Tag Archives: frs102

SORP Update – A few changes from January 2019

Leave a reply

The latest update to the Charities SORP has come into effect for accounting periods beginning on/after 1 January 2019. Update Bulletin 2 sets out various changes following amendments made to FRS102.

Below are the main changes that have been made:

1. Comparative information

This isn’t a new requirement but an extra paragraph has been added to the SORP reiterating that charities are required to include comparative information for all amounts presented in the accounts, including the notes and all additional disclosures required by the Charities SORP. Effectively, for every figure included for the current period, the corresponding figure for the prior period must also be included.

2. Payments from subsidiaries to parent charities

The idea of a charity’s wholly-owned trading subsidiary gifting its profits to the parent charity is not new. Nor has this changed.

FRS102 requires donations from subsidiaries to parent charities that qualify for gift aid to be accounted for consistently. The accounting treatment for dividends – i.e the payments are not a donation expense but a distribution of profits from reserves. This follows guidance issued by the ICAEW.

Update Bulletin 2 clarifies that when such a gift aid payment is made, income is accrued by the parent charity. This occurs when there is a legal obligation at the reporting date for the payment to be made.

Putting a Deed of Convenant in place would allow the payment to be recognised as a liability by the subsidiary and the income to be accrued by the parent charity in the period in which the subsidiary generated the profits – and I find that many charities prefer this as it helps to keep things neat. If there is no legal obligation, such as a Deed of Covenant in place, the payment will be recognised when the obligation is established – in practice, this will generally be when paid.

3. Depreciating assets comprising two or more components

Prior to this amendment, such assets could be depreciated as one whole asset where splitting it into its separate components required undue cost or exemption. Now, under Bulletin 2, where a charity holds an asset that comprises two or more major components, these components must now be depreciated separately over their separate useful lives.

4. Mixed-use property

Where a property is held partly for operational use and partly as an investment property, the two different elements should be recorded separately (as a tangible fixed asset and investment property respectively) if they could be sold or leased separately.

Note that this requirement is a ‘should’ – i.e. it is best practice to do this but not mandatory.

The whole property should be accounted for within tangible fixed assets (and not as an investment property) if the fair value investment property element cannot be measured reliably. It is worth noting that the ‘undue cost or effort’ exemption for valuing the investment property element has been removed.

5. Renting investment property to a group entity

Where a charity rents investment property to a group entity, it can chose whether to account for such property at fair value (with any gain or loss taken to the SoFA), or at cost less accumulated depreciation and impairment. If the latter cost option is adopted, the notes to the accounts must disclose the carrying amount at the balance sheet date of the investment property rented to a group entity.

6. Cash flow statement

An additional note is now required that analyses the movements in net debt during the reporting period. This note should disclose how cash, overdrafts/loans, and finance leases have moved since the start of the year. Page 11 of the Bulletin includes an example of how this may look.

The requirements for Trustees’ Reports remain unchanged.

Early adoption of Update Bulletin 2 is permitted – but all amendments must be applied at the same time.

For any questions on how the SORP update may your affect your charity and how we can help you to implement them, please do get in touch.

Proposed changes to FRS102, the ‘new’ UK GAAP

1 Reply

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?

  • Director’s loans.

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?

  • Financial instruments

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.

FRS102 – lessons learned

Leave a reply

Goodman Jones partner, Philip Woodgate quoted in the ICAEW publication Economia on handling the issues that FRS102 raises for more complex entities such as LLPs and international businesses, page 81.

Key lesson for all though is not to underestimate the time needed to prepare the new accounts.

New FRS102 accounting rules may impact media companies reported profits and asset values

Leave a reply

Disruption concept image with business icons and copyspace.

Key points

• Goodwill on acquisitions will reduce your profits and net asset value  perhaps affecting bank covenants
• Long term, interest-free inter-company loans will have to be discounted at a commercial interest rate
• Exchange rate risk and interest rate risk hedging will have to be accounted for
• Any lease incentives or premiums on office leases will now have to be accounted for over the full life of the lease, so affecting your profit every year
• Unused holiday leave at the year-end will have to be accounted for which could reduce your profit
• Your reported profits will change and this could affect the corporation tax due
• Greater amounts of disclosure and changes in terminology used in the financial statements

 

What should you do?

• Analyse the impact as soon as possible
• Plan future reporting based on new rules
• Communicate changes with key stakeholders

Your quick guide to FRS 102

FRS 102 is the new suite of accounting requirements closely aligned to International Financial Reporting Standards. Their introduction is generating a lot of concern and interest as their adoption will affect many companies’ reported financial statements. Here we consider the major areas affected as far as media sector businesses are concerned.

When do you need to apply new UK GAAP?

The first sets of accounts being prepared under FRS102 are most commonly those for the year ending 31 December 2015 and after. In addition to assessing the changes for that year you will also need to calculate those same changes for 2014 and 2013 to provide updated FRS 102 compliant comparative information. This can end up being a big exercise for some companies.

The first sets of accounts being prepared under FRS102 are most commonly those for the year ending 31 December 2015 and after. In addition to assessing the changes for that year you will also need to calculate those same changes for 2014 and 2013 to provide updated FRS 102 compliant comparative information. This can end up being a big exercise for some companies.
Planning is the key to a successful outcome.

Will the accounts look different?

This is one of the most significant financial reporting changes in the UK for many years. Although many aspects of FRS 102 accounts will be recognisable, there are many changes too.

FRS102

One of FRS102’s aims is to improve comparability of financial statements with those prepared under IFRS. Profit and Loss, Balance Sheet and Cash-flow Statement become Statement of Comprehensive Income, Statement of Financial Position and Statement of Cash flows, as they are under IFRS. However companies can keep their current terminology combined with other disclosures. In addition to these statements, there will be a Statement of Changes in Equity, which will detail movements in balances such as share capital, share premium, revaluation reserve and retained earnings. There will be greater disclosure within accounting policies, such as Significant Judgements and Estimates. It is anticipated that most businesses will have one or two significant accounting estimates which will need to be disclosed.

Goodwill

Many businesses in the sector grow through acquisitions, either of other companies’ shares or businesses. Under UK GAAP, where goodwill has arisen on acquisitions, many groups, especially those funded through equity and debt arrangements (typically MBO’s) would have an interest in maintaining the acquired value. The directors would perform annual impairment reviews using the most appropriate method and often concluding that goodwill had an indefinite useful economic life. This would result in no amortisation charge arising on goodwill. FRS102 requires goodwill to be amortised over it useful economic life. Therefore, directors will need to consider what a reliable estimate of goodwill’s economic life is. In exceptional circumstances where a reliable estimate cannot be reached goodwill is amortised over 10 years. FRS 102 could therefore result in a significant additional charge to the profit and loss account and a reduction in net assets. This may impact factors such as bank covenants, as well as landlord’ consideration of affordability on rental agreements based on reported profits. If this can be foreseen it will need to be communicated so the change is fully understood.

Intercompany loans

In the sector, groups of companies often provide interest-free, long term loans to other group companies. Currently no financial cost or income would be shown under UK GAAP however FRS 102 requires an imputed interest charge to be calculated and accounted for. This uses an amortised cost methodology, discounting to the present value future cash flows using a market based interest rate. The lender will disclose interest receivable and the borrower interest payable. This is a significant change and again can impact reported results on an entity-level.

Foreign Currency and Interest rate hedging

Many media companies enter into foreign currency hedging arrangements to manage their exposure to losses for example where  production activity is undertaken in Sterling but paid for in foreign currency by an overseas based client. Under UK GAAP such hedges would only be accounted for on completion of the arrangement, however under FRS 102 these will need to be adjusted to the fair value of the forward contract at the financial year end. This requires an estimate of the outcome of the hedge to be calculated at the financial year end and not just at the completion of the hedge. This affects interest rate hedges too, for example on bank debt, which is of particular relevance to debt backed MBO’s. These calculations can be complex and are best undertaken with the support of the financial institution making the arrangement.

Operating Leases

Media businesses often occupy rented accommodation through an operating lease, often with the benefit of a rent-free period. Under FRS102 this incentive is spread over the entire length of the lease. Under UK GAAP this period was to the first rent review date often after 5 years. What used to be a credit to the profit and loss account over 5 years may now be spread over 20 years thus reducing reported profit for each of those years under FRS 102.  For leases granted before transition it is possible to continue accounting for them as before.

Employee Benefits

Historically companies in the media sector have not accounted for holiday pay accruals. Under FRS102, it is necessary to accrue a cost for any unused holiday at the year end. Again this is likely to lead to a charge to the profit and loss account, particularly where the holiday year and financial year ends don’t coincide.

Tax Impact

Generally corporation tax on business profits follows accounting treatment. On transition to FRS 102 there could be significant changes to reported profit which will also impact the corporation tax charge. This could also affect prior year’s submitted returns. The tax impact could be beneficial such as a deduction for holiday pay accruals; however tax could also become due under FRS 102 when none was previously charged.

Conclusion

Planning is essential in ensuring a smooth transition to reporting under FRS 102. We have been working with our media clients for some time in identifying those areas where we consider the most significant changes will arise. 2016 will be the year of highest activity on FRS 102.

Likely pitfalls:

• Risk of bank covenant breaches
• Risk of faulty accounts being drafted
• Increased questioning from shareholders

Action: Please call +44 (0) 20 7388 2444 or email us and we will be pleased to talk you through the changes.

All change for profits for property investment companies

Leave a reply

Companies with investment properties will see their profit and loss accounts change when new accounting standards come into force. As headline results such as profit before tax are used for credit scoring this academic change may have a real world unexpected effect on a company’s credit rating.

Companies with investment properties have for many years followed existing UK Generally Accepted Accounting Practice (UK GAAP) and have been required to value their investment properties at market value each year. Any changes to that market value have not been shown in the reported profit or loss for the year but were in most cases only a balance sheet entry.

In March 2013 the new version of UK GAAP was published, FRS102, which is based on International Financial Reporting for small and medium entities. This new standard will be compulsory for accounting periods starting after 1 January 2015 and still requires investment properties to be at market value. The big difference is that the changes in the market value will now be shown as part of the reported profit or loss for the year. There will be no revaluation reserve in the balance sheet; instead all the previous revaluation reserve will need to be shown as part of the profit and loss account reserve.

A reduction in property value can be larger than the normal profit on the rental income, so there could easily be a reported loss for the year with these new standards; where previously that reduction in value would have hit the balance sheet only.

1 January 2015 still seems a long time away but the problem is that all the comparatives will need to be changed to the new presentation. The property value at 31 December 2013 will affect those comparatives – now the issue seems a lot more urgent.

If you are concerned about this then please contact me to discuss further.