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New UK GAAP and Transitioning Accounts
FROM IN ASSOCIATION WITH
New UK GAAP and Transitioning Accounts
FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (the new UK GAAP) becomes mandatorily effective for accounting periods commencing on or after 1 January 2015 for entities who are not eligible, or choose not to apply the FRSSE or the micro-entities legislation in their financial statements (earlier adoption of the standard is permissible). This Whitepaper focuses on some of the main practical transitional issues which practitioners and company accountants need to take into consideration when preparing to apply the new reporting regime for the first time and looks at:
• Identifying the date of transition to FRS 102• Preparing the comparative information• Presentation and software issues• Filing requirements for Companies House and HMRC
IDENTIFYING THE DATE OF TRANSITIONWhilst FRS 102 does not come into mandatory effect until accounting periods commencing on or after 1 January 2015, financial information for earlier periods will have to be gathered because the rules must be applied retrospectively to the date of transition.
Not every company will have a 31 December accounting reference date and to illustrate this concept further using quarter-end dates,
Example – identifying the date of transition Company A Ltd has a year-end of 31 December 2015 and the financial statements are currently being prepared. The company has not adopted FRS 102 early and hence the 31 December 2015 year is the first time the company has prepared accounts under FRS 102. The financial controller is trying to establish the date of transition.The date of transition is the start date of the earliest period reported in the financial statements. The earliest period reported in the financial statements will be the 2014 comparative year and this year starts on 1 January 2014 and so this is the date of transition to FRS 102.
New UK GAAP and Transitioning Accounts
the following dates of transition will also apply (assuming earlier adoption of FRS 102 is not taken):
Practitioners and company accountants are advised to gather the necessary information sooner rather than later in order to deal with entity’s accounting policy alignments and transitional adjustments at the date of transition and in the comparative year.
PREPARING THE COMPARATIVE INFORMATIONAs explained earlier in this Whitepaper, the rules are retrospective and have to be applied from the date of transition. Assuming a 31 December 2015 year-end, the reality is that adjustments will have to be made as far back as the 2013 closing trial balance as the closing balance sheet on 31 December 2013 will form the opening balance sheet on 1 January 2014 (the date of transition) and an opening FRS 102 balance sheet must be prepared as at the date of transition. Accounting policies will have to be carefully considered to ensure they are compliant with FRS 102; for example if a company adopts the use of the last-in first-out method of stock valuation, this policy will need to be changed because such a valuation method is outlawed in FRS 102 and hence the stock valuation as at 1 January 2014 and 31 December 2014 will need to be restated to comply with the entity’s revised policy.
At the date of transition all transitional adjustments will be taken to profit and loss account reserves (or an alternative component of
Accounting reference date Date of transition to FRS 102
31 December 2015 1 January 2014
31 March 2016 1 April 2014
30 June 2016 1 July 2014
30 September 2016 1 October 2014
New UK GAAP and Transitioning Accounts
equity if the entity considers this appropriate). The comparative period will also need to be restated in light of new and revised accounting policies.
When making adjustments to the comparative periods it is important to carry this out with extreme care because disclosure of the transitional effects on both equity and profit will have to be made in the first set of FRS 102 financial statements so that the user of the accounts is able to understand the impact the transition has had on the entity’s financial statements.
THE SOFTWARE CHALLENGE - NEW IXBRL TAXONOMIESSoftware providers are in the process of amending accounts production software packages so that they are ready for FRS 102. The main requirement is to replace the underlying maps (called “taxonomies”) that attach inline XML business reporting language (iXBRL) tags to items and values in the accounts to permit them to be
Example – investment propertyCompany B Ltd has a year-end of 31 December 2015 and has not adopted FRS 102 early. The company has an investment property on its balance sheet as at 31 December 2014 which was carried at its fair value on that date of £150,000 with a related revaluation surplus in equity amounting to £40,000. On 31 December 2013 the fair value of the investment property was £145,000 with a related revaluation surplus of £35,000. Under FRS 102 the company is going to continue carrying the investment property at fair value.
The date of transition in this example is 1 January 2014. Paragraph 16.7 of FRS 102 requires all fair value gains and losses relating to investment property to be taken to profit or loss and not to a revaluation reserve account and hence the financial statements must be restated from the date of transition in recognition of this revised accounting treatment under FRS 102. Therefore, at the date of transition, the accountant will debit the revaluation surplus of £35,000 and credit profit and loss reserves with £35,000. In the 2014 financial statements (the comparative year) the balance of £5,000 will also be debited from the revaluation reserve account and credited to the profit and loss reserves.
In addition, paragraph 29.16 of FRS 102 requires deferred tax for investment property measured at fair value to be calculated using the tax rates and allowances that apply to the sale of that asset. Therefore, the accountant must also recognise deferred tax at the date of transition and in the comparative year as well as in the current year.
New UK GAAP and Transitioning Accounts
submitted electronically to Companies House and HMRC.
These iXBRL tags allow financial analysts to compare the accounts using software tools, and automate the collection, analysis and publication of data by the government agencies. The process of consulting interested parties and adjusting taxonomies to accommodate new accounting standards is a long one, and the Financial Reporting Council finally published its taxonomies for FRS 101 and FRS 102 in September 2014. (FRS 101 ‘Reduced Disclosure Framework’ allows parent companies and their subsidiaries to take advantage of reduced disclosure exemptions rather than apply full IFRS).
According to the FRC, HMRC and Companies House are expected to adopt the taxonomies in due course. The Irish Revenue Commissioners are also expected to implement these once appropriate Irish requirements (extensions) are available.The current UK filing process will remain the same: upon completion of a set of final accounts, a full set will need to be tagged up and included in the pack of information submitted to HMRC alongside the CT600 Corporation Tax return and computation. Unlike HMRC, Companies House does not apply a mandatory electronic filing regime, but encourages entities to submit tagged accounts. Small firms below the audit and small company accounts thresholds can use an automated joint filing system on HMRC’s website that will direct copies to each agency, while the Companies House will also accept abbreviated accounts filed under its own UK-GAAP-AE (Audit Exempt) taxonomy.
Many of the variations in the new taxonomies are to accommodate the terms used in IFRS reporting and should allow more accurate tagging. But elements will also change to support new reporting requirements under FRS 102 such as the cash flow report, where the taxonomy refers to ‘debit’ and ‘credit’ balance attributes, where ‘credit’ represents an outflow of cash while ‘debit’ represents an
New UK GAAP and Transitioning Accounts
inflow. It is essential to check that any software or service provider you use for tagging accounts under the new standards are aware of the new taxonomies are well versed in aligning the iXBRL tags underlying accounting standards.
PRESENTATION ISSUESWhilst software packages and outsourced tagging service providers will be able to deal with the transitional adjustments and associated disclosure requirements, it is important to emphasise that accountants will have to carry out much of the work in aligning accounting policies, dealing with the necessary transitional entries and ensuring correct disclosures are made within the financial statements themselves.
Companies’ accounting programs will also have to be changed to cope with the new accounting methodologies inherent in FRS 102, such as (among other things) recognising gains and losses on fair value fluctuations of investment property in profit or loss rather than in a revaluation reserve, dealing with the recognition of certain financial instruments on the balance sheet much earlier than in current GAAP (for example derivative financial instruments) and calculating unpaid holiday entitlement at the year-end to be accrued in accordance with Section 28 Employee Benefits.
Terminology will also have to be carefully considered. FRS 102 uses international terminology (for example the balance sheet becomes the statement of financial position). Certain accounts production software packages will allow a choice of using the terminology in FRS 102 (ie the statement of financial position) or using Companies Act terminology (ie the balance sheet). Paragraph 3.22 of FRS 102 does allow a company to use alternative titles for the financial statements provided such titles are not misleading.
Preparers will not necessarily see wholesale changes to the way
New UK GAAP and Transitioning Accounts
that the financial statements are presented because the formats are dictated by the Companies Act 2006. However, the statement of cash flows (cash flow statement) prepared under Section 7 Statement of Cash Flows will be noticeably different in terms of presentation because there are only three cash flow classifications in FRS 102 as opposed to eight cash flow classifications currently contained in FRS 1 Cash Flow Statements.
FILING REQUIREMENTS FOR COMPANIES HOUSE AND HMRCApplying the rules in FRS 102 as far back as the date of transition aims to ensure that the financial information presented is both consistent and comparable. These concepts would not be achieved if the prior year comparatives and the opening balance sheet at the date of transition were not restated to reflect new or revised accounting policies.
Both Companies House and HMRC will not require prior year financial statements to be resubmitted, nor will HMRC require previous corporation tax returns to be amended as a result of the transition. This is because the transition to FRS 102 will be comprehensively disclosed in the notes to the financial statements to comply with the disclosure requirements in Section 35 Transition to this FRS. Certain transitional adjustments made to the financial statements may be allowable for corporation tax purposes or may be disallowable. To help with the tax impacts of FRS 102, HMRC have issued an Overview Paper which considers the tax implications of the transition to FRS 102.
When dealing with the transitional disclosures, it is probably worthwhile including as much disclosure as possible to explain the transitional adjustments (particularly where tax relief is being claimed) by cross-referencing the adjustment to an appropriate disclosure note. It may also be advisable to include the relevant
New UK GAAP and Transitioning Accounts
paragraph number of FRS 102 (where applicable) which requires the necessary accounting treatment.
CONCLUSIONThe move over to FRS 102 is considered to be one of the most significant changes in financial reporting for a generation and hence the transition across must be done carefully to avoid costly errors or oversights. Gathering the information for the preparation of the comparatives sooner rather than later is strongly advised.
Example – illustrative disclosure in the transitional adjustments section
Note 1 - GoodwillGoodwill is amortised in accordance with paragraph 19.23(a) of FRS 102 and as management are unable to assign a useful economic life to the goodwill it is amortised on a straight-line basis over a five-year period from the date of transition to FRS 102.
Profit for the year under previous GAAP X
Goodwill amortisation Note 1 (X)
Profit for the year under FRS 102 (as adjusted X
New UK GAAP and Transitioning Accounts
ABOUT THE AUTHORSteve Collings is the audit and technical partner at Leavitt Walmsley Associates and the author of ‘Interpretation and Application of International Standards on Auditing’.
ABOUT DATA TRACKSDataTracks UK is a part of DataTracks Services Limited, (www.datatracksglobal.com), a global leader in preparation of financial statements in XBRL and iXBRL formats for filing with regulators. DataTracks prepares more than 12,000 XBRL reports annually for filing with regulators such as SEC in the United States, HMRC in the United Kingdom, Revenue in Ireland, ACRA in Singapore and MCA in India.
In the UK, DataTracks provides iXBRL managed tagging services for accounting firms and companies to convert financial statements and tax computations to iXBRL format for filing with HMRC.
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