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FRS 102

Overview

FRS 102 “The Financial Reporting Standard Applicable in the UK and Republic of Ireland” (link to FRC website) is a single coherent financial reporting standard replacing old UK GAAP. Derived from the IFRS for SMEs, the Financial Reporting Council has made significant modifications to address company law requirements and incorporate additional accounting options.

The FRC has made several changes to FRS 102 as part of its first triennial review of the Standard to deal with issues highlighted in its implementation.  The amendments were published in December 2017.

Qualifying entities may take advantage of certain disclosure exemptions, including an exemption from preparation of a cash flow statement and related notes.

The FRC has published Staff Education Notes (SENs) which illustrate certain requirements of FRS 102 for the convenience of its users.  The SENs have been issued to assist entities using or thinking of using FRS 102 as a basis of preparation for their financial statements. These guidance notes aim to illustrate certain requirements of FRS 102, although they do not have any authoritative status.

History of FRS 102

Date Developments Comments
14 March 2013 FRS 102 issued Effective for periods beginning on or after 1 January 2015.
13 November 2013 Clarification statements Affects Sections 1, 12 and 29.
20 March 2014 Editorial amendments to FRS 102 Affects Sections 11,12 and 35.
23 July 2014  Amendments to FRS 102 'The Financial Reporting Standard Applicable in the UK and Republic of Ireland': Basic financial instruments and Hedge accounting issued Effective for periods beginning on or after 1 January 2015.
22 August 2014  Revised version of FRS 102 issued Effective for periods beginning on or after 1 January 2015.
19 February 2015
FRED 59 - Draft amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland – Small entities and other minor amendments issued
Comment period closed on 30 April 2015
27 February 2015 
 Amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland – pension obligations
Effective for periods beginning on or after 1 January 2015.
16 April 2015 
Editorial amendments and clarification statements 
Affects Sections 12 and 29.
20 April 2015 
FRED 61 Draft amendments to FRS 102 – Share-based payment transactions with cash alternatives issued
Comment period now closed.
16 July 2015
Amendments to FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland - Small entities and other minor amendments
The July 2015 amendments to FRS 102 are applicable for periods beginning on or after 1 January 2016, with early adoption permitted and required if and only if the entity is early adopting the new Accounting Regulations (or from 1 January 2015 if the entity is not subject to company law).  Note that the July 2015 amendments to FRS 102 cannot be early adopted for accounting periods beginning before 1 January 2015.  However, the amendments in relation to share based payment transactions with cash alternatives are effective for accounting periods beginning on or after 1 January 2015 with no restrictions on early adoption.
29 September 2015 
Revised version of FRS 102 issued
Effective for periods beginning on or after 1 January 2015.  Early adoption is permitted for periods ending on or after 31 December 2012.
 
The July 2015 amendments to FRS 102 are applicable for periods beginning on or after 1 January 2016, with early adoption permitted and required if and only if the entity is early adopting the new Accounting Regulations (or from 1 January 2015 if the entity is not subject to company law).  Note that the July 2015 amendments to FRS 102 cannot be early adopted for accounting periods beginning before 1 January 2015.  However, the amendments in relation to share based payment transactions with cash alternatives are effective for accounting periods beginning on or after 1 January 2015 with no restrictions on early adoption.
4 November 2015 
FRED 62 Draft amendments to FRS 102 – Fair value hierarchy disclosures
 Published in November 2015.  Comments invited until 31 January 2016.
8 March 2016
 Amendments to FRS 102 The Financial Reporting Standard in the UK and Republic of Ireland – Fair value hierarchy disclosures published
These amendments apply for accounting periods beginning on or after 1 January 2017. Early application is permitted with immediate effect.  If an entity applies these amendments to an accounting period beginning before 1 January 2017 is shall disclose that fact.
8 July 2016
FRED 65 Draft amendments to FRS 101 Reduced Disclosure Framework – notification of shareholders published
Comments closed on 14 October 2016.
13 December 2016
Amendments to FRS 101 and FRS 102 - Notification of shareholders 
The amendments are effective for accounting periods beginning on or after 1 January 2016.
23 March 2017
FRED 67: Draft Amendments to FRS 102 - Triennial Review 2017
Comments close on 30 June 2017.
May 2017
Interim amendments to provide relief for small entities when accounting for Directors’ loans prior to finalisation of the proposals in FRED 67.  As it is an interim measure, this amendment will be deleted as part of the finalisation of FRED 67.  
Effective immediately with retrospective application available; it shall not be applied directly, or by analogy, to any other transaction, event or condition.  As it is an interim measure, this amendment will be deleted as part of the finalisation of FRED 67.  It will then be replaced with permanent requirements based on the proposals in FRED 67 after considering the outcome of the consultation process.  
September 2017
FRED 68: Draft amendments to FRS 102 - Payments by subsidiaries to their charitable parents that qualify for gift aid published
Comments are requested until 20 October 2017
14 December 2017
Amended by Amendments to FRS 102 – Triennial review 2017 – Incremental improvements and clarifications
The effective date for most of the amendments to FRS 102 is for accounting periods beginning on or after 1 January 2019, with early application permitted provided all amendments are applied at the same time. The only exceptions to this are the amendments relating to directors’ loans and the tax effects of gift aid payments, for which early application is permitted separately. Limited transitional provisions are also available. The amendments to disclosure requirements under Section 1A for small entities in the Republic of Ireland are effective for accounting periods beginning on or after 1 January 2017.  However, early application is permitted for companies in the Republic of Ireland that apply the Companies (Accounting) Act 2017 is applied from the same date.
28 March 2018
Revised version of FRS 102 issued
Effective for periods beginning on or after 1 January 2015.  Early adoption is permitted for periods ending on or after 31 December 2012.
 
The July 2015 amendments to FRS 102 are applicable for periods beginning on or after 1 January 2016, with early adoption permitted and required if and only if the entity is early adopting the new Accounting Regulations (or from 1 January 2015 if the entity is not subject to company law).  Note that the July 2015 amendments to FRS 102 cannot be early adopted for accounting periods beginning before 1 January 2015.  However, the amendments in relation to share based payment transactions with cash alternatives are effective for accounting periods beginning on or after 1 January 2015 with no restrictions on early adoption.
See above for the effective dates of the March and December 2016 amendments
The effective date for most of the amendments to FRS 102 as a result of the first triennial review is for accounting periods beginning on or after 1 January 2019, with early application permitted provided all amendments are applied at the same time. The only exceptions to this are the amendments relating to directors’ loans and the tax effects of gift aid payments, for which early application is permitted separately. Limited transitional provisions are also available. The amendments to disclosure requirements under Section 1A for small entities in the Republic of Ireland are effective for accounting periods beginning on or after 1 January 2017.  However, early application is permitted for companies in the Republic of Ireland that apply the Companies (Accounting) Act 2017 is applied from the same date.
29 January 2019
FRED 71 ‘Draft amendments to FRS 102 – Multi-employer defined benefit plans’ issued.
Comments on FRED 71 close on 31 March 2019.
24 May 2019
Amendments to FRS 102: Multi-employer defined benefit plans issued

The amendments are effective for accounting periods beginning on or after 1 January 2020, with early application permitted.

11 July 2019
FRED 72 'Draft amendments to FRS 102 - Interest rate benchmark reform' issued.

Comments on FRED 72 close on 20 September 2019.

Scope

The consolidated financial statements of listed groups are required by the IAS Regulation to be prepared under EU-adopted IFRSs. FRS 102 may be applied by any other entity or group, including parent and subsidiary companies within a listed group.

To take advantage of the disclosure exemptions within the standard, an entity must be a parent or subsidiary within a group that prepares publicly available consolidated accounts that give a true and fair view. Under FRS 102, charities may be qualifying entities. Some exemptions are not available to financial institutions.

The standard is also applicable to public benefit entities and certain paragraphs within the standard are prefixed “PBE” to clarify that they are only required to be applied by public benefit entities and not by other types of entity. 

Summary

The standard comprises 35 sections, each of which addresses a specific area of accounting, including transitional provisions and specific requirements for specialised entities including public benefit entities, retirement benefit schemes and financial institutions, as shown below. 

Section 1: Scope and application

FRS 102 is available for use by UK unlisted groups and listed or unlisted individual entities preparing financial statements that are intended to give a true and fair view.

Entities that are required or choose to disclose earnings per share and/or segment information in their financial statements should also apply IAS 33 Earnings per Share and/or IFRS 8 Operating Segments respectively.

FRS 102 is effective for accounting periods beginning on or after 1 January 2015. Early application is permitted for accounting periods ending on or after 31 December 2012.

Qualifying entities (as defined in the Glossary to FRS 102) can take advantage of certain disclosure exemptions which are set out in this section.  These exemptions are available if certain requirements are met.

The key exemptions are as follows:

  • Preparation of a cash-flow statement and related notes (Section 7)
  • Certain financial instruments-related disclosures (Sections 11 & 12)†
  • Certain share-based payment disclosures (Section 26)†
  • Key management personnel compensation disclosure (Section 28)
  • Presentation of a reconciliation of shares outstanding in the period (Section 4)

The symbol (†) indicates those exemptions which are only available provided that equivalent disclosures are made in the consolidated financial statements in which the entity is consolidated. Financial institutions must still make the disclosures around financial instruments.

Section 1A: Small Entities

This section sets out the information that shall be presented and disclosed in the financial statements of a small entity that chooses to apply the small entities regime. Small entities must apply the recognition and measurement requirements of FRS 102 in full but are subject to different presentation and disclosure requirements. This section replaces the existing Financial Reporting Standard for Smaller Entities (FRSSE).  

This section sets out the minimum content elements that a small entity must include in its financial statements:

  • a Statement of Financial Position;
  • an Income Statement; and
  • notes that include the disclosures required by law.

However, the financial statements of a small entity must also include any extra disclosures necessary for them to give a true and fair view of the assets, liabilities, financial position and profit or loss of the entity for the reporting period.

Section 1A is effective for accounting periods beginning on or after 1 January 2016.  Note that Section 1A was amended in December 2017 as a result of the first triennial review of FRS 102 to incorporate section 1A for small companies in the Republic of Ireland and other disclosure amendments for small companies in the UK.  

Section 2: Concepts and pervasive principles

Section 2 describes the objective of financial statements, which is to provide useful information about the entity’s financial position, performance and cash flows, and sets out the concepts and underlying principles of preparation.  

Section 3: Financial statement presentation

Section 3 explains fair presentation, what a complete set of financial statements is and what compliance with FRS 102 requires.

The fundamental principles for the preparation of financial statements that result in the faithful representation of transactions, other events and conditions, are the going concern assumption, consistency of presentation, comparability and materiality.

A complete set of financial statements includes each of the following for the current period and the previous comparable period:

  • a balance sheet;
  • either a single statement of comprehensive income or a profit and loss account and a separate statement of comprehensive income;
  • a statement of changes in equity;
  • a statement of cash flows; and
  • notes to the financial statements. 

Section 4: Statement of financial position

Section 4 sets out the information that is to be presented in the statement of financial position and the format to be used.

The statement of financial position (balance sheet) should be presented in accordance with the relevant part of the Accounting Regulations (or LLP Regulations as appropriate). This applies to all entities whether or not they report under the Companies Act 2006, although entities not subject to the Act need only comply to the extent permitted by any statutory framework under which they report.

The 2015 revisions to the Accounting Regulations give entities more flexibility to adapt the statutory balance sheet formats, and accordingly the July 2015 revisions to FRS 102 include guidance on the minimum requirements for entities wishing to take advantage of this flexibility.

Section 5: Statement of comprehensive income and income statement

Section 5 sets out the requirements for presenting total comprehensive income in compliance with this standard and with the Companies Act 2006.

It requires the presentation of total comprehensive income either in:

  • a single statement of comprehensive income; or
  • a separate profit and loss account  and a separate statement of comprehensive income which presents all items recognised outside profit or loss. 

In each case, entities are required to present the items that are required in a profit and loss account in accordance with the relevant part of the Accounting Regulations (or LLP Regulations as appropriate). Further items should be presented as other comprehensive income, either net of tax or before tax with a single line showing the aggregate tax effect

Discontinued operations must be presented line-by-line on the face of the income statement, and an appendix to Section 5 illustrates this.   

 The 2015 revisions to the Accounting Regulations give entities more flexibility to adapt the statutory profit and loss account formats, and accordingly the July 2015 revisions to FRS 102 include guidance on the minimum requirements for entities wishing to take advantage of this flexibility.

Section 6: Statement of Changes in Equity and Statement of Income and Retained Earnings

Section 6 describes the requirements for the presentation of changes in an entity’s equity for a period 

The SOCE presents all changes in equity, including:

  • total comprehensive income for the period;
  • the effects of changes in accounting policies and correction of errors; and
  • a reconciliation between the opening and closing balance of each component of equity, separately disclosing changes resulting from:

i) profit or loss;

ii) other comprehensive income; and

iii) transactions with owners in their capacity as owners, e.g. dividends, treasury share transactions, changes in ownership interest etc.

If the only changes in equity arise from profit or loss, dividends, changes in accounting policies or the correction of errors, a combined statement of income and retained earnings may be presented instead. 

Section 7: Statement of Cash Flows

Section 7 specifies the information on the changes in cash and cash equivalents to be presented in the statement of cash flows

Cash equivalents are defined as short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value. Cash flows are presented separately for operating, investing and financing activities. Cash flows from operating activities can be presented using the direct or indirect method. 

Section 8: Notes to the Financial Statements

Section 8 describes the principles underlying the information that is to be presented in the notes to the financial statements

The section requires systematic presentation of information not presented elsewhere in the financial statements in, as well as information on the:

  • basis of preparation;
  • specific accounting policies;
  • judgements made in applying the accounting policies; and
  • key sources of estimation uncertainty. 

Section 9: Consolidated and Separate Financial Statements

Section 9 defines the circumstances in which consolidated financial statements are presented and the procedures for preparing those statements. It also provides guidance on separate financial statements and intermediate payment arrangements

Consolidated financial statements present financial information about a group (parent and subsidiaries) as a single economic entity.  A subsidiary is defined as an entity controlled by another entity (the parent) including special purpose entities. Control is defined as the power to govern the operating and financial policies of an entity so as to obtain benefits from its activities. Control is presumed to exist where the parent owns (directly or indirectly) more than half of the voting power of an entity. 

Section 10: Accounting Policies, Estimates and Errors

Section 10 provides guidance on selecting and changing accounting policies, together with the accounting treatment of changes in accounting estimates and the correction of errors.

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. In the absence of specific guidance in FRS 102, an entity should follow the following the hierarchy when developing accounting policies:

  • requirements of FRS 102 dealing with similar and related issues;
  • any relevant SORP applicable to the entity; and
  • definitions, recognition and measurement concepts and pervasive principles set out in Section 2: Concepts and pervasive principles

An entity may also consider the guidance in full EU-IFRSs dealing with similar issues, but is not required to apply it.

If a change in accounting policy is mandated by FRS 102, the transitional provisions requirements, if specified, are applied. If none are specified, or if the change is voluntary, the new accounting policy is applied retrospectively by restating prior periods unless restatement is impracticable. Changes in accounting estimates are accounted for prospectively. All material errors are corrected by restating comparative prior period amounts to the extent practicable. 

Sections 11 and 12 Basic and Other Financial Instruments

FRS 102 includes two sections on financial instruments.  Section 11 applies to so-called ‘basic’ financial instruments, whereas Section 12 applies to other, more complex financial instruments and transactions, including hedge accounting.  An entity applying FRS 102 has an accounting policy choice between applying either the provisions of Sections 11 and 12 in full or the recognition and measurement provisions of IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments and IAS 39 (as amended following the publication of IFRS 9).  An entity that applies the recognition and measurement principles of IAS 39 or IFRS 9 is required only to comply with the disclosure requirements of FRS 102 and not those of IFRS 7 Financial Instruments: Disclosures.

Section 11 applies to basic financial instruments, including cash, certain equity instruments and certain debt instruments which meet specified conditions. Initial recognition is generally at transaction price, including transaction costs, but with some exceptions. Most debt instruments are subsequently measured at amortised cost using the effective interest rate method. However, some short term payables and receivables may be measured at the invoice price. Guidance on measuring fair value and impairment losses is also included in this section.  Amendments in December 2017 as a result of the triennial review of FRS 102 introduce a description of a basic financial instrument to support the detailed conditions for classification as basic. As a result 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 this new principle-based description.  The amendments to Section 11 also confirm the simplification of the measurement of directors’ loans to small entities, following the interim relief granted earlier this year. As a result small entities will no longer need to estimate a market rate of interest when measuring loans from a director who is also a shareholder.

Section 12 applies to financial instruments not covered by Section 11. Examples of financial instruments normally within the scope of this section include interest rate swaps, forwards, options and investments in convertible debt. Initial recognition is generally at transaction price. Subsequent recognition depends on the instrument, but for many instruments in this section, fair value through profit or loss is applied. Requirements for hedge accounting are also specified. Hedge accounting is only permitted if the hedging relationship is designated, documented and expected to be highly effective. Hedge accounting is voluntary and can only be used for specific risks, instruments and hedged items as laid out in the standard. 

Section 13: Inventories

Section 13 applies to all inventories, except

  • work in progress arising from construction contracts;
  • financial instruments;
  • biological assets and agricultural produce at the point of harvest

Inventories are assets held for sale in the ordinary course of business, being produced for sale or to be consumed in the production process. Inventories are measured at lower of cost or estimated selling price less cost to complete and sell. The cost of inventories includes purchase cost, conversion cost and other costs incurred to bring the inventory to its present location and condition, including a systematic allocation of fixed production overheads. The first-in, first-out or weighted average cost formula may be used. 

Section 14: Investments in Associates

Section 14 addresses accounting for associates in consolidated financial statements or individual financial statements of an investor in an associate that is not a parent entity.

There is a presumption of significant influence if investment represents, directly or indirectly more than 20% of voting power.

An investor that is not a parent may account for investments in associates at cost less impairment, FV through OCI or FVtPL (choice available for each of the three classes) in its individual financial statements. In consolidated accounts, an investor that is a parent must use the equity method to account for investments in associates. 

Section 15: Investments in Joint Ventures

Section 15 applies to accounting for joint ventures in consolidated financial statements or individual financial statements of a venture in a joint venture that is not a parent.

A joint venture is a contractual arrangement to undertake an economic activity subject to joint control.  Joint ventures can take the form of jointly controlled operations, jointly controlled assets, or jointly controlled entities.

An investor that is not a parent may account for investments in jointly controlled entities at cost less impairment, FV through OCI or FVtPL (choice available for each of the three classes) in its individual financial statements. In consolidated accounts, an investor that is a parent must use the equity method to account for investments in jointly controlled entities. 

Section 16: Investment Property

Section 16 applies to accounting for properties held by the owner or lessee to earn rentals and/or for capital appreciation. It does not apply to property used in the production or supply of goods or services or administrative purposes or held for sale in the ordinary course of business.

Investment property is measured at cost on initial recognition. Subsequently, investment property is measured at fair value at the reporting date with any changes recognised in profit or loss.

Prior to the amendments as part of the 2017 Triennial review of the standard, FRS 102.16.1 permitted entities to account for investment property at cost in accordance with Section 17 of FRS 102 where fair value was not reliably measurable without undue cost or effort. The FRC has taken the view that UK entities should generally be able to obtain a fair value for an investment property without undue cost or effort. As a result, the ‘undue cost or effort’ exemptions have been removed from FRS 102 and, in consequence, all other investment property (i.e. that not rented to another group entity) will now need to be measured at fair value.

Amendments in December 2017 as a result of the triennial review of FRS 102 permit investment property rented to another group entity to be measured by reference to cost (less depreciation and impairment), rather than fair value. as an accounting policy choice

Section 17: Property, Plant and Equipment

Section 17 applies to the accounting for property, plant and equipment held for use in the supply of goods or services, for rental to others or administrative purposes and that is expected to be used during more than one period.

Initial recognition is at cost, which includes the purchase price, all costs necessary to get the asset ready for its intended use and an estimate of the costs of dismantling and removing the item, and restoring the site if required.

Subsequent to initial recognition, property, plant and equipment is measured either using the cost model or the revaluation (through OCI) model, which is an accounting policy choice by class of asset. Revaluations must be made with sufficient regularity to ensure that the carrying value does not differ materially from fair value. Depreciation is charged systematically over the asset’s useful life.  The depreciation method should reflect the expected pattern of benefit consumption. Land is generally not depreciated. 

Section 18: Intangible Assets other than Goodwill

Section 18 applies to all intangible assets other than goodwill and intangible assets held for sale in the ordinary course of business. Intangible assets are identifiable non-monetary assets without physical substance. They are separable from the entity or arise from contractual or legal rights. Intangible assets do not include financial assets, heritage assets or mineral rights and reserves.

An intangible asset is recognised if:

  • it is probable that future economic benefits attributable to the asset will flow to the entity; and
  • the cost or value can be measured reliably.

Internally generated brands and similar items, start-up activities, training costs, relocation costs, advertising costs and internally generated goodwill are not recognised as intangible assets. Research costs are expensed as incurred; development costs may be capitalised (an accounting policy choice) if certain criteria are met; examples of development activities are given in the standard.

Intangible assets are initially measured at cost, except where acquired as part of a business combination or by way of a government grant, where they are measured at fair value. Subsequently, intangible assets are measured either using the cost model or the revaluation (through OCI) model (less accumulated amortisation and impairment losses). 

Amendments in December 2017 as a result of the triennial review of FRS 102 require fewer intangible assets to be separated from goodwill in a business combination. Entities may choose to separately recognise additional intangible assets acquired in a business combination if this provides useful information to the entity and the users of the financial statements.

Section 19: Business Combinations and Goodwill

Section 19 applies to accounting for business combinations and goodwill both at the time of the business combination and subsequently. It does not apply to the formation of a joint venture or the acquisition of assets that do not constitute a business.

Business combinations are defined as the bringing together or separate entities or businesses into one reporting entity.  They are accounted for using the purchase method, which involves the following steps:

  • identifying an acquirer;
  • measuring the cost of the business combination as the aggregate of the fair value of assets given, liabilities assumed and equity issued plus any directly attributable transaction costs; and
  • allocating the cost of the business combination to the assets acquired and liabilities and reliably measurable contingent liabilities assumed based on their fair values.

Any difference between the cost of the business combination and the acquirer’s interest in the fair value of assets, liabilities and contingent liabilities assumed, is goodwill (or negative goodwill). Goodwill needs to be amortised over a finite useful life.  

Amendments in December 2017 as a result of the triennial review of FRS 102 require fewer intangible assets to be separated from goodwill in a business combination. Entities may choose to separately recognise additional intangible assets acquired in a business combination if this provides useful information to the entity and the users of the financial statements.

Section 20: Leases

Section 20 applies to all leases, including some arrangements that do not take the legal form of a lease but convey rights to use assets in return for payments. Certain types of arrangement are excluded from scope, such as leases to explore for or use mineral.

Lease classification is made at the inception of the lease and is not changed unless the terms of the lease change. A lease is classified as a finance lease if it transfers substantially all risks and rewards incidental to ownership. All other leases are classified as operating leases. 

Section 21: Provisions and Contingencies

Section 21 applies to all provisions, contingent liabilities and contingent assets, except those covered by other sections of FRS 102, for example, leases, construction contracts, employee benefits and income tax. It does not apply to executory contracts unless they are onerous contracts.

A provision is recognised only when a past event has created a present obligation at the reporting date, an outflow of economic benefits is probable and the amount of the obligation can be estimated reliably. An obligation arises when an entity has no realistic alternative to settle the obligation and can be a contractual, legal or constructive obligation.  This excludes obligations that will arise from future actions, even if they are contractual, no matter how likely they are to occur.

Provisions are measured at the best estimate of the amount required to settle the obligation at the reporting date and should take into account the time value of money if it is material. 

Section 22: Liabilities and Equity

Section 22 addresses classification of financial instruments as liabilities or equity and accounting for compound financial instruments. It applies to the accounting for equity instruments issued to owners of the entity and purchases of own equity.

A financial liability is:

  • A contractual obligation to deliver cash or another financial asset; or
  • A contract that will or may be settled in the entity’s own equity instruments and:

                          i.     under which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or

                         ii.     will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments.

If the issuer does not have the unconditional right to avoid settling in cash or by delivery of another financial asset, and settlement is dependent on the occurrence or non-occurrence of uncertain future events beyond the control of the issuer and the holder, the instrument is a financial liability of the issuer unless:

  • the part of the contingent settlement provision that could require settlement in cash or another financial asset (or otherwise in such a way that it would be a financial liability) is not genuine;
  • the issuer can be required to settle the obligation in cash or another financial asset (or otherwise to settle it in such a way that it would be a financial liability) only in the event of liquidation of the issuer; or
  • the financial instrument has all the features described of a puttable equity instrument.

A number of criteria must be met if a puttable instrument is to be classified as equity. 

Section 23: Revenue

Section 23 applies to the accounting for revenue arising from the sale of goods, rendering of services, construction contracts and the use by others of entity assets yielding interest, royalties or dividends. It does not apply to revenue or income arising from transactions and events dealt with in other sections of the standard (e.g. leases, changes in fair value in investment property).

Revenue is recognised at the fair value of the consideration received or receivable taking into account trade discounts, prompt settlement discounts and volume rebates. Revenue only includes the gross inflow of economic benefits for the entity’s own account. A number of examples of revenue recognition in different circumstances are included in an appendix to this section. 

Section 24: Government Grants

Section 24 applies to the accounting for government grants.  Government grants are assistance in the form of a transfer of resources to an entity in return for past or future compliance with specified conditions. It does not apply to government assistance provided in the form of income tax benefits, or to assistance which cannot be reasonably valued or distinguished from the entity’s normal trading transactions.

Government grants, including non-monetary grants, may not be recognised until there is reasonable assurance that the entity will comply with the conditions attached and that the grant will be received. Grants are measured at the fair value of the asset received or receivable. Grants are accounted for using either the performance model or the accrual model. 

Section 25: Borrowing costs

Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. This includes interest expense calculated using the effective interest method, finance charges in respect of finance leases and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

Accounting policy choice to capitalise or expense borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Where an entity adopts a policy of capitalisation of borrowing costs, it must be applied consistently to a class of qualifying assets. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. 

Section 26: Share-based payment

Specifies accounting for all share-based payment transactions including equity-settled and cash-settled share-based payment transactions, and transactions where either the entity or the recipient has a choice of settlement.

Goods/services are recognised at the time of receipt, with a corresponding increase to equity if via an equity-settled share-based payment transaction, or to liabilities if via a cash-settled share-based payment transaction. Where there is a vesting period for share-based payments, the related goods/services are accounted for over that vesting period.

Equity-settled share-based payment transactions:

  • for transactions with employees and others providing similar services, the fair value of the services received is measured by reference to the fair value of the equity instruments at the grant date; and
  • transactions with parties other than employees are measured at the fair value of the goods or services received at the date that the entity obtains the goods or services.

Cash-settled share-based payment transactions

  • liability is measured at fair value on grant date and at each reporting date, with changes recognised in profit or loss.

In July 2015, Section 26 was amended to reverse the default accounting treatment for share-based payments where the entity has the choice of settling in cash or shares.  Previously the default position for such arrangements was to treat them as cash settled, whereas now they will normally be accounted for as equity settled arrangements unless this is not reflective of the substance of the arrangement.  These amendments are effective for accounting periods beginning on or after 1 January 2015 with no restrictions on early adoption.

In December 2017, as part of the Triennial review of FRS 102, the FRC made some minor improvements to Section 26 to align some of the definitions used in the section more closely with IFRS 2 Share-based Payment.

Section 27: Impairment of Assets

Impairment occurs when the carrying amount of an asset exceeds its recoverable amount.

Inventory: 

  • impairment loss recognised in profit or loss when selling price less costs to complete and sell is lower than its carrying amount at reporting date;
  • when circumstances that led to impairment no longer exists, the impairment loss is reversed

Assets other than inventories:

  • if recoverable amount is lower than the carrying amount, the difference is recognised in profit or loss as an impairment loss;
  • assess at each reporting date if there is any indication of impairment;
  • if not possible to determine recoverable amount of asset, then determine the recoverable amount of the cash-generating unit (CGU) to which it belongs.  
  • when circumstances that led to impairment no longer exists, the impairment loss is reversed except for reversals of goodwill impairment are not allowed as part of the July 2015 amendments to FRS 102

Section 28: Employee Benefits

Section 28 applies to all forms of consideration given by an entity in exchange for service rendered by employees, including the following, but excluding share-based payment transactions:

  • short-term benefits;
  • post-employment benefits;
  • other long-term benefits; and
  • termination benefits.

The cost of providing employee benefits is recognised in the period in which employees have become entitled to the benefits. Short-term employee benefits are recognised at the undiscounted amount of benefits expected to be paid in exchange for services.

For defined contribution plans, expenses are recognised in the period in which the contribution is payable. For defined benefit plans, the defined benefit liability is recognised as the net total of the present value obligations under the plans minus the fair value of plan assets at the reporting date. 

Section 29: Income Tax

Section 29 covers accounting for current and deferred income tax for transactions or other events recognised in the financial statements and for deferred tax resulting from a business combination. Income tax includes all domestic and foreign taxes that are based on taxable profit. It also includes withholding taxes that are payable by a subsidiary, associate or joint venture on distributions to the reporting entity. This section also includes accounting requirements for VAT and other similar sales taxes that are not income taxes.

Current tax liabilities and assets are recognised for current and prior period taxes, measured using the tax rates and laws that have been enacted or substantively enacted by the reporting date.

In general, deferred tax is recognised in respect of all timing differences between taxable profit and total comprehensive income at the reporting date, with some specific instances addressed. Deferred tax is also recognised in business combinations where the deductible/taxable amount in respect of an acquired asset/liability (other than goodwill) differs from the amount at which the asset/liability is recognised, with a corresponding adjustment made to goodwill.

Deferred tax is measured using the tax rates and laws that have been enacted or substantively enacted by the reporting date that are expected to apply to the reversal of the timing difference. 

Amendments in December 2017 as a result of the triennial review of FRS 102 provide relief from recognising tax payable when a trading subsidiary expects to make a distribution of a gift aid payment to its charitable parent.

Section 30: Foreign Currency Translation

This section applies to foreign currency transactions and foreign operations in the financial statements of an entity. It also prescribes the translation of financial statements into a presentation currency.

Functional currency is the currency of the primary economic environment in which an entity operates.

On initial recognition, foreign currency transactions are recognised in the functional currency using the spot exchange rate at the date of the transaction.  At the end of each reporting period:

  • monetary items are retranslated using the closing rate;
  • non-monetary items carried at historical cost continue to be measured using the exchange rate at the date of the transaction; and
  • non-monetary items measured at fair value are measured using the exchange rate on the date when fair value was determined.

In the consolidated financial statement exchange differences arising on a monetary item that forms part of the net investment in a foreign operation is recognised in other comprehensive income and reported as component of equity.  Such exchange differences are not reclassified to profit or loss on disposal of the net investment. 

Section 31: Hyperinflation

Section 31 applies to the financial statements of an entity whose functional currency is that of a hyperinflationary economy.

The section provides indicators of hyperinflation and requires that the financial statements of an entity whose functional currency is the currency of a hyperinflationary economy are stated in terms of the measuring unit current at the end of the reporting period. 

Section 32: Events after the End of the Reporting Period

Section 32 describes principles for recognising, measuring and disclosing events after the end of the reporting period.

Events after the end of the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue.

The financial statements are adjusted to reflect those events that provide evidence of conditions that existed at the end of the reporting period (known as adjusting events).

The financial statements are not adjusted to reflect events that arose after the end of the reporting period.  The nature and impact of such events are disclosed (known as non-adjusting events). 

Section 33: Related Party Disclosures

Section 33 requires disclosure in the financial statements to draw attention to the possibility that the financial position and profit or loss have been affected by the existence of related parties and transactions and outstanding balances with such parties.

Disclosures are not required of transactions entered into between two or more members of a group as long as any subsidiary which is a party to the transaction is wholly owned by such a member.

Disclosure is required of:

  • relationships between a parent and its subsidiaries;
  • key management personnel compensation in total (exemption available for qualifying entities); and
  • related party transactions. 

Section 34: Specialised Activities

Section 34 provides guidance on financial reporting by entities involved in agriculture, extractive activities, and service concessions. It also addresses specific requirements for financial institutions, public benefit entities and retirement benefit plans, and provides accounting requirements for heritage assets, funding commitments and incoming resources from non-exchange transactions. 

In March 2016, the FRC published amendments to paragraphs 34.22 and 34.42 of FRS 102 require disclosure of financial instruments held at fair value to be on the basis of a fair value hierarchy consistent with EU-adopted IFRS.  The amendments are relevant only to financial institutions and retirement benefit plans as defined in FRS 102.

Section 35: Transition to FRS 102

Section 35 applies to first-time adopters of FRS 102 regardless of whether an entity has previously applied full IFRSs or local GAAP. An entity can be a ‘first time adopter’ more than once (i.e. if an entity switched from FRS 102 to, say, IFRSs and then changed back to FRS 102 the following year, Section 35 may be applied again on re-adoption).

The date of transition is the beginning of the earliest period for which an entity presents full comparative information in accordance with FRS 102. An opening or ‘third’ balance sheet is not required on transition. Reconciliations and explanations of the impact of adoption of FRS 102 are required.

In the opening statement of financial position, the entity should:

  • recognise all assets and liabilities as required by FRS 102;
  • not recognise items if FRS 102 does not permit recognition;
  • reclassify items previously recognised as required by the FRS; and
  • apply FRS 102 in measuring all recognised assets and liabilities.

A number of specific voluntary exemptions are provided which an entity can apply in preparing its first financial statements that comply with FRS 102. 

Effective date

FRS 102 was first effective for periods beginning on or after 1 January 2015.  The revised version of FRS 102 (July 2015 changes other than the one to Section 26) is applicable for periods beginning on or after 1 January 2016, with early adoption permitted and required if and only if the entity is early adopting the new Accounting Regulations (or from 1 January 2015 if the entity is not subject to company law).  The July 2015 amendments in relation to share based payment transactions with cash alternatives are effective for accounting periods beginning on or after 1 January 2015 with no restrictions on early adoption.  See box above for effective date of December 2017 amendments to FRS 102 as a result of the Triennial review of the standard.  See also above for effective date of subsequent amendments to the standard.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.