Accounting standards don't change very often and when they DO change, they don't tend to be headline news - perhaps for obvious reasons!
The new FRS 102 accounting standards do, however, represent the biggest change to accounting standards in recent history and, for many business owners, should demand close attention.
Over the coming months, Clayton & Brewill will help you to understand what the change to FRS 102 will mean to you and your business.
The government has introduced the changes within FRS 102 to modernise the current accounting standards, to deliver better reporting and to harmonise the UK with international accounting procedures. The changes will alter the way businesses have to present their accounts (including more disclosure requirements) and could have a significant impact on tax positions.
The current UKGAAP accounting standard is being replaced with FRS 102 and is effective for accounting periods that started on or after 1 January 2015 for all medium and large unlisted businesses.
‘Small’ companies (those with a turnover of less than £6.5m, fixed assets of less than £3.26m or fewer than 50 employees) will be brought into FRS 102 for accounting periods beginning on or after 1 January 2016.
How will FRS 102 affect my business and the accounts we prepare?
The first impact of FRS 102 will be that the first year accounts prepared under FRS 102 will need to restate the prior year figures to show them as if they were prepared under the new standard.
Main changes to consider:
Financial instruments will be split into ‘basic’ and ‘other’
The majority of assets and liabilities are classed as financial instruments and are basically a contractual right to receive or pay cash, such as bank loans, trade debtors and so forth.
The ‘basic‘ classification will be for trade debtors, creditors and loans. They will mostly be measured as normal if they are due in less than one year, or at an amortised cost if due in over a year’s time. The ‘amortised cost’ is basically the present value of the future cash flow, meaning that an amount will be charged to the profit & loss annually to reflect the reducing value over time.
This means that business owners should consider any assets or liabilities currently sat on the balance sheet and due in less than one year, and make a record of their future value, so that it can be discounted and charged to the profit & loss.
Loans will be recognized at the present value of the future payments discounted at a market rate of interest for a similar loan of this type, over the period of the loan. Interest payable will be calculated and added to the loan, rather than amounts being recognised at proceeds and interest being applied at a constant rate over the period of the loan.
This change will affect any business with properties that they rent out or hold for investment purposes, as the property must now be revalued each year to fair value, with revaluations taken to the profit & loss, rather than to the reserve.
This change won’t affect businesses that occupy their property for their own purposes except where portions are rented out, where, in these mixed use cases, you will need to treat it as part investment and part fixed asset.
Business owners will need to keep records of fair values of any investment properties and must be prepared for some significant swings in the profit and loss on a year to year basis.
Goodwill and other intangibles
Again FRS 102 brings in really quite a major change that could have a significant effect on businesses that rely on goodwill to bolster their balance sheet.
Under UKGAAP, intangible assets can be presumed to have a useful life of 20 years, but under FRS 102 must be written off over five years – unless you can show solid proof that there useful life will go beyond this. Talk to us for advice on how to provide evidence of a longer useful life.
Under FRS 102 any software shown as a fixed asset must be reclassified as an intangible asset and will also have a useful life of 5 years.
Leases – risk and reward method
Again this is quite a big change as under FRS 102 business owners will need to categorise leases into ‘finance’ or ‘operating’ based on whether or not the risks and rewards of ownership stay with the lessor.
Under UKGAAP, leases are classified based on whether or not the future lease payments equate to more than 90% of the fair value of the asset. This means that any leases recorded using this method could change from ‘finance’ to ‘operating’ or vice versa.
Finance leases are currently recorded on the balance sheet with interest to the profit & loss, and operating leases are currently expensed entirely to the profit & loss, so category changes could have a fairly big impact.
Clayton & Brewill can help you to assess each lease and how it will be classified under this risks & rewards method.
Find out more about how FRS 102 will affect your business