FinancialReporting
FINANCIAL REPORTING
Periodic review of UK and Ireland GAAP
Steve Collings gives a run-through of the amendments in the FRC’s periodic review of UK and Ireland GAAP.
Words: Steve Collings Illustration: Michał Bednarski
As has been widely publicised, the Financial Reporting Council (FRC) published its final amendments to UK and Ireland accounting standards on 27 March 2024. These amendments come into effect for accounting periods commencing on or after 1 January 2026. Early adoption is permissible provided all the periodic review amendments are applied at the same time.
The headline amendments, of course, relate to on-balance sheet lease accounting for lessees (FRS 102 only) and the introduction of a comprehensive five-step model approach for revenue recognition (both FRS 102 and FRS 105). These issues have been covered in previous articles, and more detailed technical articles on these subjects will be published in the next few months.
This article focuses on some of the less prevalent changes that have been made to UK and Ireland accounting standards that preparers will need to have an awareness of.
Concepts and Pervasive Principles
The Concepts and Pervasive Principles is found in Section 2 Concepts and Pervasive Principles of both FRS 102 and FRS 105.
The Concepts and Pervasive Principles has been completely redrafted in order to align the sections to the latest Conceptual Framework for Financial Reporting as issued by the International Accounting Standards Board.
The structure of the new Section 2 in FRS 102 is as follows:
· Scope
· Objective of financial statements
· Qualitative characteristics of useful financial information
· Financial statements and the reporting entity
· The elements of financial statements
· Recognition and derecognition
· Measurement
· Presentation and disclosure
One of the most notable changes in Section 2 is in respect of the qualitative characteristics of useful financial information. These are split between fundamental qualitative characteristics and enhancing qualitative characteristics as follows:
It should also be noted that there is a new Section 2A Fair Value Measurement which contains the updated fair value measurement guidance. This has replaced the Appendix to Section 2 Fair value measurement in the 2022 edition of FRS 102 and has been aligned to IFRS 13 Fair Value Measurement.
A future article will focus on the revised Concepts and Pervasive Principles.
Periodic review amendments
As the UK is no longer a part of the EU, this paved the way for the FRC to be given more powers to extend the disclosure requirements for smaller entities in the UK. This applies to those small entities that apply the presentation and disclosure requirements of FRS 102, Section 1A Small Entities in preparing financial statements.
The encouraged disclosures found in Appendix E Additional disclosures encouraged for small entities have been moved into Appendix C Disclosure requirements for small entities in the UK (hence Appendix E will only be relevant to small entities in the Republic of Ireland under FRS 102 (September 2024)).
For clarity, the encouraged disclosures are:
· A statement of compliance with FRS 102 (adapted to refer to Section 1A);
· A statement that the entity is a public benefit entity (if applicable);
· Material uncertainties relating to going concern;
· Dividends paid or payable; and
· Transition information on first-time adoption of FRS 102.
The FRC has also mandated additional disclosure requirements for small entities in the UK in respect of:
· Taxation (current and deferred)
· Leasing transactions
· Revenue recognition
· Provisions and contingencies
· Share-based payment transactions
Small entities in the UK will also be required to make fuller related party disclosures rather than only limited disclosures for material transactions with certain related parties.
The idea of mandating these additional disclosures is to reduce the need for professional judgement on the part of directors in deciding what, if any, additional disclosures are required in order for the financial statements to give a true and fair view.
Uncertain tax positions
FRS 102, Section 29 Income Tax did not deal with uncertain tax treatments prior to the periodic review. The term ‘uncertain tax treatment’ is defined as:
‘A tax treatment for which there is uncertainty over whether the relevant taxation authority will accept the tax treatment under tax law. For example, a tax treatment that relies on an interpretation of the law is not in accordance with the way in which the taxation authority is known to interpret the law.’
In this respect, an entity must determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. In applying this requirement, the entity uses the approach which better predicts the resolution of the uncertainty.
FRS 102 (September 2024), para 29.17B states that the entity assumes a tax authority will examine amounts that it has a right to examine and have full knowledge of all related information when making those examinations.
Identify the performance obligations in the contract
There is additional guidance in FRS 102, Section 26 Share-based Payment to clarify that equity instruments issued in a business combination (i.e. where a parent acquires a subsidiary) in exchange for control are not within the scope of Section 26. However, equity instruments granted to employees of the acquiree in their capacity as employees (e.g. in return for continued service) are within scope.
The cancellation, replacement or other modification of share-based payment arrangements arising as a consequence of the business combination, or other equity restructuring, must be accounted for in accordance with Section 26.
There is also additional clarification on the use of the term ‘fair value’ because Section 26 uses the term differently in some respects. For the purposes of Section 26, fair value is the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable willing parties in an arm’s length transaction. Section 26 sets out specific guidance for measuring fair value for certain share-based payment transactions.
The headline amendments relate to on-balance sheet lease accounting for lessees (FRS 102 only) and the introduction of a comprehensive five-step model approach for revenue recognition (both FRS 102 and FRS 105).
Accounting policies, estimates and errors
Accounting policies, estimates and errors are dealt with in FRS 102, Section 10 Accounting Policies, Estimates and Errors. The amendments to Section 10 clarify that when the measurement of a class of biological assets and its related agricultural produce changes from the cost model to the fair value model, this is dealt with as a change in accounting policy to be dealt with as a change in fair value less costs to sell as per Section 34 Specialised Activities.
In addition, there is new content in Section 10 on developing accounting estimates, highlighting that when items in financial statements involve uncertainty, the reporting entity must use judgement and assumptions to estimate amounts based on the most reliable available information, applying measurement techniques and inputs.
Examples of accounting estimates include fair value, estimated selling price, depreciation, warranty provisions and recoverable amounts.
The amendments also clarify that changes in inputs or measurement techniques are accounting estimate changes unless they result from the correction of a prior period error. A change in the measurement basis is a change in accounting policy rather than a change in accounting estimate (hence must be applied retrospectively).
FRS 102, Section 8 Notes to the Financial Statements requires an entity to disclose material accounting policy information. This is a change from the requirement to disclose significant accounting policies. The term ‘significant’ was never defined in the 2022 edition of FRS 102 (or previous editions) and hence the FRC has clarified that it is material accounting policy information that is required to be disclosed. The amendments also provide clarity on what material accounting policy information is.
In addition, it is emphasised that immaterial accounting policy information need not be disclosed unless there is a requirement under Regulations (or LLP Regulations) to disclose such information.
Conclusion
The effective date of the periodic review amendments is creeping closer and preparers must ensure they have a sound understanding of them in order to be able to advise on their potential impact. Further technical articles on the periodic review amendments (including lease accounting and revenue recognition) will be published in due course to help AAT members understand their potential impact.
FINANCIAL REPORTING
Periodic review of UK and Ireland GAAP
Steve Collings gives a run-through of the amendments in the FRC’s periodic review of UK and Ireland GAAP.
Words: Steve Collings Illustration: Michał Bednarski