Q1: We have announced a plan to staff that bonuses will be paid in six months’ time if certain targets are met. The announcement was made and the earning period began prior to the year end, but no payments have been made at the time of preparing the accounts. How should this be accounted for under FRS 102? Should a provision be included in the year end accounts?
FRS 102 Section 28.8 tells us to recognise the expected cost of a bonus payment when we can estimate the obligation reliably and when there is a constructive or legal obligation to make the payment. This is consistent with the requirements in Section 21 of FRS 102 regarding provisions.
Here, the announcement has been made to staff before the year end, which creates a constructive obligation even if formal legal documentation is not in place yet. The payment of the bonus is dependent on company performance, which is outside of the entity's control, meaning the company cannot avoid the outflow if the targets are met.
FRS 102 is not explicit on how this type of bonus should be calculated but, as a period of ongoing employment and performance is required, it would be typical to provide for the bonus as it was earned. In other words, it would generally be accrued over the six-month period provided that it was probable that the related targets would be met. Any expected level of staff loss in the period would be reflected in the valuation of the provision.
Q2: We have been looking at the impact on our financial statements of the amendments to FRS 102, in particular the appearance of our leases. We are concerned that the accounts may appear inconsistent or confusing if we apply the provisions of section 1.47 in amended FRS 102 and do not restate our comparatives. Can we choose to apply the changes retrospectively and restate comparatives for operating leases?
Under amended FRS 102, Section 1.47 explicitly states that entities shall not restate comparatives when applying the new lease accounting requirements. In the context of the standard, the term “shall” is a “must” and so not optional.
Therefore, entities cannot elect to apply the changes retrospectively or restate prior period comparatives for operating leases. The transitional provisions are designed to ensure consistency in application and comparability across entities, even if this results in a change in presentation that may appear unusual in the year of transition.
Q3: We have previously prepared IFRS compliant figures for internal reporting, but these were never used for consolidation purposes. Can we still take advantage of the practical expedient in Section 1.48 of amended FRS 102?
The wording in amended FRS 102 is specific again here. The practical expedient in Section 1.48 permits entities to use IFRS 16 compliant figures that have previously been used for consolidation purposes for the lease liabilities and right-of-use assets, rather than carrying out new calculations in line with the full transition requirements. Since your IFRS 16 figures were prepared solely for internal reporting and not used in consolidation, this practical expedient would not be available.
Q4: We are currently preparing accounts for a client and during the year they experienced high consultancy fees because they undertook significant restructuring. None of these costs can be capitalised, resulting in a large expense in the accounts. As the amount is material, we have advised the client to include this as a separate line item in the profit and loss account and label it an exceptional item. The client is unhappy with this as they feel it draws undue attention to the costs. What is the correct treatment under FRS 102?
FRS 102 does not use the term “exceptional items” but Section 5.9A does introduce a similar concept.
Section 5.9A tells us that material items should be shown separately, either on the face of the statement of comprehensive income or in the notes. FRS 102 is not explicit about how these material items should be labelled but it does call for the nature and amount of these items to be clearly disclosed.
Rather than labelling items as “exceptional” it would be more appropriate, and consistent with the principles of FRS 102, to include any additional lines alongside their normal statutory format heading, and call them something that describes their nature, in this case, perhaps “consultancy fees”. This presentation provides more useful and understandable information to the users of the financial statements at a glance.
FRS 102 Section 5.9A does give the option of splitting material items out either on the face of the primary statement or in the notes, so judgement will need to be applied to establish which is the most appropriate approach in each situation.
