FRS 102 – UK GAAP: Changes to financial statements
Earlier in 2024, ten years after we first wrote about FRS 102, changes have been announced that will come into force for accounting periods beginning 1 January 2026, with early adoption permitted.
Amendments to FRS 102, a set of accounting standards, were announced in March 2024, with several financial reporting implications.
One of the amendments addresses supplier finance arrangements, introducing disclosure requirements, for example. For a full list of the amendments, here is the full list of editions from the Financial Reporting Council.
From 1 January 2015, companies filing their annual financial statements according to UK Generally Accepted Accounting Practice saw several changes implemented, in the form of FRS 102.
FRS 102, issued by the Financial Reporting Council, is the Financial Reporting Standard applicable for qualifying entities that are not applying the adopted IFRS, FRS 101 or FRS 105. It sets out financial reporting requirements, measurement and recognition rules as well as disclosure exemptions / disclosure requirements.
We’ve set out the key changes to separate and consolidated financial statements below, so you’re aware of them.
Cash Flow Statement
Currently, only 90% subsidiaries are exempt from preparing a cash flow statement (according to FRS 1) during accounting periods. However, under FRS 102, it is possible for any company to opt out of preparing a cash flow statement, provided certain conditions are met.
Additionally, cash flow statements are prepared under a simplified three classifications according to FRS 102, as opposed to nine under FRS 1.
Error Correction
The current rules require errors that are ‘fundamental’ (i.e. would affect a true and fair view being presented) be corrected by a prior-period adjustment. FRS 102 stipulates that if an error is ‘material’ they have to be corrected the same way – widening the scope and requiring more corrections.
Stock Valuation
FRS 102 bans the use of a LIFO (Last In First Out) method of stock valuation, and requires either FIFO (First In First Out), or average cost.
Investment Property
Gains or losses on revaluations should be taken directly to the profit and loss account from 1 January. Previously, losses were taken to the P&L as a non-deductible expense; however gains were transferred to a revaluation reserve on the balance sheet (and did not appear on the P&L)
These gains, however, are not distributable to shareholders as a dividend.
Intangible Assets & Goodwill
Under FRS 102, goodwill and other intangible assets are deemed to have a finite life, of a maximum of five years unless management can show a reliable estimate in excess of that. Under current UK GAAP, it is presumed to be 20 years.
Leasing
According to the current rules, leases are treated as finance leases (and the asset is listed on the balance sheet) if the minimum lease payments equate to 90% or more of the asset value. The new guidelines do away with the 90% threshold, and replace it with ‘substantially all’ of the lease payment value.
Employee Benefits
FRS 102 specifies that entities make accruals for unpaid short-term employee benefits (e.g. unpaid sick pay and holiday pay) at the end of the reporting period. Currently there is no specific requirement.
Deferred Tax
From 1 January onwards, deferred tax is required to be recognised in relation to revalued assets, regardless of whether a binding agreement is in place.
FRS 19 (current UK GAAP) does not require this.
Grants
Income from grants can either be recognised as deferred income, once conditions have been met to recognise it, or alternatively be matched against related expenses (as is currently required).
Final thoughts: FRS 102 terminology
- FRS classifies financial instruments as either ‘basic’ or ‘other’.
- Public benefit entities are those whose ‘primary objective is to provide goods or services for the general public, community or social benefit’.
- Insurance contracts are those ‘under which one party accepts significant insurance risk from another party’.
- FRS 102 defines borrowing costs as ‘interest and other costs incurred by an entity in connection with the borrowing of funds’.
FRS 102 uses international terminology in accordance with IFRS (e.g. balance sheet = statement of financial position etc). You can still use the current UK GAAP titles, provided they are not misleading.
In 2018, the ICAEW (Institute of Chartered Accountants in England and Wales) published a technical note suggesting potential accounting treatments of cryptocurrencies under FRS 102. Read about it here in our guide on cryptocurrency tax in the UK.
For any other queries you may have, contact us at Howlader & Co.