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FRC consults on changes to UK Financial Reporting Standards as a result of the implementation of the EU Accounting Directive in the UK and Republic of Ireland

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01 Sep 2014

The Financial Reporting Council (FRC) has today issued a consultation of proposed changes to UK Financial Reporting Standards as a result of the implementation of the EU Accounting Directive (“the Directive”) in the UK and Republic of Ireland. Comments are invited until 30 November 2014.

The European Union published the Directive on 26 June 2013, which amended Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC. The Directive aimed to simplify the accounting requirements for small companies and improves the clarity and comparability of companies' financial statements within the European Union.  The Directive must be incorporated into UK law no later than 20 July 2015, but permits that the changes may first apply for financial years beginning on or after 1 January 2016. 

The FRC consultation document, ‘Accounting standards for small entities - Implementation of the EU Accounting Directive’ sets out the FRC’s proposals to amend UK accounting standards as part of the implementation of the Directive.  As explained in the parallel consultation on implementation of the Directive by the Department of Business, Innovation and Skills (‘BIS’), change is necessary because the Directive prohibits member states from requiring more than a limited set of notes to the financial statements of small companies unless their inclusion is required to give a true and fair view. Member state requirements include both law and accounting standards; therefore the FRC has to revisit its standards for small companies. 

The FRC is proposing that:

  • The existing Financial Reporting Standard for Smaller Entities (FRSSE) should be withdrawn. FRS 102 The Financial Reporting Standard Applicable in the UK and Ireland will replace the FRSSE for small companies (proposed in the BIS consultation as those earning less than £10.2 million), and will be amended to include a new section for the presentation and disclosure requirements for small entities. Small companies applying FRS 102 will not need to prepare a cash-flow statement or consolidated financial statements. There will, however, be some changes to the recognition and measurement criteria for small entities as a result of moving from the FRSSE to FRS 102:
    • financial instruments within the scope of section 12 of FRS 102 must be fair valued;
    • financial instruments at non-market rates of interests will be accounted for differently;
    • transactions and balances in foreign currency may no longer be recognised at contracted forward rates. Hedge accounting may be applied which may result in a similar outcome;
    • revaluation gains and losses on investment properties will be recognised in profit and loss rather than the statement of total recognised gains and losses;
    • deferred tax will be recognised on revaluations and business combinations;
    • holiday pay accruals will be needed; and
    • equity-based share-based payment transactions will need to be accounted for when goods or services are received.
  • A new Financial Reporting Standard for Micro-Entities (FRSME) will be published. Currently the FRSSE covers the requirements for micro-entitieswith paragraphs 2.40-2.42 disapplying and simplifying other parts of the FRSSE. The FRSME will only contain the requirements applicable to micro-entities, making it simpler to navigate. It will include only those disclosures required by law for micro-entities. The recognition and measurement criteria of FRS 102 (from which the FRSME will be developed from), will be simplified such that:
    • all financial instruments are accounted for at historical cost or amortised cost, with the proviso that if a derivative contract becomes onerous a provision is required;
    • there is no requirement to account for deferred taxation, equity-based share-based payment schemes (apart from any eventual issue of shares);
    • defined benefit pension schemes can be accounted for as defined contribution schemes, provide that provision is made for any agreement to fund a deficit; and
    • borrowing costs may not be capitalised.

Sections covering areas unlikely to be relevant to micro-entities (e.g. business combinations, hyperinflation and specialised activities other than agriculture) will be removed. 

  • FRS 102 as applicable to large and medium-sized companies will be updated to:
    • include up-to-date legal references;
    • remove references to extraordinary items;
    • prohibit reversal of impairment losses for goodwill (a similar change will be made to FRS 101 Reduced Disclosure Framework); and
    • subject to BIS changing the law, to amend FRS 102 such that, in the rare situations where the useful economic life cannot be reliably estimated, goodwill should be amortised over a maximum of ten years (the top end of the range permitted by the Directive) rather than five years as required by current FRS 102.
  • The FRC is also proposing that a new section of FRS 102 (within Section 34 Specialised Activities) will be added based on FRED 50 Residential Management Companies’ Financial Statements. This means that no separate abstract will be developed. It will not, however, include new disclosure requirements as the majority of residential management companies are small companies or micro-entities for which the Directive restricts mandating of disclosures. 

The FRC is also seeking views as to whether the increased flexibility in accounting formats offered by the Directive could allow companies adopting FRS 101 Reduced Disclosure Framework to use IAS 1 when presenting their primary statements rather than the existing Companies Act formats. If this is possible, it would remove one more complexity for the adoption of FRS 101 by subsidiaries of IFRS reporting groups. 

No draft standards are included in the consultation document. The FRC expects to issue exposure drafts of FRS 102, the FRSME and FRS 101 following considerations of responses to this consultation in time for the amended FRS 101 and 102 to be adopted from 1 January 2016 when the changes to the Companies Act will take effect; the FRSME may be adopted as soon as it is issued as there is no need to wait for a change to the law. 

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