Under FRS 102, a debt instrument must be regarded as ‘basic’ in order for it to be measured at amortised cost.  The Exposure Draft proposes to amend the criteria that determine whether a debt instrument is ‘basic’ and is intended to reduce the need for entities to measure debt instruments at fair value.
  
Following the publication of FRS 102 in March 2013, concerns were expressed about the restrictive nature of the criteria for classifying financial instruments as ‘basic’. The amendments proposed in the Exposure Draft are intended to reduce the cost of compliance with FRS 102 by allowing amortised cost measurement where it adequately captures the risks associated with those financial instruments. 

Examples illustrating the application of the revised requirements are also included in the Exposure Draft.  In particular, under the new proposals some inflation-linked debt instruments, which would not meet the definition of basic financial instruments under FRS 102 as currently drafted, would now be classified as basic.  

The FRC invites comments on FRED 54 until 30 April 2014.  The comment period is slightly shorter than the standard consultation period of three months, in order to allow for the publication of the final amendments to FRS 102 by mid-2014.  The draft amendments are proposed to be effective from 1 January 2015. 

Alongside the publication of the Exposure Draft, the FRC announced that:

• It aims to issue FRS 103 ‘Insurance Contracts’ by the end of March 2014 after considering responses to its consultation;
• It aims to finalise hedge accounting requirements under FRS 102 after taking into account responses to its consultation on FRED 51 ‘Draft amendments to FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland: Hedge Accounting’; and
• It does not intend to make amendments in respect of the impairment of financial assets to ‘new’ UK GAAP and Irish GAAP prior to 1 January 2015. 

The FRC aims to issue FRS 103 and finalise the hedge accounting requirements in advance of the ‘new’ UK GAAP mandatory effective date of 1 January 2015.

Additionally the FRC highlight that they will continue to assess the impact of the new EU Accounting Directive on small companies and they will continue to consider the accounting requirements for micro-entities. 

Click for:

• Press release (link to FRC website).
• FRED 54 ‘Draft amendments to FRS 102 – Basic financial instruments (link to FRC website).
• Deloitte ‘Need to know’ on FRED 54.
• UK Accounting Plus project page on FRED 54.