FRS 102: Triennial Review 2017 amendments

On 14 December 2017, the Financial Reporting Council (FRC) issued Amendments to FRS 102 - Triennial Review 2017 which makes FRS 102 easier to use as well as providing some useful clarifications.

The amendments are effective for accounting periods beginning on or after 1 January 2019. Early adoption is permitted and could be desirable, in circumstances that are explained below.

Amendments to FRED 67

The FRC did not diverge significantly from the proposals in FRED 67 but did provide some additional helpful clarifications and additions, as follows:

• SORP requirements: where a SORP requires a small entity to prepare a cash flow statement the SORP requirements must be applied.
• Loans from a director’s close family group to a small entity: a new provision explains how to apply the new requirements when making the transition into or out of the small entities regime.
• Immaterial subsidiaries excluded from consolidation: this is now an option rather than a requirement.
• Investment properties: how to deal with the transfer of properties between investment property and inventories.
• Disclosures required by the Companies Act 2006 regardless of materiality: small entities applying section 1A cannot omit these.
• Operating profit: explains that this heading is not mandatory but if it is used, gives examples of items that should be included in it, such as disposals of particular categories of fixed assets and restructuring expenses.
• Cash flows statements: clarifying that the cash flows relating to acquisitions and disposals of subsidiaries or other businesses should be the net cash flows.

FRED 67 proposed introducing certain disclosures, guidance and examples that were not included in the final amendments:

• inventory impairment losses reconciliation;
• allocation of revenue in a single transaction with multiple goods/services provided; and
• an example of a written option that fails the ‘fixed for fixed’ criteria

Could early adoption be an attractive option?

As the simplifications are designed to make FRS 102 easier to use, early adoption may be desirable. However, the costs and benefits need to be evaluated for your specific circumstances. It will be a matter of judgment as to whether to adopt the amendments early or not.

Advantages of early adoption

• Loans from a director’s close family group to a small entity: Small entities can choose not to account for notional interest when measuring loans from a director’s group of close family members (which includes the director) when that group also includes a shareholder in the entity. So, when this exemption is taken, loans meeting the definition of a basic financial instrument will be recorded at transaction price rather than present value. This will avoid the need of having determine an appropriate market rate or a similar debt instrument.
  
  This relief will apply to small LLPs and more small owner-managed businesses than was stated in FRED 67 and the May 2017 interim amendment.
  
  
• Intangible assets acquired in a business combination: Fewer intangible assets may need to be recognised separately from goodwill based on the revised, more restrictive, criteria ie those that meet the overarching recognition criteria and are both separable and legal/contractual rather than separable or legal/contractual. This could save the cost of valuing those intangibles and so, where applicable, will almost certainly be a provision to encourage early adoption.
  

  We expect challenges will remain and there will still be a need for judgement, particularly when assessing the separability criterion eg relationships associated with a customer contract. A qualitative disclosure is required in the year of a business combination of the nature of any intangibles that are subsumed within goodwill.

  Alternatively, entities may adopt a policy of identifying additional intangible assets and valuing them separately. If they do, additional disclosure requirements apply.

  Unlike the other changes, this amendment can only be applied prospectively and comparative amounts relating to previously approved financial statements cannot be re-stated for this change.
  
  

• Investment property: Investment property (or part thereof) rented to another group entity may be transferred to plant, property and equipment and measured thereafter at cost less depreciation and impairment, thereby avoiding the need to obtain further valuations. As an additional consideration, rather than restate a property’s carrying value back to historical cost, entities are permitted, if they make this election, to transfer the property at its fair value and use that fair value as its deemed cost at the date of transition to the amendments.
  
  
• Classification of financial instruments: There is a new principle-based description of a basic financial instrument. More financial instruments may be considered ‘basic’ when applying this description, and so measured at amortised cost even if they fail the general criteria. This could simplify the production of your accounts, if you have a financial instrument which can now be treated as being basic.
  
  
• Revised definition of a financial institution: Fewer types of businesses will be classified as financial institutions and required to provide the ‘enhanced’ disclosures about financial instruments in section 34 (eg stock brokers will no longer be in scope).
  
  
• Accounting for tax on gift aid payments: Entities wholly-owned by one or more charitable entities are permitted to account for the tax consequences of those payments earlier than the period in which the gift aid payments are made, where it is probable that the payments will be made within nine months of the reporting date.

Does early adoption require all the amendments to FRS 102 to be applied at the same time?

Generally, yes. However, the following changes can be applied early separately (both from each other and the rest of the amendments):

• loans from a director’s close family group to a small entity; and
• accounting for tax on gift aid payments.

If you have any queries or concerns about the amendments or you would like to discuss your options for early adopting the amendments, the transitional arrangements or the associated disclosure requirements, please contact Danielle Stewart OBE or speak to your usual RSM contact.