The first review of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, which was mandatory for years commencing on or after 1 January 2019, concentrated on making the standard easier to use, with incremental improvements and clarifications. The trickier issue of updating FRS 102 to reflect major developments in international standards – namely IFRS 9 Financial Instruments, IFRS 15 Revenue and IFRS 16 Leases – was held over to a future update of the standard in order to learn from IFRS implementation experience. With outreach work on the next periodic review of FRS 102 set to start in early 2021, this article considers the factors that might drive any changes.
IFRS for SMEs is under review
In January 2020 the International Accounting Standards Board (IASB) issued a request for information as a first step in its second comprehensive review of the IFRS for SMEs. FRS 102
was originally based on the IFRS for SMEs, therefore its next update will certainly have an impact on the Financial Reporting Council’s thinking about how to update UK GAAP. However, we need to remember that the IFRS for SMEs was itself based on the UK’s Financial Reporting Standard for Smaller Entities (the FRSSE), the main standard under ‘old UK GAAP’ used by small reporters for the 15 years of its reign. In this area of reporting, as well as others, the UK leads rather than follows, and so whilst it is very helpful to know what the IASB is doing, we are not obliged to follow.
There is also a practical reason why FRS 102 might not follow the IFRS for SMEs. The international small company standard was designed to cater for the many very small entities around the world that previously had no formalised financial reporting regime to apply, and for whom full IFRS was simply over the top. Many of these entities are far smaller than the typical FRS 102 user and have limited stakeholders beyond the owner-manager and the local tax authorities. For this user group, maintaining a steady state is one of the most important characteristics for its reporting regime, and staying in line with full IFRS does not matter.
In the UK, on the other hand, FRS 102 is available for all UK reporters (other than those entities required to apply IFRS in their consolidated accounts). This means it is frequently used by large groups with significant levels of turnover, who might well be on their way to full IFRS reporting in the long run. For these reporters, consistency with IFRS is more important than a steady state. Moreover, the latest changes in financial reporting will be necessary and appropriate for the nature of their businesses and transactions.
The UK also has the advantage of a separate micro company standard, FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime, which has simplified measurement requirements. The existence of this standard means that we can save the smallest businesses from changes that might be inappropriate for this sector. Feedback indicates that small international companies consider FRS 105 to be a useful standard, and that an appetite exists for something similar within the international suite of standards.
ICAEW’s response to the IASB’s request for information recommends that there should be a rebuttable presumption that the IFRS for SMEs should be aligned with full IFRS unless a cost/benefit analysis gives clear grounds for not doing so. ICAEW is supportive of aligning the principles, definitions and wordings of requirements, as long as they are relevant to SMEs and to users of SME accounts. The response recommends some simplifications compared to the full requirements of the new IFRS but the simplifications recommended are less extensive than those proposed by the IASB.
Exiting the European Union
The UK’s exit from the EU will bring into force certain statutory instruments that will change the way IFRS are adopted in the UK, resulting in some new language that will need to be reflected in FRS 102. Other than this, it is not anticipated that Brexit itself will have any impact on UK GAAP in the short term.
However, in the longer term it might well do, as the UK ceases to be regulated by European accounting directives. For example, FRS 102 Section 1A Small Entities was introduced because a change in the accounting directives permitted small companies to use a reduced disclosure regime and required member states to implement the directive verbatim. Over time, UK reporters have become used to these reduced disclosures, but some critics argue there is little logic to them.
Similarly, FRS 105 came about as a result of a European directive and although it generally works well, it also has its critics. When the UK is no longer bound by adherence to EU accounting directives, it might pave the way for changes to the small and micro-entities regimes. However, it will take primary legislation to make any changes and financial reporting is unlikely to be at the top of the Government’s legislative agenda for many years.
Changes through consultation
In general, FRS 102 (and its sister standards) work well. However, there are a few areas where improvements could be made. For example, COVID-19 has put Section 24 Government Grants under the spotlight. This section gives an accounting policy choice between the ‘accruals model’ and the ‘performance model’. The equivalent international standard on government grants (IAS 20) gives only one approach, effectively the accruals model plus the principle that grants with performance conditions attached should not be recognised until there is reasonable assurance those conditions will be met. FRS 102’s performance model requires government grants without performance conditions to be recognised on receipt, which can lead to lumpy and counterintuitive reporting. I think Section 24 should be amended to be more consistent with IAS 20.
Another area that could be reviewed is Section 35 Transition to this FRS. This section was written with initial application of FRS 102 in mind and requires a fully retrospective approach to be adopted. The application of recent new IFRS has tended towards non-restatement of prior periods – the cumulative catch up or modified retrospective approach. Perhaps it would be sensible to allow this approach as an option, where appropriate, in Section 35. <
Consultation is bound to throw up other areas where users want further changes, but these are likely to be more niche. For example, the article on the next page of this magazine highlights the challenges of accounting for share-based payments by private companies. The agricultural provisions of Section 34 Specialised Activities are also being questioned.
In conclusion, it is likely that the upcoming periodic review of FRS 102 will concentrate on incorporating IFRS 9, 15 and 16, with less detailed requirements and simplified disclosure, but only minor changes in measurement. The Financial Reporting Faculty will continue to monitor developments and respond as appropriate to future consultations. If you have any thoughts you would like to be taken into account, please get in touch by emailing frf@icaew.com.
About the author
Danielle Stewart OBE, Head of Financial Reporting, RSM UK
