Diversity

46
Financial Reporting
FRS 102: UK & Irish
GAAP to get easier
before it gets harder?
In FRED 67, the Financial Reporting Council has published
its proposals to relax and improve aspects of FRS 102.
BY FIONA HACKETT AND TERRY O’ROURKE
By now, a huge number of Irish
companies have prepared
one, if not two, sets of annual
accounts in accordance with FRS 102
The Financial Reporting Standard
applicable in the UK and Republic of
Ireland. Many of these companies had
to change aspects of their accounting
to comply with FRS 102, such as
accruing holiday pay and recognising
foreign exchange contracts at fair
value – two areas of accounting
where the UK’s Financial Reporting
Council (FRC) specifically made FRS
102 more rigorous than old GAAP.
As part of its triennial review
of FRS 102, the FRC heard
concerns from preparers and other
stakeholders about aspects of FRS
102 where the case for its degree of
rigour was not so compelling.
Areas of concern
Aspects of FRS 102 that caused
particular concern to many
commentators included:
• The complexity of having to
account for loans at fair value,
rather than amortised cost,
where the loans do not meet the
rules-based definition of “basic”
as prescribed in FRS 102;
• The impracticality of small
companies having to apply net
present values to interest-free
loans from director shareholders;
• The difficulty and questionable
usefulness of having to identify,
recognise and measure new
types of intangible assets in
acquisition accounting;
• The cost of having to obtain
a fair value for accounting
purposes for property that
is rented to another group
company, where that property is
not included at fair value in the
group accounts; and
• The inconsistent interpretation
of the definition of a financial
institution under FRS 102, which
has caused uncertainty about
which companies have to provide
enhanced disclosures about their
financial instruments.
The good news is that the FRC
has listened to these concerns and
proposes to relax these requirements
of FRS 102, just as it reduced the
burden of shareholder notification
for companies that were qualified
to avail of the reduced disclosures
under FRS 101 and FRS 102. The FRC’s
proposals to change FRS 102 are
contained in the financial reporting
exposure draft, FRED 67 Draft
Amendments to FRS 102, which has
just been issued.
The proposals would result in
fewer loan assets and liabilities
having to be fair valued because of
the proposed wider definition of
what loans qualify as “basic”.
The proposed option not to apply a
present value to interest-free or nonmarket
rate loans would be available
only to small companies and in
relation to loans from shareholder
directors that are natural persons.
The proposals would allow less
intangible assets to be recognised in
acquisition accounting than under
FRS 102, and would provide an option
for a group company to avoid the
need to fair value a property it has
rented out to another company which
is not an investment property in the
group accounts.
FRED 67 proposes that the revised
FRS 102 would be effective for
reporting periods commencing on
or after 1 January 2019, but allowing
early adoption once the revised FRS
102 is finalised, which could be before
the end of 2017. In this case, many
preparers may choose to avail of
its proposals in their 2017 accounts.
Early adoption would, of course, come
with the caveat that the whole of the
revised FRS 102 should be adopted,
and not all of the proposals of
FRED 67 represent relaxation of the
existing requirements of FRS 102.
FRED 67 emphasises that its
proposals are intended to balance
improvements in the quality of
ACCOUNTANCY IRELAND
APRIL 2017