TT304: 2019 year end accounts (FRS102 update)

With 2019 almost at a close, and attention turning shortly to year-end numbers, accounts preparers should be aware of important changes to FRS102 now effective.

In December 2017, the Financial Reporting Council (FRC) concluded their triennial review of new UK GAAP (FRS102) by publishing amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. 

The effective date for the amendments is accounting periods beginning on or after 1 January 2019, and whilst some early application has been permitted, we look here at some of the key changes to note:

Directors’ loans

Non-market rate (e.g. interest-free) loans from a director or a close family member of the director, when one of them is also a shareholder of the company, may now be measured at transaction price (i.e. face value) rather than having to present value future payments discounted at a market rate of interest.

Present valuing such loans was a problematic requirement for smaller entities where it was difficult to determine an appropriate market rate for a similar debt instrument. This exemption is therefore intended to present a more practical solution.

Investment properties

Investment properties rented to another group entity can now be measured at cost less depreciation and impairment rather than at fair value.

This change reflects concerns by smaller entities that the cost of obtaining a valuation for an investment property rented to another group entity far outweighed the benefit.

All other investment property will need to be measured at fair value and no “undue cost or effort” exemption will be available.

Intangible assets

FRS 102 had previously required intangible assets acquired in a business combination to be recognised separately from goodwill. However, intangibles are now only required to be separately recognised if they meet 3 specific criteria; they (a) meet the recognition criteria for intangible assets generally; (b) arise from contractual or other legal rights, and (c) are separable.

This amendment is likely to result in fewer intangible assets being identified separately from goodwill and will result in consistent accounting treatment for goodwill and intangible assets under FRS 102.

However, entities do have the option of recognising additional intangibles if this provides valuable additional information to the users of their financial statements.

Debt instruments

Debt instruments are currently classified as “basic” or “non?basic” under FRS 102. In general, those debt instruments classified as “basic” are measured at amortised cost and those classified as “non?basic” are fairly valued through profit or loss.

Additional description of debt instruments that may be treated as “basic” has been introduced so that when specific conditions are met, being that the debt instrument is one that gives rise to cash flows on specified dates that constitute repayment of the principal advanced, they may also be accounted for as “basic”.

This change will likely result in more financial instruments being treated as “basic”, therefore measured at amortised cost rather than at fair value.

Financial institutions

A simplified definition of a financial institution has now been established so that fewer entities are considered to be “financial institutions” and therefore subject to additional disclosure requirements.

The definition in the Glossary to FRS 102 has been amended to remove the references to “generate wealth” and “manage risk”, so entities such as Stockbrokers have now been excluded from the definition.

IFRS

The amendments do not include any changes arising from recent changes to IFRS, notably the introduction of IFRS 9 (Financial Instruments), IFRS 15 (Revenue from Contracts with Customers) or IFRS 16 (Leases). Any such changes to FRS102 will likely be covered by a separate FRC consultation and will not be effective before 1 January 2022 at the earliest.

Should you have any queries regarding these changes or year-end accounts preparation, please do not hesitate to reach out to your contact at Barnes Roffe.