UK GAAP

FRS 101 ‘Reduced Disclosure Framework’ sets out the financial reporting requirements and disclosure exemptions available for use by subsidiaries and ultimate parent companies in their individual financial statements.

FRS 101 permits qualifying subsidiaries and ultimate parent companies to apply the recognition and measurement principles of IFRS in their individual financial statements. Applying FRS 101 may lead to a reduced number of consolidation adjustments necessary to produce the group accounts, and provides disclosure exemptions, a welcome relief from some of the extensive disclosure requirements of IFRS at the entity specific level.

Changes affecting those reporting under FRS 101 include:

• FRC advice on interim reporting
• Brexit: amendments to UK GAAP 
• Brexit: changes to accounting
• Significant changes affect work needed for auditing going concern
• Proposed amendments to FRS 101 - March 2020

Consultations

• New proposed amendments to FRS 101
  
  

FRS 101: What entities qualify

A qualifying entity is defined in FRS 101 as:

• A member of a group where the parent of that group prepares publicly available consolidated financial statements which are intended to give a true and fair view (of the assets, liabilities, financial position and profit or loss) and that member is included in the consolidation.
• A charity may not be a qualifying entity.

However, a qualifying entity which is required to, or voluntarily chooses to, prepare consolidated financial statements may not apply FRS 101 in its consolidated financial statements.

This does not prevent a qualifying entity which prepares consolidated accounts from applying FRS 101 in its individual financial statements and another reporting framework (eg EU-adopted IFRS) to its consolidated financial statements.

In order to apply the disclosure exemptions of FRS 101, a qualifying entity must also comply with the following requirements:

1. Adopt the recognition, measurement and disclosure requirements of EU-adopted IFRS but make amendments where necessary in order to comply with the Companies Act and company regulations.
2. Disclose:
   • a summary of the disclosure exemptions taken; and
   • the name of the parent of the group in whose consolidated financial statements the financial statements of the entity are included, and where these may be obtained.
3. For periods beginning before 1 January 2016 only, notify shareholders and ensure objection has not been received from:
   • the immediate parent;
   • a shareholder with 5% or more of the shares; and
   • a shareholder with more than 50% of the shares not held by the immediate parent.

Please note that while an entity may meet the definition of a qualifying entity and may therefore apply FRS 101 to its individual financial statements, some of the disclosure exemptions may only be taken when other conditions are satisfied.

FRS 101: What disclosure exemptions are available

FRS 101 provides a number of disclosure exemptions for qualifying entities, some of which are available automatically and some of which require equivalent disclosure by the parent entity.

Some disclosure exemptions are automatically available such as:

• cash flow statements;
• key management personnel remuneration and transactions with parent companies and wholly owned subsidiaries; and 
• comparative reconciliations for property, plant and equipment, intangible assets and investment property. 

Others are available when equivalent disclosures are provided in the consolidated financial statements such as:

• for non-financial institutions many of the financial instrument and fair value disclosures;
• many disclosures in respect of business combinations and share-based payment arrangements; and 
• details of key assumptions used for the purposes of impairment testing.  

In addition, some of the disclosure exemptions are not available to entities which are financial institutions.

Disclosure exemptions automatically available

First–time adoption

• The requirement to present an opening statement of financial position at the date of transition (IFRS 1.21). 

Primary statements

• A statement of cash flows for the period (IAS 1.10(d), 111).
• A statement of financial position as at the beginning of the preceding period when an entity applies an accounting policy retrospectively or makes a retrospective restatement (IAS 1.10(f), 38A-38D,40A-40D). 

Other disclosures

• Comparative period information in respect of the following (IAS 1.38):
  
  • a reconciliation of shares outstanding at the beginning and end of the period (IAS 1.79(a)(iv));
  • a reconciliation of carrying amount of PPE at the beginning and end of the period (IAS 16.73(e));
  • a reconciliation of carrying amount of intangible assets at the beginning and end of the period (IAS 38.118(e));
  • reconciliations of investment property as measured under the fair value model and/or cost models at the beginning and end of the period (IAS 40.76 & 79(d)); and
  • a reconciliation of carrying amount of biological assets at the beginning and end of the period (IAS 41.50).
• Information relating to the entities objectives, policies and processes for managing capital (IAS 1.134-136). 
• Information relating to new IFRS standards which have been issued but which are not yet effective, including an assessment of the possible impact that it will have when it is adopted for the first time (IAS 8.30-31).
• Disclosure of key management personnel remuneration (IAS 24.17). 
• Disclosure of amounts incurred by the entity for the provision of key management personnel services that are provided by a separate management entity (IAS 24.18A). 
• Disclosure of related party transactions entered between two or more members of a group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member.

Other disclosure exemptions available

The following disclosure exemptions are only available where equivalent disclosures are included in the consolidated financial statements of the group in which the entity is consolidated.

Business combinations

• Certain information relating to business combinations completed during the reporting period (IFRS 3.62 and IFRS 3 B64(d),(e),(g),(h),(j)-(m),(n)(ii), (o)(ii),(p), (q)(ii)).
• Details of any business combination required by B64 in relation to any business combination that occurred after the end of the reporting period, but before the financial statements were authorised for issue (IFRS 3.B66).
• Information relating to:
  • incomplete accounting for business combinations;
  • contingent consideration;
  • contingent liabilities;
  • reconciliation of goodwill; and
  • an explanation of any amounts recognised in profit or loss that relates to assets or liabilities acquired in a business combination in the current or a previous period (IFRS 3.B67). 

Non-current assets held for sale and discontinued operations

• The net cash flows attributable to operating, investing and financing activities of discontinued operations (IFRS 5.33(c)).

Financial instruments

• All the disclosure requirements of IFRS 7 Financial Instruments: Disclosures. (IFRS 7 - all disclosures).
• These exemptions are not available to entities which are financial institutions.     

Fair value measurement

• Details of the valuation techniques and inputs used to develop measurements of assets and liabilities measured at fair value.
• The effect of measurements on total comprehensive income for assets and liabilities measured on a recurring basis using significant unobservable inputs. (IFRS 13.91-99).
• These exemptions are not available to entities which are financial institutions.
  
   

Impairment

• Details of the valuation technique and key assumptions used to measure fair value less costs of disposal where the fair value is categorised as Level 2 or 3 in the fair value hierarchy and the asset or CGU has been subject to an impairment loss or reversal of impairment loss in the year (IAS 36130(f)(ii) & (iii)).
• The valuation technique and details of key assumptions used to determine recoverable amount for CGUS containing significant goodwill or intangible assets with an indefinite useful life and sensitivity to assumptions if a reasonable change in a key assumption would result in impairment (IAS 36.134(d)-(f)).
• For goodwill or intangible assets with indefinite useful lives allocate across multiple cash generating units, details of the key assumptions used in determining the recoverable amount and, sensitivity to assumptions if a reasonable change in a key assumption would result in impairment (IAS 36.135(c)-(e)).

Share-based payments

• A reconciliation of share options in the year (IFRS 2.45(b)).
• Details of how fair value of the equity instruments granted during the period was determined. (IFRS 2.46-49).
• Information about the effect of share-based payments on profit or loss and financial position (IFRS 2.50-52).
• These exemptions are only available where the entity is either, a subsidiary and the arrangement concerns equity instruments of another group entity, or, where the entity is a parent and the arrangement concerns its own equity instruments and its separate financial statements are presented alongside the consolidated financial statements of the group.
  
   

FRS 102 came into effect for accounting periods commencing on or after 1 January 2015.

The following entities can apply FRS 102:

• entities which are not required to apply IFRS;
• small entities; and
• micro-entities.

Small entities can also apply FRS 102 Section 1A (S1A) and micro entities can also apply FRS 102 S1A or FRS 105.

The accounting policy choices you apply could enable you to influence the strength of your balance sheet or simplify your accounting but care must be taken because they may also create earnings volatility.

Fundamental to FRS 102 is the concept of ‘Fair Value’. In some instances you may require expert advice to determine a fair value.

Changes affecting entities reporting under FRS 102

• FRS 102: Periodic review 
• FRS 102: 2021 and beyond 
• Does a change to accounting for leases under US GAAP impact my UK entity?
• FRC advice on interim reporting 
• Brexit: amendments to UK GAAP 
• Coronavirus and FRS102 
• Brexit: changes to accounting 
• Significant changes affect work needed for auditing going concern 
• Amendments to FRS 102 for pension accounting
• FRS 102: Triennial Review 2017 amendments

FRS 102: Accounting policy choices

The accounting policy choices you use in FRS 102 could enable you to influence the strength of your balance sheet or simplify your accounting but be careful, because they may also create earnings volatility.

Borrowing costs

These may be capitalised as part of the cost of a qualifying asset or written off as incurred. A qualifying asset takes a substantial period of time to get ready for its intended use or sale and could be property, plant and equipment, investment properties or inventories. The policy must be applied consistently to each class of qualifying asset.

Development costs

These may be written off as incurred or capitalised if certain criteria are met. It must be clearly demonstrated that the criteria have been achieved. The policy must be applied consistently to all expenditure that meets the criteria.

Fixed assets

Each class of property, plant and equipment, heritage asset and intangible asset (other than goodwill and exploration and evaluation assets (EEA)) may be measured at fair value less depreciation and impairment losses. Gains and losses are recognised in a revaluation reserve or, in certain circumstances, profit and loss. Alternatively, these assets can be measured at depreciated cost less impairment losses.

Financial instruments

An entity can choose to apply FRS 102 or the recognition and measurement principles of its international equivalent IAS 39 (as adopted in the EU) or IFRS 9 and the disclosure requirements of FRS 102. Public benefit entities may measure all concessionary loans made or received initially at the amount received/paid or at fair value.

Government grants

Entities may apply the performance model or the accrual model on a class-by-class basis. Under the performance model income is only recognised when any performance conditions are met. With the accrual model, income is recognised on a systematic basis over the periods in which the entity recognises the related costs.

Leased property interests

A property interest held under an operating lease may be classified and accounted for as investment property if the property would otherwise meet the definition of an investment property and the lessee can measure the fair value of the property interest without undue cost or effort on an on-going basis. This option is available on a property-by-property basis.

FRS 102: Fair Value

Fundamental to FRS 102 is the concept of ‘Fair Value’. Fair value is the amount for which an asset, liability or equity instrument could be exchanged or settled between knowledgeable, willing parties in an arm’s length transaction. In some instances you may require expert advice to determine a fair value..

Property, plant and equipment

A class of assets may be measured at fair value. Whilst there are no fixed intervals when revaluations must be performed, they must be performed with sufficient regularity to ensure that the carrying value does not materially differ from its fair value at the reporting date.

Investment property

Investment property whose fair value can be reliably measured without undue cost or effort must be measured at fair value with gains and losses recognised in profit and loss.

Financial instruments

Under FRS 102 certain instruments must be measured at fair value with gains and losses recognised in profit and loss (eg interest rate swaps/options, forward contracts, commodity contracts, some debt instruments and investments in non-convertible and non-puttable shares that are publicly traded or their fair value can be estimated reliably).

Investments

In individual entity accounts, investments in subsidiaries, associates and jointly controlled entities may be held at cost less impairment or fair value with gains and losses recognised in a revaluation reserve or, in certain circumstances, profit and loss. A parent may also opt to recognise fair value gains and losses entirely in profit or loss.

Business combinations

Intangible assets whose fair value can be measured reliably need to be recognised separately from goodwill on acquisition ie intellectual property, customer contracts, relationships, in-process R&D.

Biological assets

A living animal or plant may be measured at fair value (if fair value can be measured reliably) with gains and losses recognised in profit and loss or held at depreciated historical cost. The policy must be applied consistently to each class of biological asset and its related agricultural produce.

In September 2015, FRS 102 was amended to include a new Section 1A (S1A). With effect from 1 January 2016, this section replaces the FRSSE. Whilst the recognition and measurement requirements of FRS 102 will apply, Section 1A sets out the presentation and disclosure requirements for small entities.

Who can apply Section 1A?

Section 1A may be applied by:

• companies that are not excluded from the small companies regime;
• LLPs that are not excluded from the small LLPs regime*; and
• other unincorporated entities that qualify as small.

An entity will qualify as small if:

• two or more of the thresholds are met in the current financial year; and 
• two or more of the thresholds were met in the previous financial year (if the company is not newly incorporated).

Small company thresholds

What is the difference between FRS 102 and FRS 102 S1A?

If you choose to report under FRS 102 Section 1A you can:

• retain the ability to omit the profit and loss account and directors’ report when filing accounts at the Registrar* but no longer have the option to prepare separate abbreviated accounts; 
• potentially reduce the volume of disclosure notes in your accounts compared to applying all the disclosure requirements of FRS 102; and 
• prepare abridged accounts as your statutory accounts (if all members agree).

*Does not apply to charitable companies.

In a addition, parent companies of small groups continue to be exempt from the consolidation requirement and, together with their subsidiaries, may also be eligible to apply reduced disclosure options under FRS 102, the latter being an alternative to section 1A.

However, directors will still have to comply with the Companies Act and show a true and far view of the company’s assets, liabilities, financial position and performance. You will, therefore, need to include all relevant disclosure notes. 

What is the difference between FRS 102 S1A and the FRSSE?

FRS 102 has, at its basis, IFRS which is quite different to old UK GAAP. If there are any transition adjustments arising from changes in recognition or measurement from old UK GAAP to FRS 102, these will be processed at the opening date of the comparative accounts eg 1 January 2015 for a 31 December 2016 year end. This means that your accounts may need to be restated. In addition, the formatting of your accounts will certainly change under FRS 102.

You will need to identify areas in your accounts where transition adjustments are likely to arise. The consequences of these adjustments could affect your ability to pay dividends and the amount and timing of tax due. 

It is not all bad news, there may be opportunities on transition to boost your balance sheet if you have fixed assets that are worth more than they are recorded in the accounts for, and this can be recorded as a one-off transition adjustment which is treated as deemed cost. 

Is early adoption available?

Early adoption of Section 1A is available however care must be taken. Section 1A is brought in as a result of the EU directive which was introduced into UK law via Statutory Instrument 2015/980 Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015. So, whilst the option is available, all the other changes brought into the Companies Act 2006 and the Statutory Instrument 2008/409 Small Companies and Groups (Accounts and Directors' Report) Regulations 2008 via SI 2015/980 must also be applied.

For more information, please get in touch with Danielle Stewart.

With effect from 1 January 2016, FRS 105 can be applied by micro entities. FRS 105 replaces the FRSSE and micro-entities will have to choose a different framework.

Who can apply FRS 105?

FRS 105 may be applied by companies that do not exceed two of the following criteria in the current year and in the prior year (unless the entity is newly incorporated):