A welcome bit of reality is slowly appearing from our accounting standard setters. The Financial Reporting Council has recently requested feedback from users and has now published an exposure draft, FRED 67, of the proposed changes to FRS 102, the ‘new’ UK GAAP.
Although there are a mass of changes there are a few proposals that should achieve some of their promised simplification.
Any simplification is welcome, but it would have been so much better if these had all been included in the original new UK GAAP, FRS 102, which has now been effective from 1 January 2015. Unfortunately we can’t get too excited about these changes as they are unlikely to be in force earlier than December 2019 year ends, so we still have plenty of time to wait for these modest but welcome simplifications to come into effect.
What are the main changes they are proposing?
Many interest-free or below market interest rate loans provided by directors had to be included under FRS 102 at a discounted value. As well as being difficult to understand, many companies have had challenges is identifying a suitable market rate of interest to use for the discount.
The proposal is that for small companies, loans from directors who are also shareholders can be shown without any discounting.
Very welcome but will not solve all the discounting issues, and we still have to discount in current sets of accounts
Intangible assets acquired in a business combination
The original FRS102 required intangibles such as customer lists to be identified, this resulted in any goodwill on acquiring a company being much lower than under old UK GAAP.
The cost of identifying these intangibles can be a burden, but some companies did like identifying the underlying assets that they had acquired.
The proposal is that there will now be flexibility to choose to identify or not.
This will be a useful reduction in costs when proposal is implemented; but ends up with a complete lack of consistency between companies.
Investment property rented to a group company
When the new FRS 102 came into force, any property rented to another group company had to show this property as an investment property, with all the resultant volatility in profits of changes in valuation going through profit or loss. Always seemed very academic as in the consolidated accounts this adjustment was ‘undone’.
The proposal is that companies can choose to go back to old way of showing at cost less depreciation.
A welcome simplification – but why did we have to wait so long?
FRS 102 split financial instruments into basic and other, with much more onerous measurement and disclosure if not basic. This has had significant impact on property companies where the structure of their loans are often not simple.
The proposal is that there will be a bit more wriggle room in some marginal cases, so there may be a few more basic financial instruments.
This is likely to be one of those areas where we need to wait for the final detailed rules before we can really assess whether it helps an individual case, but any simplification of this complex area must be welcome.