Financial Reporting Standard

What are the Implications of changes to the Financial Reporting Standard, FRS 102?

The Generally Accepted Accounting Practice of the UK (UK GAAP) is the regulation that establishes how accounts must be prepared in the UK, encompassing both accounting standards as well as UK company law.

What is FRS 102?

FRS 102 comes into UK GAAP, as a new standard that largely replaces existing accounting standards for most large and medium-sized businesses, but there are also certain paragraphs in Section 1A of FRS 102 that effect small business or, as they are known, Micro-entities. The changes will affect how businesses prepare their accounts and will have a significant impact on both balance sheets and profit and loss accounts. It may also affect how much tax is paid by the business and its ability to pay dividends; it may also change the result of a current contract, a loan covenant, earn-out, profit sharing agreement, or bonus scheme.

Who will be affected by FRS 102

Small business or micro-entities may choose to adopt FRS 102, but must take careful note of where FRS 102 affects the Financial Reporting Standard for Smaller Entities (FRSSE), and by January 2016 resort solely to Section 1A of FRS 102 for the guidance. FRS 102 is mandatory for most large and medium-sized businesses that are not already applying full International Financial Reporting Standards (IFRS). If any two of the following bullets below apply to your business then it is probably not classed as a "small" or micro-business and you must already have applied the changes:

• Your turnover is over £6.5m
• You have assets of more than £3.26m
• You have more than 50 employees

When did it come into force?

The new rules come into force for accounting periods starting on or after 1st January 2015, but some businesses implemented FRS 102 earlier.

The adoption timetable has been:

Year	Adoption	Which businesses are effected?
2013	First optional adoption date for year-end 31/12/2012	Medium and large businesses. Small or micro-businesses can use FRSSE, but should note exemptions in FRS 102
2014	Opening balance sheet 1/1/2014	Medium and large businesses. Small or micro-businesses can use FRSSE, but should note exemptions in FRS 102
2014/2015	Comparative year balance sheet 31/12/2014	Medium and large businesses. Small or micro-businesses can use FRSSE, but should note exemptions in FRS 102
2015/2016	Comparative year balance sheet 31/12/2014	Medium and large businesses. Small or micro-businesses NOTE that FRSSE is withdrawn from January 2016 and replaced by FRS 105 or Section 1A of FRS 102

Preparation For businesses that planned for the switch, they will have anticipated any unexpected impacts. The key impact of FRS 102 on your accounts and your wider business are:

• Tax
• Profits available for distributions
• Covenants, earn-outs, profit sharing and bonus schemes
• Credit references

Key questions?

• Have you planned for the changes?
• Have you collated all the information needed for the transition?
• If not, do you know how to soften the blow?

For small businesses, if you currently use the Financial Reporting Standard for Smaller Entities (effective from January 2015), you should now be ready to make sole use of Section 1A of FRS 102 from 1 January 2016; Section 1A of which is the FRS applicable to micro-entities. Micro-entities are defined by the Companies Act as companies that do not exceed two or more of the following thresholds (together with further criteria):

Turnover	£632,000
Balance sheet total	£316,000
No. of employees	10

Certain new paragraphs have been added to both FRSSEs that are relevant only to micro-entities. These are:

• Require micro-entities to disregard the majority of the presentation and disclosure requirements of the FRSSE;
• Disallow certain measurement bases allowed within the FRSSE;
• Require the use of the primary statement format provided in The Small Companies Regulations 2013;
• Significantly reduce the number of disclosure notes required

How will businesses be affected?

Some of the key changes	How it could affect you
Derivatives move onto the balance sheet at fair value with movement through P&L	Profit fluctuation
Changes in the value of investment properties will show as profit or loss For groups, more investment properties shown in individual company accounts	Profit fluctuation
Multi-employer pension schemes more likely to be on balance sheet	New liabilities on the balance sheet
More intangible assets separate from goodwill Amortisation presumed to be five years; no infinite amortisation period	Profits following the acquisition of a business may be lower Taxable profit affected
May spread lease incentives over a longer period	Initial profit reduction Tax paid later
More finance leases due to definition change	Taxable profit affected
Transitional arrangements may have permanent benefit	Could increase balance sheet value of properties in pre-conversion accounts without committing to future revaluations
Negative goodwill written back immediately	Increase assets

How can DNS help?

The implications of FRS 102 are complex and decisions you make now could have implications for the future. Call your DNS account manager who can support and advise you about what to do, including:

• A preliminary general discussion about FRS 102 and what it means to you;
• Help with gathering information at transitional balance-sheet dates
• A review of key accounting differences
• An assessment of the impact on every area of your business, including tax advice on how to minimise the impact of conversion, such as removing potential dividend blocks and minimising profit and loss volatility
• Drafting converted accounts once FRS 102 is adopted

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