FRS102 - a major change to accounting standard in the UK and IrelandMany companies are unprepared for one of the biggest changes in financial reporting in 20 years.
FRS 102 is a single accounting standard that will replace UK and Irish GAAP for accounting periods beginning on or after 1 January 2015, although early adoption is permitted. This represents the most widespread and fundamental financial reporting change in the last 20 years.
Although FRS 102 retains the familiar principles of going concern, consistency, comparability and materiality, in many respects financial statements will look very different. FRS 102 introduces changes to terminology, financial statement format, primary statements and accounting policies and, for all but the simplest of organisations, is likely to result in differences in both reported profits and taxation. It also introduces new disclosure requirements.
For the people who run financial reporting in the UK or the Republic of Ireland (ROI), this is as big as it gets. However, many UK and ROI businesses are failing to appreciate the impact it could have and are not planning accordingly. For some, the impact of the new standard on their business will not be immediate, but having an awareness of what the key changes are is important so that they have a response ready when required.
For businesses preparing their first set of accounts, it may be sensible to start with FRS 102 rather than prepare accounts under current UK GAAP and then restate two years or so later. In addition, because some of the accounting treatments are different from current UK GAAP, there are quite a few situations where either profits or net assets will be lower or higher. This in turn could lead to a reduction in corporation tax or an improved reported performance.
It is also worth thinking ahead when negotiating financial covenants, and considering the impact of the transition to FRS 102, for example for profit and loss covenants, e.g. interest cover and exclusions/add backs for any fair value movements recognised in profit and loss.
Managing the transition
FRS 102 includes a variety of transition reliefs and choices over accounting treatment. To assess which of these choices is most appropriate for a company will take time and detailed investigation. It is likely that many businesses will significantly underestimate the amount of work and time required to manage the transition and therefore the earlier the process is started the better.
It is also essential to start preparing for this transition as soon as possible to avoid losing some benefits. In particular, some of the important reliefs from hedge accounting in relation to financial instruments require parts of the process to be in place at transition date. For companies with December year-ends this therefore means prior to 31 December 2013. Clearly, it is too late for those companies who are not already reasonably advanced in their thinking on this point.
For more information, contact:
Smith & Williamson, UK
T +44 20 7131 4235