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Mind the GAAP

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There are changes afoot and much is being made of ‘FRS 102’ and ‘new UK GAAP’, so in an effort to understand what all the fuss is about, and how it will impact on a small accounting practice with a client base firmly in the SME sector, I have dragged myself off to seminars and scoured t’Internet, and what follows is a brief summary of my understanding to date of these changes.

If you can put further flesh on these bones or correct misunderstanding then please feel free to comment.

First a little terminology:

  • IFRS Foundation”: an independent, not-for-profit private sector organisation.
  • “IASB”: International Accounting Standards Board is the independent standard-setting body of the IFRS Foundation.
  • “IFRS”: International Financial Reporting Standards which are designed to be global standard so that company accounts are understandable and comparable across international boundaries.
  • “IFRIC”: International Financial Reporting Standards Interpretations are the official interpretations of IFRSs.
  • “IAS”: International Accounting Standards are international financial reporting standards that were created by the predecessor body of the IASB and form part of the body of IFRS requirements.
  • “SIC”: the official interpretations of the IASs.
  • “IFRS for SMEs”: a self-contained standard of 230 pages, designed to meet the needs and capabilities of small and medium sized enterprises (SMEs) and includes simplified language and fewer disclosure requirements (expect to be aligned with FRS 102 in due course).
  • “SMEIG”: SME Implementation Group is an advisory body to the IASB, is providing recommendations to the IASB in connection with IFRS for SMEs.
  • “Small Company”: organisations with up to £6.5m turnover, £3.26m assets, and 50 employees (to be revised to £10m turnover etc. under new EU directive).
  • “Micro Company”: companies with up to £632k turnover, £316k assets, and 10 employees.
  • “UK GAAP”: Generally Accepted Accounting Practice in the UK is the overall body of regulation establishing how company accounts must be prepared in the United Kingdom.
  • “ASB”: UK Accounting Standards Board which is the body responsible for publishing accounting standards and other guidance.
  • “FRS”: Financial Reporting Standard.
  • “SSAP”: Statements of Standard Accounting Practice.
  • “UITF”: Urgent Issues Task Force of the UK Accounting Standards Board (now disbanded).
  • “SORP”: Statement of Recommended Practice for charity accounts and reports.
  • “New UK GAAP”: new reporting standards applicable from 1st January 2015 (latest) comprising
    1. “FRS 100”: Application of Financial Reporting Requirements which sets out the overall reporting framework.
    2. “FRS 101”: Reduced Disclosure Framework which permits disclosure exemptions from the requirements of EU-adopted IFRSs for certain qualifying entities.
    3. “FRS 102”: the Financial Reporting Standard applicable in the UK and ROI which replaces all existing FRSs, SSAPs and UITF Abstracts.
    4. “FRS 103”: the Financial Reporting Standard for insurance companies.
  • “FRSSE”: the Financial Reporting Standard for small company accounts includes reduced reporting requirements (anticipate this may be phased out in due course).

Phew! so which standard do I use?

Listed company consolidated accounts: must use IFRS

Listed company parent/ subsidiary accounts: either IFRS or UK GAAP (FRS 102)

Other companies: either IFRS or UK GAAP (FRS 102)
Small (& micro) companies: either above or IFRS for SMEs or FRSSE

Charities: must use UK GAAP (FRS 102 or FRSSE) and the new Charities SORP

So in particular, what is FRS 102?

  • for medium and large companies is similar to IFRS but reduced disclosure requirements
  • allows ‘amortised cost’ or ‘fair value’ methods of valuation except equities held which which must be at fair value
  • investment properties should be valued at far value via the P&L where possible but depreciated costs allowable if fair value involves undue cost or effort
  • allows goodwill to be amortised rather than applying impairment method
  • no ‘indefinite life’ option for goodwill
  • other intangibles to be recognised separately from goodwill
  • greater regulation of hedge accounting such as forward currency contracts
  • option to use IAS 39 (which outlines the requirements for the recognition and measurement of financial assets, financial liabilities, and some contracts to buy or sell non-financial items)
  • deferred tax to be provided on revaluations
  • government grants can be recognised immediately or accrued and matched with costs
  • holiday pay entitlement must be accrued where holiday not taken
  • disclosure of total lease commitment (i.e. note on operating lease liability)
  • cash flow statement required
  • reduced reporting for small companies which will no longer be required to include a director’s report, analysis of income

New EU Directive

From 1st September 2013 micro companies can report a greatly simplified balance sheet (and P&L) and are not required to provide notes and analysis on most balance sheet items, but must still include details of directors’ loans.

HM Revenue & Customs

All the above deal with reporting for public record; there are no changes on reporting requirements to HMRC at this time, so from a parochial point of view, is this going to make any real difference?

Paul Driscoll is a Chartered Management Accountant, a director of Central Accounting Limited, Cura Business Consulting Limited, Hudman Limited, and AJ Tensile Fabrications Limited, and is a board level adviser to a variety of other businesses.

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