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FRC consults on proposals for incremental improvements and clarifications to FRS 102

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23 Mar 2017

The Financial Reporting Council (FRC) has today published proposals for incremental improvements and clarifications to Financial Reporting Standard (FRS) 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’.

The proposals, which are being consulted on within Financial Reporting Exposure Draft (FRED) 67, have arisen as a result of the first triennial review of FRS 102 and after taking into account stakeholder feedback on the implementation of FRS 102.  As a result of feedback (gathered through an invitation to comment directly to the FRC and through responses to a Consultation Document issued in September 2016), the FRC concluded that “FRS 102 is working well in practice but there are a small number of areas where a significant improvement could be made to the cost effectiveness of FRS 102 without loss of useful information”.

FRED 67 proposes amendments to: 

  • Directors’ loans – small entities will no longer need to estimate a market rate of interest when measuring loans from a director who is also a shareholder.
  • Intangible assets acquired in a business combination – fewer intangible assets will be required to be separately identified from goodwill and valued.
  • Investment property rented to another group entity – entities will now be able to choose to measure these investment properties at cost less depreciation and impairment instead of fair value. At present, such property must be measured at fair value unless the entity can conclude that determining fair value would require ‘undue cost or effort’. The undue cost or effort exemption will be removed for all investment property.
  • Classification of financial instruments – additional financial instruments will be considered ‘basic’ (and thereby measured on a cost rather than fair value basis) beyond those meeting the prescriptive conditions, if they are consistent with a new principle-based description.
  • Definition of a financial institution – financial institutions are required to provide additional disclosures about financial instruments. Fewer entities should be financial institutions following changes to the definition, although all entities will need to consider if the risks associated with the financial instruments they hold are significant enough to warrant further disclosures.

As well as the above areas, further amendments are proposed to improve and clarify existing requirements within FRS 102 although these do not change the underlying requirements of FRS 102.  Consequential amendments are also are proposed to the other UK and Ireland accounting standards, such as FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime, for consistency with FRS 102.

The FRC expects to finalise these amendments in December 2017.  The amendments will be effective for accounting periods beginning on or after 1 January 2019 with earlier application permitted if all of the amendments are applied at the same time.

As a separate phase of its triennial review, the FRC will be consulting on more significant amendments be made to FRS 102 to reflect recent changes in International Financial Reporting Standards (IFRSs).  This separate consultation, likely to be consulted on towards the end of the third quarter of 2017, will be informed by the responses received to the September 2016 Consultation Document and will include consideration of whether, and if so how, to incorporate elements of the expected loss model of IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases.  These major amendments will be effective to be effective from 1 January 2022. 

Comments on FRED 67 are requested by 30 June 2017. 

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