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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Regulatory Reporting
- Sprache: Englisch
A practical manual for preparing UK GAAP-compliant disclosures
UK GAAP Financial Statement Disclosures Manual is the practical handbook accounting professionals need to prepare audit-proof financial statements. The recent establishment of the new UK GAAP has brought significant changes to financial reporting, and this guide collects all of the latest guidelines into one place. Clear, concise and heavily geared toward practical application, this book is designed for easy navigation with stand-alone chapters and real-world examples. You'll find step-by-step guidance for the entire disclosure process, with explicit instruction on what to include, how to include it and why. Financial statements prepared from 2015/2016 in the UK and Republic of Ireland will appear significantly updated, and this manual gives you the guidance you need to understand what's required to achieve full compliance.
Insufficient or incorrect disclosures are frequently the reason why financial statements are rendered deficient. This book provides practitioners with a reference and guide for all aspects of financial statement disclosure preparation.
- Get up to speed on the most recent UK GAAP guidelines
- Understand the 'what' and 'why' of disclosure statements
- Study real-world example statements for practical guidance
- Prepare statements that stand up to auditor and regulator scrutiny
Many practitioners fall afoul of regulators' criticisms with subjective, incomplete, omitted or incorrect disclosures, resulting in sanctions being brought against the practitioner or the firm. Financial statement disclosure emphasis is on transparency at a time when changes in the profession require an entirely new method of preparation. For practitioners who need to stay ahead of the curve, UK GAAP Financial Statement Disclosures Manual is the invaluable reference to keep within arm's reach.
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CONTENTS
Cover
Title Page
Copyright
Foreword
Preface
Acknowledgements
About the Author
Chapter 1: The Structure of UK GAAP
Introduction
FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland
The EU Accounting Directive
Response by the Financial Reporting Council
The Structure of New UK GAAP
Key Points
Chapter 2: Interaction of the Companies Act 2006
Introduction
Part 15 of the Companies Act 2006
Companies Subject to Audit: Part 16 of the Companies Act 2006
Other Applicable Provisions of the Companies Act 2006
Statutory Formats of the Financial Statements
Abridged and Adapted Financial Statements
The True and Fair Concept
Key Points
Chapter 3: The Directors' Report and Strategic Report
Introduction
Directors' Report for Small Companies
Content of the Directors' Report
Strategic Report
Approval of the Directors' Report
Key Points
Chapter 4: The Income Statement/Statement of Comprehensive Income
Introduction
Formats for the Income Statement (Profit and Loss Account)
Total Comprehensive Income
Presentation of Items in the Profit and Loss Account
Operating Profit
Exceptional and Material Items
Discontinued Operations
Abridged Profit and Loss Accounts
Adapted Profit and Loss Accounts
Micro-Entities
IAS 1 Presentation of Financial Statements
Key Points
Chapter 5: Statement of Financial Position (Balance Sheet)
Introduction
Formats Permitted by the Companies Act 2006
Presentation of Assets
Net Current Assets and Liabilities
Liabilities
Share Capital and Reserves
Off-Balance Sheet Arrangements
Micro-Entities
Abridged and Adapted Balance Sheets
IAS 1 Presentation of Financial Statements Requirements
Key Points
Chapter 6: The Statement of Changes in Equity
Introduction
Purpose of the Statement of Changes in Equity
Presentation of Information in the Statement of Changes in Equity
Statement of Income and Retained Earnings
Presentation of Information in the Statement of Income and Retained Earnings
Transitional Issues
IAS 1 Presentation of Financial Statements Requirements
Key Points
Chapter 7: The Statement of Cash Flows
Introduction
Preparing the Statement of Cash Flows
Cash and Cash Equivalents
Reconciliation to the Balance Sheet
Non-Cash Transactions
Foreign Currency Transactions
Consolidated Statement of Cash Flows
Specific Items in the Statement of Cash Flows
Illustrative Statements of Cash Flows
Key Points
Chapter 8: The Auditor's Report
Introduction
Concept of Materiality
Elements of the Audit Report
Types of Audit Opinion
Emphasis of Matter Paragraphs
Other Matter Paragraphs
Proposed Changes to the Auditor's Reporting Regime
Key Points
Chapter 9: Accounting Policies, Estimates and Errors
Introduction
Accounting Policies for a Micro-Entity
Selecting Accounting Policies
Changing an Accounting Policy
Changing an Accounting Estimate
Disclosing Accounting Policies
Disclosing Changes in Accounting Policy
Disclosing Changes in Accounting Estimates
Disclosing Information Relating to Error Correction
Key Points
Chapter 10: Operating Segments
Introduction
Objective and Scope of IFRS 8
Chief Operating Decision-Maker
Identifying Reportable Segments
Disclosure Requirements
Information Considered to be Commercially Sensitive
Key Points
Chapter 11: Directors' Remuneration Report
Introduction
Voting On Directors' Remuneration
Reporting on Directors' Remuneration
Scheme Interests
Other Disclosures (Not Subject to Audit)
Information Relating to Benefits to Directors
Chairperson's Statement
Key Points
Chapter 12: Taxation
Introduction
Overview of Current Tax
Overview of Deferred Tax
Presentation of Taxes in Comprehensive Income And Equity
Presentation in the Balance Sheet
Offsetting
IAS 12 Income Taxes
Disclosure Requirements
Key Points
Chapter 13: Fixed Assets and Investment Property
Introduction
General Recognition Principles
Presentation of Fixed Assets in the Balance Sheet
Revaluation of Fixed Assets
Disclosure Requirements for Fixed Assets
Disclosure Requirements for Entities Reporting Under Section 1A of FRS 102
Fixed Assets Disclosures for Micro-Entities
IAS 16 Property, Plant and Equipment
Investment Property
Investment Property Classification
Presentation of Investment Property in the Balance Sheet
Disclosures Relating to Investment Properties
Key Points
Chapter 14: Government Grants
Introduction
Government Assistance
Recognition Principles
Presentation of Grants
Repayment of Grants
IAS 41 Agriculture and Grants
Disclosure Requirements
Key Points
Chapter 15: Financial Investments
Introduction
Simple Financial Investments
Investments in Subsidiaries
Investments in Associates
Investments in Joint Ventures
Disclosure Requirements: Simple Investments
Disclosure Requirements: Parents and Subsidiaries
Disclosure Requirements: Investments in Associates
Disclosure Requirements: Investments in Joint Ventures
Key Points
Summary of Standards and Reporting Regimes
Chapter 16: Financial Instruments
Introduction
Types of Basic Financial Instruments
Presentation of Financial Instruments Under UK GAAP
Disclosure Requirements
Companies Act Disclosure Requirements
Hedge Accounting
Micro-Entities
IFRS 7 Financial Instruments: Disclosures
Key Points
Chapter 17: Leasing
Introduction
Classification of Leases
Finance Lease Disclosures Under FRS 102: Lessees
Finance Lease Disclosures Under FRS 102: Lessors
Operating Lease Disclosures Under FRS 102: Lessees
Operating Lease Disclosures Under FRS 102: Lessors
Micro-Entity Issues
Sale and Leaseback Transactions
IAS 17 Leases Disclosure Requirements
IFRS 16 Leases
Key Points
Chapter 18: Inventories
Introduction
Basic Principles and Accounting Policies
Presentation
Disclosure Requirements (FRS 102/FRS 105)
IAS 2 Disclosure Requirements
Key Points
Chapter 19: Provisions and Contingencies
Introduction
Accounting for a Provision
Provisions and Contingencies in the Financial Statements
Restructuring Provisions
Estimating a Provision
Future Operating Losses
Prejudicial Disclosures
Disclosure Requirements
Summary of the Treatment of Contingencies
Key Points
Chapter 20: Transactions with Directors
Introduction
Directors' Advances, Credit and Guarantees
Dividends to Directors
Directors' Remuneration
Entities Reporting Under EU-Adopted IFRS
Key Points
Chapter 21: Events After the Reporting Period
Introduction
Defining Events after the End of the Reporting Period
Adjusting Events
Non-Adjusting Events
Going Concern
Dividends
Authorisation of the Financial Statements
Auditor's Considerations
Disclosure Requirements
Key Points
Chapter 22: Going Concern
Introduction
Assessing Going Concern
Events After the End of the Reporting Period
UK Guidance on Going Concern
Guidance on Going Concern, Solvency and Liquidity Risks (April 2016)
Disclosure Requirements: Going Concern
Disclosure Requirements: Going Concern Basis, Solvency and Liquidity Risk
Disclosure of Information in the Strategic Report
Undertaking the Assessment
Risks and Uncertainties in the Context of Materiality
IAS 1: Reporting on Going Concern
Auditor's Responsibilities Related to Going Concern
Key Points
Chapter 23: Related Parties
Introduction
Definition of a Related Party
Groups
Parties Not Considered to be Related Parties
Key Management Personnel
Controlling Parties
Small Companies' Regime Disclosure Requirements Under the Companies Act 2006
Other Companies Act 2006 Disclosure Requirements
Disclosure Requirements of Section 33 of FRS 102
IAS 24 Related Party Disclosures
Key Points
Chapter 24: Consolidated Financial Statements
Introduction
Exemptions from Preparing Group Accounts
Concept of Control
Subsidiaries Excluded from Consolidation
Overview of the Consolidation Process
Disclosure Requirements: Consolidated Financial Statements
Disclosure Requirements: IAS Group Accounts
Disclosure Requirements: Separate Financial Statements
Intermediate Payment Arrangements
Related Undertakings
Key Points
Chapter 25: Filing Financial Statements with Companies House
Introduction
Revisions to the Companies Act 2006
Micro-Entities' Filing Requirements
Small Company Filing Requirements
Medium-Sized Entity Filing Requirements
Filing Obligations for Unquoted Companies
Filing Obligations for Quoted Companies
Unlimited Companies
Filing Deadlines
Group Issues
Filing Penalties
Key Points
Chapter 26: Interim Financial Reporting
Introduction
FRS 104 and IAS 34 Interim Financial Reporting
Scope of FRS 104
Interim Financial Reports
Form and Content of Interim Reports
Significant Transactions and Events
Other Disclosure Requirements
Recognition and Measurement
Estimates
Restating Previous Interim Periods
Transition to a New Framework
Key Points
Chapter 27: Earnings Per Share
Introduction
Objectives and Scope of IAS 33
Basic Earnings Per Share
Diluted Earnings Per Share
Bonus Issues of Shares
Rights Issues
Share Split
Group Issues
Issuing Additional Shares
Presentation of Earnings Per Share
Disclosure Requirements
Key Points
Chapter 28: Financial Statements for Micro-Entities
Introduction
FRS 105 The Financial Reporting Standard Applicable to the Micro-Entities Regime
Key Features of FRS 105
True and Fair View
Qualifying as a Micro-Entity
Structure of the Primary Financial Statements
Filing Requirements for a Micro-Entity
Differences Between FRS 105 and Previous UK GAAP
Disclosure Requirements
Content of the Financial Statements
Illustrative Financial Statements for a Micro-Entity
Key Points
Chapter 29: Insurance
Introduction
IFRS 4 Insurance Contracts
Accounting Policies
Disclosure Requirements
Key Points
Index
End User License Agreement
Guide
Cover
Table of Contents
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UK GAAPFinancial Statement Disclosures Manual
Steven Collings
This edition first published 2016
© 2016 Steven Collings
Registered office
John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom
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Library of Congress Cataloging-in-Publication Data
Names: Collings, Steve, author.Title: UK GAAP financial statement disclosures manual / Steven Collings.Description: Hoboken : Wiley, 2016. | Series: Wiley regulatory reporting | Includes index.Identifiers: LCCN 2016022153| ISBN 9781119132752 (paperback) | ISBN 9781119132776 (epub) | ISBN 9781119132769 (ebk) | ISBN 9781119283393 (ebk)Subjects: LCSH: Accounting–Standards–Great Britain. | Financial statements–Great Britain. Classification: LCC HF5616.G7 C63 2016 | DDC 657.0941–dc23LC record available at https://lccn.loc.gov/2016022153
A catalogue record for this book is available from the British Library.
ISBN 978-1-119-13275-2 (paperback) ISBN 978-1-119-13276-9 (ebk)ISBN 978-1-119-13277-6 (ebk) ISBN 978-1-119-28339-3 (obk)
Foreword
Since the demise of old UK GAAP, companies and their advisers now face a diverse range of potential financial reporting requirements, and the need to get accustomed to the alphabet soup of the different reporting requirements of full IFRS, the variations of FRS 102, FRS 101 and FRS 105. Determining which requirements, options and exemptions might be appropriate to a particular company or group is likely to present a real challenge. This book will help navigate the reader, topic by topic, through the complex maze of UK financial reporting in 2016 and beyond.
The book starts off with a comprehensive review of the UK financial reporting regulatory framework, explaining clearly the implications for each category of entity – whether groups, subsidiaries or small and micro-entities – and then deals with each major topic in turn.
The chapters are well-structured with clear signposting, and each contains a summary of key points and an excellent selection of practical examples and illustrations. The book never loses focus – it contains a wealth of good practical, down-to earth stuff relevant to the day-to-day work that passes over the desks of most accountants.
Steve Collings has extensive experience as an accounting practitioner, lecturer and author, and he writes in a highly practical and user-friendly way. The book should provide an excellent and constant source of reference.
Paul Gee, BA(Econ) FCA
July 2016
Preface
This is the first edition of UK GAAP Financial Statement Disclosures Manual aimed at practising accountants, accountants in industry and commerce, student accountants and boards of directors. This publication is a companion guide to Interpretation and Application of UK GAAP: For Accounting Periods Commencing On or After 1 January 2015 (Wiley, March 2015). Target audiences include micro-entities, small companies and companies which are reporting under EU-adopted International Financial Reporting Standards (IFRS). This is in recognition of the fact that UK GAAP is comprised of an IFRS-based regime (for micro-entities, small companies and unlisted companies which are not small) and EU-endorsed IFRS.
Financial reporting in the UK and Republic of Ireland has seen considerable changes over the last couple of years with the introduction of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. Many companies had to mandatorily adopt FRS 102 for accounting periods commencing on or after 1 January 2015 and this meant restating prior year financial statements so that they were FRS 102 compliant and making the additional disclosures required by the new regime.
Shortly afterwards the small companies' regime experienced a significant overhaul. This was due to the issuance of the EU Accounting Directive (the Directive) in June 2013. The UK's Department for Business, Innovation and Skills was given until July 2015 in which to transpose the Directive into legislation and this completed in January 2015; the revised Companies Act 2006 became effective from 6 April 2015 for accounting periods commencing on or after 1 January 2016, or for accounting periods commencing on or after 1 January 2015, but before 1 January 2016, if the directors so wished.
One of the most notable changes which the EU Accounting Directive brought about was a reduction in small and micro-entities' disclosure requirements in an attempt to reduce the burdens placed on smaller companies.
As a direct result of the Directive, the Financial Reporting Council (FRC) had to revise UK GAAP for small and micro-entities. The FRC had previously incorporated the micro-entities' legislation in the (now defunct) Financial Reporting Standard for Smaller Entities (the FRSSE) in order that qualifying entities could use the regime; but this was never intended to be a long-term solution. It had already become clear that the FRSSE could not be sustained and the FRC then made the decision to withdraw the FRSSE, move small companies within the scope of FRS 102 and have micro-entities reporting under a standalone standard (that of FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime).
The new regime in the UK and Republic of Ireland has brought about significant change where disclosures are concerned in small and micro-entities' financial statements and this publication examines those disclosure issues in detail. This book also caters for those companies which report under EU-adopted International Financial Reporting Standards (IFRS) because EU-adopted IFRS forms part of UK GAAP.
The book goes through the technical theory within UK GAAP and brings this theory to life through the use of worked examples (where considered applicable) and also by illustrating how certain financial statement disclosures might look. Where examples and illustrations are concerned, it is to be emphasised that these are not prescriptive and it should be borne in mind that every company/entity is different and will require differing levels of disclosure requirements depending on specific facts and circumstances.
It is also particularly important to emphasise that where small companies' are concerned, directors still have a legal responsibility to ensure that the entity's financial statements give a true and fair view and whilst the Directive (and the revised Companies Act 2006) limit the amount of disclosures that are required to be made in the small company's financial statements, additional disclosures, over and above those required by law, should be made where making such disclosures enables the financial statements to give a true and fair view. Wherever appropriate, professional advice should be sought to ensure disclosures are made which are appropriate to the company's specific circumstances.
I hope you find this book helpful in your role as a financial statement preparer and comments are always welcome, via the publisher, for future editions.
Steve Collings, FMAAT FCCA
April 2016
Acknowledgements
The production of a book involves many stages and a variety of individuals who help the author, not only in terms of grammar and technical content, but also with the structure, content and flow of the book. Without these individuals the books I write would not see the light of day.
I would like to offer my sincere thanks to Gemma Valler, who is the commissioning editor for this title. Gemma has been closely involved from the start and agreed to deadline extensions so I could incorporate the changes that have recently taken place in the small companies' regime following the Financial Reporting Council's decision to withdraw the Financial Reporting Standard for Smaller Entities and introduce a new reporting regime for micro-entities.
Thank you to my copy-editor Caroline Quinnell who has done a wonderful job on the manuscript and also to all the staff at Wiley who have been involved in the printing, production and marketing of this book.
I would also like to express my sincere thanks to my technical editor, Caroline Fox, BA FCA, who always does a remarkable job in reviewing the draft chapters for technical accuracy and provides me with advice throughout the production of the title as to how to make each chapter even better!
My grateful thanks go to Paul Gee who has written the Foreword to this book.
I would also like to thank all my friends and family who are supportive of my authoring commitments, particularly Les Leavitt who is my co-director at Leavitt Walmsley Associates Ltd. Without this support, it would not be possible to commit to the huge task which is authoring books.
Finally, I would like to thank you, the reader, who has picked up this book. I hope that it helps you, not only with the disclosure issues you may be facing, but also the additional points incorporated in the chapters giving an overview of the various changes in accounting treatment brought about by the new UK Generally Accepted Practice and Companies Act 2006. Comments and suggestions for future editions are always welcome via the publisher.
About the Author
Steve Collings, FMAAT FCCA, is the audit and technical director 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 a member of the Financial Reporting Council's UK GAAP Technical Advisory Group that advises the Corporate Reporting Council on all issues relating to UK accounting standards.
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) and Interpretation and Application of UK GAAP for Accounting Periods Commencing on or after 1 January 2015 (Wiley, March 2015). He is the author of several articles published in the accounting media and much of Steve's work can be seen on his website at www.stevecollings.co.uk.
Steve lectures to professionally qualified accountants on the areas of accounting, audit and Solicitors Accounts Rules and was named Accounting Technician of the Year at the 2011 British Accountancy Awards. He was also awarded Outstanding Contribution to the Accountancy Profession in 2013 by the Association of International Accountants and was shortlisted for Practitioner of the Year at the 2014 British Accountancy Awards.
1The Structure of UK GAAP
Introduction
FRS 102
The Financial Reporting Standard Applicable in the UK and Republic of Ireland
The EU Accounting Directive
Response by the Financial Reporting Council
The Structure of New UK GAAP
Key Points
Introduction
Financial reporting in the UK and Republic of Ireland has undergone considerable change over the last few years. This is because the standard-setters in the UK and Republic of Ireland (the Financial Reporting Council (FRC)) had always foreseen entities reporting under an international-based financial reporting framework. Since 2005, listed companies in the UK and Republic of Ireland have had to report under EU-adopted IFRS and during the transition to IFRS there were considerable problems encountered meaning lessons had to be learned. Since 2005, the FRC (previously the Accounting Standards Board) have been actively producing a framework for private companies to report under, which is based on IFRS. The intention by the (now defunct) Accounting Standards Board was to adopt an IFRS-based framework because IFRS has gathered pace much faster over the years. In addition, having a framework which is based on IFRS is said to improve comparability and consistency and open up capital markets.
FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland
FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland was issued on 14 March 2013. This marked the end of several years' work by the FRC (and the previous Accounting Standards Board) in developing a standard which was based on IFRS and which could be used by private companies. The standard itself was initially 350 pages long, which was a considerable reduction in volume from previous UK GAAP, which was some 3,500+ pages long. Professional accountants had often complained about the sheer volume of UK GAAP and the voluminous disclosures which it mandates. The Accounting Standards Board at the time also acknowledged that UK GAAP had become too voluminous and disjointed and hence it was more cost-effective to develop a new UK GAAP rather than change the previous GAAP.
FRS 102 is itself based on IFRS for SMEs, although it is not identical to IFRS for SMEs because IFRS for SMEs was not compatible with UK and Republic of Ireland companies legislation. In addition, IFRS for SMEs is based on the concept of ‘public accountability’, a concept which proved very difficult to define in the eyes of UK legislation. The initial Exposure Drafts of FRS 102 were based on the concept of public accountability, but this would have meant that certain entities would have had to adopt EU-adopted IFRS (for example, the smallest of pension schemes), which would not have been appropriate because of the associated disclosure requirements which IFRS requires.
FRS 102 was originally issued in March 2013 and was mandatory for accounting periods commencing on or after 1 January 2015 for those companies who were not reporting under the small companies' regime (i.e. the Financial Reporting Standard for Smaller Entities (the FRSSE)). Early adoption was permissible, although the take-up for early adoption was not vast. Initially, medium-sized businesses were the main entities to adopt FRS 102 for their accounting periods beginning on or after 1 January 2015 and the original plan was to ensure that the medium-sized businesses transitioned across to the new regime and then the FRC would see how smoothly those transitions had gone. Small companies would continue to report under the FRSSE and originally the FRC said that they would eventually have to align the FRSSE with FRS 102 to ensure that no significant disparities in accounting and disclosures existed between the two standards.
The EU Accounting Directive
On 26 June 2013, the EU issued Directive 2013/34/EU of the European Parliament and of the Council (referred to as the EU Accounting Directive (the Directive)). It replaced the 4th and 7th Accounting Directives and established minimum legal requirements for financial statements in the EU as well as providing 100 Member State options. The overarching objective of the Directive is to allow more companies to have access to a less burdensome financial reporting regime than was the case under the previous Companies Act 2006. There are three core objectives to the Directive, which are to:
simplify accounting requirements so as to reduce the administrative burden on companies with particular emphasis focused on smaller companies;
increase the clarity and comparability of financial statements of companies so as to reduce the cost of capital and increase the level of cross-border trade and merger and acquisition activity; and
protect essential user needs by retaining necessary accounting information for users.
The Directive's objectives are therefore to simplify the accounting requirements for small entities within its scope and hence reduce the levels of disclosures contained in the financial statements. The Directive achieves this objective by applying a ‘think small first’ approach and this approach:
introduces a ‘building block’ approach to the statutory accounts whereby disclosure levels are increased depending on the size of the undertaking;
reduces the number of options available to preparers in respect of recognition, measurement and presentation; and
creates a largely harmonised small companies' regime and, for the first time, limits the amount of information which Member States are permitted to require small undertakings to place in their annual financial statements.
The Directive states that small, medium-sized and large undertakings should be defined and distinguished by reference to balance sheet total, net turnover and the average number of employees during the financial year because this criterion usually provides objective evidence as to the size of the undertaking. The Directive also allows Member States the option of using maximum mandatory thresholds to determine company sizes or minimum mandatory thresholds. The Department for Business Innovation and Skills (BIS) confirmed that in order to allow more companies access to a less burdensome financial reporting regime, it would apply the maximum mandatory thresholds in the Directive (Chapter 2 examines the new thresholds).
In January 2015, BIS issued their response to the consultation in which it confirmed its decision to take advantage of the maximum thresholds which the Directive permits. This would, according to BIS, allow 11,000 medium-sized companies to be re-categorised and enable them to take advantage of the small companies' regime, thus allowing them to make less disclosure in their financial statements than would otherwise be the case. In their response to the consultation, BIS also confirmed that they would also apply the mandatory increases in the thresholds for medium-sized and large businesses. The transposition of the Directive into company law completed on 26 March 2015 and became effective from 6 April 2015 for accounting periods commencing on or after 1 January 2016, or for accounting periods commencing on or after 1 January 2015, but before 1 January 2016 if the directors wished. This early adoption clause was built into the legislation to allow a medium-sized business to consider whether it would fall to be classed as small under the revised Companies Act 2006 and hence possibly take advantage of the new small companies' regime.
Response by the Financial Reporting Council
In light of the revisions to the Companies Act 2006, the FRC issued three Exposure Drafts on 19 February 2015 as follows:
FRED 58 Draft FRS 105
The Financial Reporting Standard applicable to the Micro-entities Regime
;
FRED 59
Draft Amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland – Small entities and other minor amendments
; and
FRED 60
Draft Amendments to FRS 100 Application of Financial Reporting Requirements and FRS 101 Reduced Disclosure Framework
.
Unlike when the FRC have previously issued Exposure Drafts, on issuance of the above three Exposure Drafts, the FRC also included an ‘Overview Document’, which gave a brief outline as to the FRC's overall intentions. In addition to overhauling the financial reporting regime for smaller and micro-entities, the FREDs also incorporated other minor amendments to the FRSs.
The FRC took the decision to issue three FREDs in order to make a distinction between the different standards which have been affected by the proposals.
The Exposure Drafts were open for comment until April 2015. Once the comment period closed, the FRC took on board feedback which they received on the Exposure Drafts from various commentators and then made further changes to arrive at a set of finalised standards for small and micro-entities. The most notable changes to the Exposure Drafts in arriving at finalised standards were as follows:
A complete restructuring of Section 1A of FRS 102
Small Entities
. The end result is a much more user-friendly and concise section and has the specific disclosure requirements split into two Appendices: Appendix C outlines those disclosures which are legally required and Appendix D outlines those disclosures which are encouraged in order that the financial statements of a small entity give a true and fair view.
Restructuring of FRS 105
The Financial Reporting Standard applicable to the Micro-entities Regime
to remove sections and paragraph numbers which are not applicable to micro-entities. The consequence of this is that the structure of FRS 105 is not the same as FRS 102.
A switch from the performance method as a mandatory accounting treatment for micro-entities which receive government grants back to the accruals method.
The final standards were published by the FRC in summer 2015.
The Structure of New UK GAAP
The issuance of the new standards for small and micro-entities marked the end of several years of work undertaken by the FRC (and the previous Accounting Standards Board) in developing an IFRS-based framework for reporting entities in the UK and Republic of Ireland.
The following diagram illustrates the structure of new UK GAAP:
Each FRS in the above diagram is referred to as follows:
FRS 100
Application of Financial Reporting Requirements
(September 2015)
FRS 101
Reduced Disclosure Framework
(September 2015)
FRS 102
The Financial Reporting Standard applicable in the UK and Republic of Ireland
(September 2015)
FRS 103
Insurance Contracts
(March 2014)
FRS 104
Interim Financial Reporting
(March 2015)
FRS 105
The Financial Reporting Standard applicable to the Micro-entities Regime
(July 2015)
The smallest companies in the UK can report under FRS 105 as this applies to micro-entities (see the later section ‘FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime’). Small companies (or micro-entities who choose not to apply FRS 105) can report under FRS 102 with reduced disclosures. Companies which are excluded from the small companies' regime will report under full FRS 102. Companies that deal with insurance contracts (or reinsurance contracts) will apply the provisions in FRS 103. Listed companies, including those companies listed on the Alternative Investment Market (AIM), will report under EU-adopted IFRS.
The idea behind the frameworks is that they become more complex and require more disclosures the further up the suite of standards a company goes. For example, a small company will clearly make fewer disclosures in their financial statements than a company listed on the London Stock Exchange reporting under EU-endorsed IFRS.
FRS 100 Application of Financial Reporting Requirements
The latest version of FRS 100 Application of Financial Reporting Requirements is the September 2015 version. The overall objective of FRS 100 is to outline which types of entity will report under which financial reporting framework. The FRS itself applies to all financial statements which are intended to give a true and fair view in respect of the entity's assets, liabilities, financial position and profit or loss for the accounting period.
It is to be noted that FRS 100 requires a ‘Statement of compliance’ for entities which apply the provisions of FRS 101 Reduced Disclosure Framework and FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. Such a statement is included in the notes to the financial statements, unless the entity is a small entity reporting under FRS 102 with reduced disclosures in which case it is encouraged to make such a statement of compliance in the notes to the financial statements.
Statement of Recommended Practice
If an entity is required to apply a Statement of Recommended Practice (SORP), FRS 100 requires the relevant SORP to be applied in the circumstances which are set out in the relevant FRS. In addition, FRS 100 also requires an entity (other than a small entity) to state the title of the SORP which it is applying in the preparation of the financial statements and whether the financial statements have been prepared in accordance with the provisions of the SORP. If the entity has chosen to depart from the requirements of any relevant SORP, then FRS 100 requires the entity to disclose a brief description of how the financial statements depart from the recommended practice outlined in the SORP. This should also include:
in respect of any accounting treatment which is not compliant with the requirements of the SORP, the reasons why the accounting treatment applied is judged to be appropriate; and
brief details relating to any disclosures which are recommended by the SORP, but which have not been provided together with the reasons why they have not been provided.
The overall objective of a SORP is to clarify how the requirements of an accounting framework (such as FRS 102) apply in the industry or sector which the reporting entity operates in. For example, a Limited Liability Partnership (LLP) that falls to be classed as small under the LLP Regulations will apply the requirements of FRS 102 with reduced disclosures. The SORP applicable to LLPs is the Statement of Recommended Practice – Accounting by Limited Liability Partnerships, which is issued by the Consultative Committee of Accountancy Bodies. A revised version is expected to be published in the summer of 2016.
The idea behind a SORP is that when an entity complies with the requirements of a relevant SORP, it enhances comparability of the financial statements among entities within the same industry or sector. Comparability is one of the key traits which financial statements must possess in order that interested stakeholders (for example, potential investors) can make reasoned and balanced decisions concerning the financial performance, financial position and cash flows of the reporting entity.
Where an entity departs from a requirement of the SORP, FRS 100 acknowledges that the effect of the departure need not be quantified, with the exception in rare situations where such quantification would be judged necessary in order that the reporting entity's financial statements give a true and fair view.
Some entities are not caught by the requirements of a SORP, but may choose to adopt the provisions of a relevant SORP in preparing their financial statements. Where this is the case, then the reporting entity is encouraged (under FRS 100) to disclose such facts.
Effective Date of FRS 100
The provisions in FRS 100 apply for accounting periods beginning on or after 1 January 2016. However, early adoption of FRS 100 is permitted; although if an entity early-adopts FRS 100 then it must also apply the edition of FRS 101, FRS 102 and FRS 105, which are effective for accounting periods commencing on or after 1 January 2016, and the entity will also be subject to the early application provisions which are set out in those FRSs. Where an entity chooses not to early-adopt then it must also not adopt the associated amendments made to FRS 101, FRS 102 and FRS 105 to accounting periods commencing prior to 1 January 2016.
Where FRS 100 is early-adopted then disclosure of that fact must be made in the financial statements. The exception to making this disclosure is where the entity is a micro-entity or a small entity. A small entity would be encouraged to make such disclosure.
First-Time Adoption of FRS 100
When a reporting entity adopts the provisions in FRS 100 for the first time, it must apply the transitional arrangements which are relevant to its specific circumstances, which are outlined as follows:
Circumstances
What it must apply
The entity is transitioning to EU-adopted IFRS
The transitional arrangements, which are set out in IFRS 1
First-time Adoption of International Financial Reporting Standards
as adopted by the EU.
Qualifying entity transitioning to FRS 101
The provisions in paragraphs 6 to 33 of IFRS 1 as adopted by the EU (unless it is applying EU-adopted IFRS before the date of transition) together with the relevant appendices with the exception of paragraphs 6 and 21, which require an opening statement of financial position (balance sheet) to be presented as at the date of transition.
The entity is transitioning to FRS 102
The transitional provisions outlined in FRS 102.
The entity is transitioning to FRS 105
The transitional provisions outlined in FRS 105.
When a qualifying entity prepares their financial statements under EU-adopted IFRS prior to the date of transition to FRS 101 it will be preparing Companies Act individual accounts as per section 395(1)(a) of the Companies Act 2006 and will not be preparing International Accounting Standards (IAS) individual accounts. The reporting entity must consider whether any amendments are needed in order to comply with paragraph 5(b) of FRS 101 but it must not reapply the provisions in IFRS 1. Paragraph 5 of FRS 101 allows a qualifying entity to take advantage of the disclosure exemptions contained in paragraphs 7A to 9 of FRS 101 (subject to paragraph 7), but paragraph 5(b) requires the qualifying entity to make amendments to EU-adopted IFRS requirements, where considered necessary, so that the financial statements comply with the Companies Act 2006 and Regulations. The reason that paragraph 5(b) requires such amendments is so that the financial statements are compliant with UK legislative requirements.
Where the qualifying entity determines that amendments are necessary for the financial statements to be compliant with the Companies Act 2006 and Regulations, management must first determine whether the amendments have a material effect on the first set of financial statements presented.
Amendments have no Material Effect on the First Financial Statements
Where the amendments have no material effect on the first financial statements prepared under the new regime, the entity should make disclosure that it has undergone a transition to FRS 101 and give brief details of the disclosure exemptions which the entity has adopted for all periods presented in the financial statements.
Amendments are Material on the First Financial Statements
Where the amendments do have a material effect, the qualifying entity's first financial statements must include the following:
narrative describing the nature of each change of the qualifying entity's accounting policies;
reconciliations of equity, which were determined under EU-adopted IFRS to its equity that has been determined in accordance with FRS 101 provisions. These reconciliations must be at both the date of transition to FRS 101 and also at the end of the latest period presented in the entity's most recent annual financial statements that have been prepared in accordance with EU-adopted IFRS; and
a reconciliation of the profit or loss which was determined under EU-adopted IFRS to the profit or loss determined under the provisions of FRS 101 for the latest period presented in the entity's most recent annual financial statements, which have been prepared to EU-adopted IFRS.
Paragraph 12(b) of FRS 101 allows for early adoption and where it is impracticable to apply the above amendments retrospectively, FRS 100 requires the qualifying entity to apply the amendments to the earliest period for which it is practicable to do so. In addition, the qualifying entity must also identify the data presented for prior periods which are not comparable with the data for the period in which the entity prepares its first financial statements that comply with the reduced disclosure framework set out in FRS 101.
FRS 101 Reduced Disclosure Framework
FRS 101 allows a qualifying entity to apply the provisions in FRS 101 Reduced Disclosure Framework and to take advantage of certain disclosure exemptions in the individual financial statements of subsidiaries, which also include intermediate parents, and ultimate parents which apply the recognition, measurement and disclosure requirements of EU-adopted IFRS.
The term ‘qualifying entity’ is pivotal in the application of FRS 101 and is defined in the Glossary to FRS 101. Essentially a qualifying entity is one where the parent company prepares consolidated financial statements (group accounts) which are intended to give a true and fair view and that group member is included in the consolidated financial statements. It is important to emphasise that charities cannot be qualifying entities.
The scope of FRS 101 also does not extend to those entities which are required to prepare consolidated financial statements and are not entitled to any of the exemptions in the following sections of the Companies Act 2006:
Section 400
Exemption for company included in EEA group accounts of a larger group
Section 401
Exemption for company included in non-EEA group accounts of a larger group
Section 402
Exemption if no subsidiary undertakings need to be included in the consolidation
.
Qualifying entities which also voluntarily choose to prepare consolidated financial statements cannot apply the provisions in FRS 101 and hence given the restrictions on the scope of FRS 101 it is important that care is taken in ensuring correct application of the FRS.
Protocol to be Followed in Taking Disclosure Exemptions under FRS 101
When a qualifying entity satisfies the criteria to use FRS 101 and wishes to take the disclosure exemptions in paragraphs 7A to 9 of FRS 101, it must ensure the following conditions are complied with:
The shareholders have been notified in writing informing them that the entity is proposing to apply the disclosure exemptions in FRS 101 and they do not object. Where a shareholder objects to the disclosure exemptions being applied, they must object within a reasonable specified timeframe and in an acceptable format. The shareholder must also be a shareholder of the immediate parent, or a shareholder(s) who hold(s) in total 5% or more of the total issued shares in the entity, or more than 50% of the issued shares in the entity, which are not held by the immediate parent.
The entity applies the recognition, measurement and disclosure requirements in EU-adopted IFRS but amendments are made to the requirements of EU-adopted IFRS where necessary so as to comply with the Companies Act 2006 and the Regulations. A qualifying entity is required to comply with the requirements of the Companies Act 2006 and the Regulations in preparing their financial statements and the Application Guidance in FRS 101 outlines the amendments necessary to remove conflicts between the requirements of EU-adopted IFRS and the Companies Act 2006 and the Regulations. FRS 101 also acknowledges that the Application Guidance in FRS 101 is an integral part of the standard.
The notes to the qualifying entity's financial statements provide the following disclosures:
a brief summary of the disclosure exemptions that have been adopted; and
the name of the parent of the group in whose consolidated financial statements the qualifying entity's financial statements are included and where those consolidated financial statements can be obtained.
Financial Institutions
Where a qualifying entity is a financial institution, it may take advantage in its individual financial statements of the disclosure exemptions in paragraphs 8 and 9 of FRS 101, with the exception of:
the disclosure exemptions in IFRS 7
Financial Instruments: Disclosures
;
the disclosure exemptions in IFRS 13
Fair Value Measurement
to the extent that they apply to financial instruments; and
the disclosure exemptions from paragraphs 134 to 136 of IAS 1
Presentation of Financial Statements
.
First-Time Adoption of FRS 101
When a qualifying entity applies the provisions in FRS 101 for the first time, it is required to apply the requirements of paragraphs 6 to 33 of IFRS 1 First-time Adoption of International Financial Reporting Standards. A first-time qualifying entity does not, however, have to comply with the requirements of paragraphs 6 and 21, which require an opening statement of financial position (balance sheet) to be presented at the date of transition to FRS 101.
The Disclosure Exemptions in FRS 101
The table below outlines the disclosure exemptions which are available to qualifying entities under FRS 101.
Relevant IFRS
Disclosure exemption available
IFRS 2
Share-based Payment
Requirements of paragraphs 45(b) and 46 to 52, provided that:
if the qualifying entity is a subsidiary, the share-based payment arrangement concerns equity instruments of another group entity; or
if the qualifying entity is an ultimate parent, the share-based payment arrangement is in relation to its own equity instruments and the ultimate parent's own financial statements are presented alongside the consolidated accounts.
In both of the above cases, the equivalent disclosures must be made in the consolidated financial statements of the group in which the entity is consolidated.
IFRS 3
Business Combinations
The requirements in paragraphs 62, B64(d), B64(e), B64(g), B64(h), B64(j) to B64(m), B64(n)(ii), B64(o)(ii), B64(p), B64(q)(ii), B66 and B67. Again, equivalent disclosures must be included in the consolidated financial statements of the group in which the entity is consolidated.
IFRS 5
Non-current Assets Held for Sale and Discontinued Operations
The requirements of paragraph 33(c) and equivalent disclosures must be made in the consolidated financial statements of the group in which the entity is consolidated.
IFRS 7
Financial Instruments: Disclosures
Exemption is available to qualifying entities in respect of all disclosure requirements, provided that the equivalent disclosures are made in the consolidated financial statements of the group in which the entity is consolidated. Note – a qualifying entity which is a financial institution cannot take advantage of this disclosure exemption.
IFRS 13
Fair Value Measurement
The requirements of paragraphs 91 to 99 provided that equivalent disclosures are made in the consolidated financial statements of the group in which the entity is consolidated.
IAS 1
Presentation of Financial Statements
Paragraph 38, which requires comparative information in relation to:
paragraph 79(a)(iv) of IAS 1
paragraph 73(e) of IAS 16
Property, Plant and Equipment
paragraph 118(e) of IAS 38
Intangible Assets
paragraph 76 and 79(d) of IAS 40
Investment Property
paragraph 50 of IAS 41
Agriculture
In addition, a qualifying entity can take advantage of the requirements of paragraphs 10(d), 10(f), 16, 38A, 38B, 38C, 38D, 40A, 40B, 40C, 40D, 111 and 134 to 136. Although for accounting periods starting before 1 January 2013, paragraphs 38A, 38B, 38C, 38D, 40A, 40B, 40C and 40D of IAS 1 (effective 1 January 2013) should be replaced with paragraphs 39 and 40 of IAS 1 (effective 1 January 2009).
IAS 7
Statement of Cash Flows
A qualifying entity can take advantage of the exemption from preparing a statement of cash flows (cash flow statement) in its individual financial statements.
IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors
The requirements of paragraphs 30 and 31.
IAS 24
Related Party Disclosures
The requirements of paragraphs 17 and 18A. In addition, a qualifying entity does not have to disclose transactions entered into between two, or more, group members provided that any subsidiary which is a party to the transaction is wholly owned by such a member.
IAS 36
Impairment of Assets
The requirements of paragraphs 130(f)(ii), 130(f)(iii), 134(d) to 134(f) and 135(c) to 135(e) provided that equivalent disclosures are made in the consolidated financial statements of the group in which the entity is consolidated.
FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland (September 2015)
The ‘backbone’ of ‘new UK GAAP’ is in the form of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. This standard applies to all entities, with the exception of:
micro-entities reporting under FRS 105
The Financial Reporting Standard applicable to the Micro-entities Regime
; and
entities reporting under EU-adopted IFRS.
At the time of writing, the latest version of FRS 102 is the September 2015 version. This version of FRS 102 incorporates provisions for small companies in the form of Section 1A Small Entities, which was not found in previous editions of FRS 102. In addition, the FRC took the opportunity to make other minor amendments to the standard at the same time as incorporating presentation and disclosure requirements for small entities.
The vast majority of companies in the UK and Republic of Ireland will report under the provisions in FRS 102 and it offers a more compact financial reporting framework than previous UK GAAP did and is more aligned to the requirements of EU-adopted IFRS, which was always the intention by the FRC (and, of course, the previous Accounting Standards Board who initiated the ‘new UK GAAP’ project).
Structure of FRS 102
FRS 102 is structured in sections and each section of FRS 102 follows a structure. Each section starts with the Scope section, which outlines which entities or types of transactions do, and do not, fall under a particular section's scope. It then moves into the detailed requirements of the section, which sometimes do vary depending on the section – for example, Section 33 Related Parties does not contain any recognition and measurement principles because the section is a wholly-disclosure standard. The disclosure requirements relevant to each section are always contained at the end of each section.
Example – Accounting Policy Change
Morley Ltd is reporting under the provisions of FRS 102 for its financial statements for the year ended 31 December 2017. During the year the directors decided to change the way in which it accounts for its borrowing costs as it is in the process of self-constructing a number of fixed assets. Prior to the change in accounting policy, the company always expensed borrowing costs immediately in profit or loss. However, the directors now feel that given the levels of borrowing costs they are currently incurring on such projects, the financial statements would be more relevant and reliable if such costs were capitalised.
Such a change in accounting methodology would constitute a change in accounting policy under the provisions of Section 10 Accounting Policies, Estimates and Errors. The directors have concluded that the effect of this accounting policy change is material and wish to make the required disclosures in respect of a voluntary change in accounting policy.
Accounting policies are changed where an FRS requires such a change or management deems the accounting policy change will enable the financial statements to provide more relevant and reliable financial information. As the change in accounting policy is material, the entity should make the required disclosures. In order to do this, management will look at the end of Section 10, which outlines the disclosure requirements and in respect of accounting policies these are split into two parts: the first part deals with the disclosure requirements in respect of an accounting policy change mandated because of an amendment to an FRS or FRC Abstract; the second part deals with a voluntary change in accounting policy. Management will therefore make the disclosures required by the second part of the disclosure section contained in paragraph 10.14 of FRS 102.
The structure of FRS 102 is as follows:
Section
Content
1
Scope
1A
Small EntitiesAppendix A: Guidance on adapting the balance sheet formatsAppendix B: Guidance on adapting the profit and loss account formatsAppendix C: Disclosure requirements for small entitiesAppendix D: Additional disclosures encouraged for small entities
2
Concepts and Pervasive Principles
3
Financial Statement Presentation
4
Statement of Financial Position
5
Statement of Comprehensive Income and Income StatementAppendix: Example showing presentation of discontinued operations
6
Statement of Changes in Equity and Statement of Income and Retained Earnings
7
Statement of Cash Flows
8
Notes to the Financial Statements
9
Consolidated and Separate Financial Statements
10
Accounting Policies, Estimates and Errors
11
Basic Financial Instruments
12
Other Financial Instruments IssuesAppendix: Examples of hedge accounting
13
Inventories
14
Investments in Associates
15
Investments in Joint Ventures
16
Investment Property
17
Property, Plant and Equipment
18
Intangible Assets other than Goodwill
19
Business Combinations and Goodwill
20
Leases
21
Provisions and ContingenciesAppendix: Examples of recognising and measuring provisions
22
Liabilities and EquityAppendix: Example of the issuer's accounting for convertible debt
23
RevenueAppendix: Examples of revenue recognition
24
Government Grants
25
Borrowing Costs
26
Share-based Payment
27
Impairment of Assets
28
Employee Benefits
29
Income Tax
30
Foreign Currency Translation
31
Hyperinflation
32
Events after the End of the Reporting Period
33
Related Party Disclosures
34
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
35
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
The Accounting Council's Advice to the FRC to issue Amendments to FRS 102 – Pension obligations
The Accounting Council's Advice to the FRC to issue Amendments to FRS 102 – Small entities and other minor amendments
