FRS 102 was published in July 2013 and represents one of the biggest changes to the way in which accounts are to be prepared which has been introduced in the last 40 years. FRS 102 is mandatory for businesses with accounting periods starting on or after 1 January 2015 and for the first period that is prepared; there is a requirement under the new rules for the comparatives to be re-stated. For example, in a company with a December year end, the first period where a company must account for FRS 102 is the year ending 31 December 2015, however the financial statements ending 31 December 2014 will require re-stating using the changes included in FRS 102.
Companies must now start examining the potential changes of FRS 102 to their businesses and the real financial and cash-flow impact it could have.
FRS 102 is applicable to medium sized companies and represents a significant overhaul of the existing accountancy standards. All current Financial Reporting Standards (FRS’, SSAP’s and UITF’s currently known as UK GAAP) are being replaced by one single standard – FRS 102.
The changes included will affect businesses on a day-to-day basis and change the way they report and manage their finances. The biggest changes come in the following areas:
- Accounting for rent free lease periods on leases
- Maximum useful economic life of goodwill and other intangible assets
- Accounting for investment properties
- Mandatory holiday pay accruals
- Fair valuation of derivative financial instruments at the balance sheet date
- Accounting for deferred tax on revaluation of assets
The overall impact of these changes will be very company specific; however companies with one or more of the above will see an impact on profits, with the majority of the changes reducing profitability. Despite the changes being purely accounting based there will be a cash flow impact on businesses and in some instances this could be a positive cash flow impact.
The impact of the reduction in profits and increases in liabilities on the balance sheet at the year-end could give rise to an accelerated tax deduction, however could cause potential other problems including:
- Reduction in profits available to be distributed to shareholders by dividends
- Calculation of profit related pay bonuses to staff and managing the expectations of staff when profits (and potential bonus payments) are reducing based around accounting adjustments not related to actual performance
- Calculation of financial covenants if profit related or include any fixed balance sheet criteria and communication with finance providers on the changes in financial results
We believe the key to managing the changes of the impact of FRS 102 is an early understanding of the impact of the changes on your financial statements. Only when you are completely aware of the financial impact of changes to your business can you really start to manage and communicate them to your stakeholders.
If you have any questions or would like to know more about how FRS 102 will affect your business, please contact Paul Shields on 0191 285 0321 or email paul.shields@taitwalker.co.uk.
