Financial Reporting Standard 102

Readers of the previous issue of Perspective will be aware that the next few years will see one of the most radical changes in UK Financial Reporting for a generation. From 1 January 2015 a single standard, Financial Reporting Standard 102 (FRS 102), will replace all current Financial Reporting Standards and Statements of Standard Accounting Practice for medium and large UK companies.

On the same date a new financial reporting standard for Smaller Entities (FRSSE) will apply which can be used by qualifying companies (generally companies qualifying as small). The changes to the FRSSE are less radical and this article focuses on the requirements of FRS 102.

The new regime is compulsory for accounting periods beginning on or after 1 January 2015 - i.e. the ? rst 12 month period affected will be 31 December 2015 year ends. However these accounts will also need to show comparatives under the new accounting standards - i.e. numbers for the year ended 31 December 2014 will need to be prepared under the new rules. This means that opening balances under the new rules will be required as at 1 January 2014.

Bearing this in mind the most urgent point to consider is whether the company has any derivatives that will need to be valued at 1 January 2014. You may not think of your business as one which has derivatives, but the de? nition includes forward exchange contracts and interest rate hedging arrangements which are reasonably common. At present it is hard to identify the value of these instruments after the relevant date. Hopefully this will change as banks realise why this information is needed, but until they do the relevant value should be requested in advance of the relevant valuation date.

The new accounting standard allows biological assets and agricultural produce to be included at fair value or cost - the user has a choice. Biological assets are de? ned as a living animal or a plant. If they are to be included at a value then it might be useful to obtain the valuations as at the relevant balance sheet date to avoid problems in getting values at a later stage.

There are also a number of other matters which should be considered at an early stage including:

• Holiday pay - the new standards require that a company make an accrual for unused holiday pay. Whilst some companies already do this others do not and a ? gure for the opening balance will be required at the start of the comparative accounting period.

• Intangible assets - under the new standard there will be the requirement to identify all intangibles acquired as part of an acquisition (for example customer lists, databases and technology). If a company is making an acquisition, the value of the intangible assets acquired should be considered at the time rather than after the event as it will make accounting for the transaction easier.

• Bank covenants - some changes to the accounting standards mean that accounting pro?t might be adversely affected. For example, in the future, the change in value of an investment property will be recognised directly in the pro?t and loss account.

This might mean that pro?t is lower than under the existing standards which could adversely affect bank covenants. If this is likely to be an issue then it should be considered and possibly discussed with the bank at an early stage.

Whilst many aspects of accounting will not change there are a number of small but important changes in the new standard that will need some planning.