants

Borrowing Costs

Share-based Payment

Impairment of Assets

Employee Benefits

Income Tax

Foreign Currency Translation

Hyperinflation

Events after the End of the Reporting Period

Related Party Disclosures

Specialised Activities

Agriculture

Extractive Activities

Service Concession Arrangements

Financial Institutions

Retirement Benefit Plans: Financial Statements

Heritage Assets

Funding Commitments

Incoming Resources from Non-exchange Transactions

Public Benefit Entity Combinations

Public Benefit Entity Concessionary Loans

Appendix A: Guidance on funding commitments

Appendix B: Guidance on incoming resources from non-exchange transactions

Transition to this FRS

Approval by the FRC

The Accounting Council's Advice to the FRC to issue FRS 102

The Accounting Council's Advice to the FRC to issue

Amendments to FRS 102 – Basic financial instruments and hedge accounting

Appendices

Glossary

Significant Differences between FRS 102 and the IFRS for SMEs

Table of Equivalence for UK Companies Act Terminology

Note on Legal Requirements

Previous Consultations

Republic of Ireland (RoI) Legal References

Smaller Companies and the Financial Reporting Standard for Smaller Entities

Chapter 4 looks in more detail at the specific financial reporting requirements for companies at the smaller end of the scale. At the time of writing, small company financial reporting was undergoing a significant period of change and consultations had been issued by both the BIS and the FRC on 29 August 2014 as a consequence of the EU Accounting Directive. Consultations closed in November 2014 and final standards relating to the small companies regime are expected in the summer of 2015 with an ‘effective from’ date of 1 January 2016 (although at the time of writing this had not yet taken place).

Smaller companies are eligible to use the Financial Reporting Standard for Smaller Entities (the FRSSE). The FRSSE has been amended because of FRS 102 and the latest version (at the time of writing) issued by the FRC was the FRSSE (effective January 2015), which is effective for accounting periods commencing on or after 1 January 2015, with earlier adoption permissible.

The Small Companies (Micro-Entities Accounts) Regulations 2013 (SI 2013/3008) brought the European Union's directive on ‘micro-company’ reporting into effect in November 2013. For the purposes of this statutory instrument, an entity can qualify as a micro-entity if two, or more, of the following are not exceeded in a year:

Turnover £632,000

Balance sheet total £316,000

Employee head count 10

Companies that fail to meet two out of the above three criteria for two consecutive years will fail to meet the qualifying criteria for micro-entities.

Under the micro-entities regime, a micro-entity will prepare a balance sheet, which will present (where applicable):

Format 1 balance sheet

Called up share capital not paid

Fixed assets

Current assets

Prepayments and accrued income

Creditors due within one year

Net current assets (liabilities)

Total assets less current liabilities

Creditors due after more than one year

Provisions for liabilities

Accruals and deferred income

Capital and reserves

Format 2 balance sheet

Assets:

Called up share capital not paid

Fixed assets

Current assets

Prepayments and accrued income

Liabilities:

Capital and reserves

Provisions for liabilities

Creditors (those due within and more than one year are separated)

Accruals and deferred income

Profit and loss account:

Turnover

Other income

Cost of raw materials and consumables

Staff costs

Depreciation and other amounts written off assets

Other charges

Tax

Profit or loss

Notes to the micro-entity's financial statements

Notes will be placed at the foot of the balance sheet and will merely consist of:

Guarantees and other financial commitments and

Directors' benefits: advances, credits and guarantees.

The micro-entities regulations are effective for financial years ending on or after 30 September 2013 for companies filing their accounts on or after 1 December 2013. An important point to emphasise is the fact that the new regime will not affect the recognition or measurement of amounts included in a micro-entity's financial statements. In addition, the reduced disclosure regime will only affect companies who apply the FRSSE. Companies that will qualify to report under the micro-entities regulations will still apply the FRSSE but are eligible to apply the reduced disclosures in the new Regulations.

As part of the overhaul of the small companies regime, the FRC announced their intention to issue a separate standard for micro-entities, namely the Financial Reporting Standard for Micro-Entities (FRSME), which will also offer further simplifications to micro-entity accounts. Companies not eligible to apply the FRSME or who choose not to apply the FRSME may have the option of applying FRS 102 ‘Light’, which will be an amended version of FRS 102 for small companies, and the FRC have suggested including a Section 1A Small Entities in FRS 102 that will set out the framework and presentation and disclosure requirements for small entities.

Financial reporting has developed considerably over the last few years and it is likely to be further developed as new accounting practices emerge or existing practices are amended to keep up with the ways in which entities conduct their business.

Chapter 1General Requirements of the Companies Act 2006

Introduction

Accounting Requirements under the Companies Act 2006

True and Fair and Adequate Accounting Records

International Financial Reporting Standards

Generally Accepted Accounting Practice

Substance of Transactions

Directors' Reports

Group Accounts

Approval of Financial Statements

Interaction of FRS 102 Terminology with Companies Act 2006 Terminology

Micro-Entities Legislation

Introduction

In the United Kingdom and Republic of Ireland (RoI), financial statements are prepared using Generally Accepted Accounting Practice (GAAP) and legislation prescribed in the form of the Companies Act 2006. Additional legislation also applies to certain financial statements (for example, the Charities Act) but this publication will only consider the Companies Act 2006 in relation to accounting by companies. At the outset of this chapter it is important to emphasise that the small companies regime in the UK is planned for significant change and these changes are discussed in more detail in Chapter 4. Readers are advised to keep up to date with all developments in this area by regularly reviewing the Department for Business Innovation and Skills' website as well as the Financial Reporting Council's website, as consultation documents were issued in September 2014 outlining proposals to overhaul the small companies regime in the light of the EU Accounting Directive. This chapter examines some of the proposals, with more detail being examined in Chapter 4, but at the time of writing, no final framework had been issued by the Department for Business Innovation and Skills nor the Financial Reporting Council.

Accounting standards are issued and amended by the Financial Reporting Council (FRC). The Regulations consist of the Small Companies and Groups (Accounts and Directors' Report) Regulations 2008 (SI 2008/409) and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410). The application of accounting standards and the requirements of the Companies Act 2006 have the objective of enabling financial statements to give a true and fair view of the state of a company's financial affairs as at the reporting date, satisfying the directors' duty.

The Consultative Committee of Accountancy Bodies (CCAB) are committed to the promotion and compliance with accounting standards by their members, whether they are auditors or preparers of financial information. The CCAB is made up of:

The Association of Chartered Certified Accountants (ACCA)

The Chartered Institute of Public Finance and Accountancy (CIPFA)

The Institute of Chartered Accountants in England and Wales (ICAEW)

The Institute of Chartered Accountants in Ireland (ICAI)

The Institute of Chartered Accountants in Scotland (ICAS)

Whilst the Chartered Institute of Management Accountants (CIMA) is no longer part of the CCAB, it also expects conformance and compliance with accounting standards by its members.

Significant departures from accounting standards and the requirements of the Companies Act 2006 must be adequately disclosed within the financial statements in order that the users can have an understanding of the reasons why the departure is considered to be appropriate. This can arise in certain issues where fair value accounting is concerned. Investment properties, for example, are required to be carried in a company's balance sheet (statement of financial position) at fair value at each reporting date under GAAP. The Companies Act 2006 requires fixed assets to be depreciated on a systematic basis; however, where investment properties are concerned the requirement to depreciate such properties is overridden (known as the ‘true and fair override’) because to carry such properties in the balance sheet at open market value as at the balance sheet date is considered to give more relevant and reliable information. Such a departure from the requirements of the Companies Act 2006 should be disclosed within the notes to the financial statements (often within the Accounting Policies section). An example of such a disclosure is as follows:

Example – Illustrative disclosure when the true and fair override is invoked

No depreciation is provided for in respect of investment properties as they are accounted for under the provisions in Section 16 of FRS 102. Such properties are held for their investment potential and not for consumption within the business. This is a departure from the Companies Act 2006 which requires all properties to be depreciated and the directors consider that to depreciate them would not enable the financial statements to give a true and fair view. Investment properties are stated at their market value at the reporting date.

Accounting Requirements under the Companies Act 2006

Part 15 of the Companies Act 2006 deals with Accounts and Reports related to a company's financial statements. It outlines the distinction between companies that are subject to the small companies regime and those that are not.

Every company prepares financial statements to a reporting date (a financial year). The Companies Act 2006 says that a company's financial year:

Begins with the first day of its first accounting reference period and

Ends with the last day of that period or such other date, not more than seven days before or after the end of that period, as the directors may determine.

For subsequent financial years, these will:

Begin with the day immediately following the end of the company's previous financial year and

End with the last day of its next accounting reference period or such other date, not more than seven days before or after the end of that period, as the directors may determine.

The requirement to prepare annual financial statements is laid down in Chapter 4 to Part 15 of the Companies Act 2006. Section 394 requires the directors of every company to prepare financial statements for the company for each of its financial years, unless the company is exempt from that requirement under section 394A. These financial statements are referred to as the company's ‘individual accounts’. Under section 394A, a company is exempt from the requirement to prepare individual accounts for a financial year if:

It is itself a subsidiary undertaking,

It has been dormant throughout the whole of that year and

Its parent undertaking is established under the law of an EEA state.

The section then goes on to say that exemption is conditional upon compliance with all of the following conditions:

All members of the company must agree to the exemption in respect of the financial year in question,

The parent undertaking must give a guarantee under section 394(C) in respect of that year,

The company must be included in the consolidated accounts drawn up for that year or to an earlier date in that year by the parent undertaking in accordance with:

The provisions of the Seventh Directive (83/349/EEC) or

International Accounting Standards,

The parent undertaking must disclose in the notes to the consolidated accounts that the company is exempt from the requirement to prepare individual accounts by virtue of this section and

The directors of the company must deliver to the registrar within the period for filing the company's accounts and reports for that year:

A written notice of the agreement referred to in subsection (2) (a),

The statement referred to in section 394(C) (1),

A copy of the consolidated accounts referred to in subsection (2) (C),

A copy of the auditor's report on those accounts and

A copy of the consolidated annual report drawn up by the parent undertaking.

The filing requirements are also laid down in the Companies Act. Private companies must file their financial statements with the Registrar of Companies (Companies House) within nine months after the financial year-end (although different filing requirements apply to a newly incorporated entity). Public companies must file their financial statements within six months after the financial year-end.

Thresholds for small and medium-sized companies and groups

A company is deemed to be ‘small’ and hence can apply the small companies regime if it satisfies the small company thresholds for two out of three consecutive years. The thresholds are as follows (note that these thresholds are planned to be changed in 2015 – see Chapter 4 for further details of these changes).

Size

Turnover

Balance sheet total

Employees

Small company

£6.5m

£3.26m

50

Small group

£6.5m net£7.8m gross

£3.26m net£3.9m gross

50

Medium company

£25.9m

£12.9m

250

Medium group

£25.9m net£31.1m gross

£12.9m net£15.5m gross

250

Where reference to ‘net’ or ‘gross’ is made this relates to intra-group trading. ‘Net’ means that intra-group trading (and the effects thereof) have been eliminated, whilst ‘gross’ means that intra-group trading (and the effects thereof) have not been eliminated. A point to note is that a company may satisfy the qualifying criteria using gross or net figures and it is permissible to mix the use of gross and net figures in any year. Rather than eliminating intra-group transactions, the gross criteria should be checked first and the net size criteria checked only if required.

Financial statement content

A small company has a choice of preparing full UK GAAP financial statements without taking advantage of any of the concessions. In reality this is uncommon as small companies will often take advantage of the small companies regime in the Companies Act 2006. Where advantage is taken to prepare financial statements in accordance with the small companies regime, the company will use the Financial Reporting Standard for Smaller Entities (FRSSE) (or another alternative regime if the FRSSE is withdrawn following the overhaul of the small companies regime). Small companies must also file abbreviated financial statements with the Registrar of Companies. The fact that a company may file abbreviated financial statements with Companies House does not absolve them from any other responsibility for preparation of full financial statements for the shareholders or any other regulatory body to whom the financial statements may be submitted (for example, the Charities Commission).

Where the financial statements contain an auditor's report, the audit report is the special audit report contained in section 449 of the Companies Act 2006. This auditor's report states that in the auditor's opinion:

The company is entitled to deliver abbreviated accounts in accordance with the section in question and

The abbreviated accounts to be delivered are properly prepared in accordance with regulations on that section.

If the auditor's report is qualified, section 449(3) (a) requires the special report to set out the qualified auditor's report in full as well as outlining any further material deemed necessary so that users are able to understand the reasons for the audit qualification. In addition, where the auditor's report contains a statement under:

Section 498(2) (a) or (b) (accounts, records or returns inadequate or accounts not agreeing with records and returns) or

Section 498(3) (failure to obtain necessary information and explanations),

the special report must set out that statement in full.

A table outlining the financial statement requirements is shown below:

Full financial statements

Full balance sheet only

Abbreviated financial statements

Abbreviated balance sheet only

Formats under Companies Act 2006

Schedule 1

Schedule 1

Schedule 4

Schedule 4

Companies Act 2006 accounts or IAS accounts

Option available for both

Option available for both

Option not available for IAS accounts

Option available for both

Statement in a prominent position on balance sheet

Yes – Companies Act 2006, section 414(3)

Yes – Companies Act 2006, section 444(5)

Yes – SI 2008/409 Schedule 4, paragraph 2

Yes – Companies Act 2006, section 444(5)

Copy of profit and loss account

Yes

No

No

No

Copy of directors' report

Yes

No

No

No

Audit report (where audit exemption does not apply)

Yes – Companies Act 2006, section 495

Yes – Companies Act 2006, section 495