For as long as I can remember, changes in accounting standards have had one common theme; a seemingly never-ending trend towards greater regulation and complexity in accounting and financial reporting.
However, the latest amendments to FRS102 are in fact good news – for once a more common sense approach is being adopted, and the changes are largely beneficial in terms of removing rather than reinforcing burdensome and complex requirements.
Additionally, although the changes don’t become mandatory until 2019, they have now been approved and are available for early adoption.
The key changes are as follows…
FRS102 introduced the often unwelcome requirement to make a discounting adjustment to loan balances in certain circumstances – usually where the loan has a fixed term but interest rate charged is not a market rate.
So if you have a group where one member has borrowed money from another on an interest free basis but repayable in 5 years’ time, the general expectation is that the borrower should show an interest charge in profit and loss at an appropriate rate, and the lender would show interest income. This has generated debate on points including the usefulness of preparing accounts showing profits after interest charges that do not relate to cash flows, and because of the difficulty in determining what market rate should be used to calculated the discount. Arguably in many cases there may not be a market rate because the loan has been made where there is no market alternative.
These rules still apply in many circumstances – including intercompany balances such as the above. However, where the following apply:
- The company qualifies as a small company;
- It has received a loan;
- The loan is from a director of the company’s group of close family members (which includes the director); and
- That group includes a shareholder in the company.
Then the discounting requirement falls away and the “old GAAP” treatment of recording at book value can be applied.
FRS102 requires investment property to be recorded at fair value with changes through profit and loss, but in its original version allowed cost to be used where there was “undue cost or effort” in obtaining a valuation. This is now no longer permitted. Arguably other than for highly specialised properties the “effort” part given the availability of qualified valuers should not be controversial, although some may still argue that the “cost” element is still undue.
A more helpful change, however, is the removal of an anomaly in relation to properties held by one member of a group but occupied by another. For consolidated groups, this resulted in accounts where the property would be likely to be shown at cost at the consolidated level, but the member of the group holding it would be required to obtain valuations. This is now removed so cost applies at both levels.
Intangible assets on business combinations
Another welcome development is the removal of the obligation to separate intangibles such as customer lists, customer relationships or unprotected trade secrets from the goodwill arising on the acquisition of a business. Many had questioned the benefits of the time-consuming and judgemental valuation process imposed by the original standard, and whether the additional information it generated was genuinely useful.
Certain intangibles will still need to be separated (examples include licences, copyrights and trademarks), and as a policy choice it is possible (if you want!) to continue to record the non-mandatory items on a class by class basis. (Early indications are that many corporates will revert to the “old GAAP” treatment of a single goodwill figure).
Less significant changes include:
- The reintroduction of a net debt reconciliation to required cash flow disclosures
- Limited relaxation of the guidance on distinguishing between ‘basic’ and ‘complex’ financial instruments
- Additional guidance on recognising revenue as an agent or a principal
- Amendments to the definition of a financial institution
- Disclosure requirements for small Republic of Ireland companies
The new rules apply for periods starting on or after 1 January 2019, but can be early adopted from now as long as all the changes are applied.
For property that is no longer required to be treated as investment property, instead of reverting to historic cost it is possible to carry forward the revalued amount as deemed cost (i.e. and not have to continue revaluing it).
Companies that have booked intangibles that would not be required under the new rules will continue to carry forward and amortise these assets, but not have to add any new ones.
There’s a link to the detail of the revisions below – please don’t hesitate to email me should you have any questions – email@example.com.