Q1: We have taken on a new client and we have identified a material prior period error. The client is unhappy about the idea of changing figures that have already been filed. Are we able to choose to correct the error in the current year rather than restating comparatives?
FRS 102 section 10.21 doesn’t allow for an accounting policy choice here. As the error is material it needs to be corrected retrospectively in the first set of financial statements following the identification of the error. This will involve restating the comparatives and adjusting any opening reserves that are impacted.
If the client does not wish to see this correction as a prior period restatement in the next set of accounts, they could potentially look to section 454 of Companies Act 2006 and choose to refile the previous accounts under the defective accounts regime. Refiling is not required; it is a voluntary option available to Directors. Any refiled accounts would be added to the company’s record at Companies House rather than replacing the previously filed accounts.
Where an entity is audited, they should notify the auditor when revised accounts are being prepared under section 454, as the auditor will need to issue either a new audit report or a statement explaining why the original report remains unchanged.
Additional resources:
- Defective accounts and reports helpsheet
- Revision of defective accounts factsheet
- Filing requirements and defective accounts page
Q2: We have a client that has transactions with another entity which was a related party during the period we are reporting on but by the end of the period they were no longer a related party. How do we handle the related party disclosures?
FRS 102 does not state whether a relationship needs to exist at the year-end for parties to be related for disclosure purposes. This means that the disclosure requirements are open to interpretation.
We need to consider how to best make the information provided informative and helpful to users of the financial statements. Being transparent over the relationships and transactions entered into can be the best approach here, and potentially the approach that is most easily defended.
A sensible way forward would be to include details of transactions entered into while the parties were related. When it comes to year-end balances an argument could be made that closing balances are not required because the parties were unrelated at the year end. However, information on outstanding balances could give useful information to users of the financial statements on the approach taken to clearing related party balances.
Ultimately judgement will need to be applied, and the approach taken should be documented and applied consistently.
Additional resources:
Q3: We have a client that is constructing an asset and capitalising expenditure related to this. The asset is to be used going forward in the operations of the company and so has been classified as property, plant and equipment in the financial statements. A question has arisen about the limits on the nature of the costs that can be capitalised.
There were initially significant costs incurred assessing the possibilities of different sites and carrying out environmental surveys on multiple potential sites before the site that is being used was selected and obtained. Can these costs be capitalised as part of the asset?
Following the acquisition of the site, substantial demolition and site preparation was undertaken. Should these costs be capitalised?
It may be useful for management to keep track of all costs incurred for their internal assessment of the success of the project, but these records would not necessarily feed directly into the financial statements.
For the financial statements we need to follow section 17 of FRS 102; the nature of the costs that can be capitalised is covered in sections 17.10 and 17.11.
If we consider the due diligence and surveys carried out initially, we need to assess whether these costs are directly attributable to the asset we are now constructing and capitalising. Typically, professional service fees incurred in identifying the site that is being used, including surveys of that site, would be capitalised because these would be considered directly attributable to the asset. However, we should only capitalise the costs that relate to the asset we are now constructing on the selected site. Costs that relate to other sites that were not selected would not be capitalised because the link to the ongoing project is not direct; these are more akin to costs that relate to speculative or aborted projects and should be expensed.
When we look at site preparation costs and demolition of assets that were already present, we need to consider whether the costs relate to the new asset, or whether they should feed into the gain or loss on disposal of those existing assets. Typically, where a site is acquired specifically for the project, the site preparation and demolition costs would be capitalised. However, if the existing assets have been used by the entity prior to their removal, these costs would form part of the disposal of those assets.
In a lot of cases these assessments will be straight forward but, where judgement is required, it is recommended to keep file notes to document the considerations and judgements made.
