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John Selwood Q&As

Questions about the audit implications of FRS 102 simply won’t go away. This time John Selwood deals with some of the broader issues that auditors are encountering.

Q) Because of my audit client's low distributable reserves the company has always pushed the boundaries when declaring distributions. As auditor, I have previously identified illegal dividends and in my auditors’ communications to management I have advised, on a number of occasions, the directors to prepare management accounts before making distributions. Management is objecting to my suggestion that these management accounts should apply FRS 102. Am I right to suggest this?

A) Probably, yes. Ordinarily, the availability of distributable reserves will be determined by looking at the latest relevant financial statements. In this case it is clear that the distributable reserves shown in those accounts will not always be sufficient, so interim accounts will be needed.

Assuming the company is not small, for periods commencing before 1 January 2015, old UK GAAP can be applied when preparing those accounts. Thereafter, new UK GAAP will need to be applied. In your case this appears to be FRS 102.

If the company were small, of course, the relevant application date would be periods commencing 1 January 2016.

Therefore, after the mandatory FRS 102 application date has passed, interim accounts, for the purposes of determining distributable profits, should apply FRS 102. I wonder how many companies have not spotted this?

This is an extract from an article in the July/August 2015 edition of Audit & Beyond, the magazine of the Audit and Assurance Faculty.

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