FRS 101 REDUCED DISCLOSURE FRAMEWORK BACKGROUND In November 2012, the FRC published FRS 101, Reduced Disclosure Framework, which together with FRS 100 (published in November 2012) and FRS 102 (published in March 2013) form part of the new UK GAAP regime. FRS 101 requires qualifying entities to apply the measurement and recognition rules set out in IFRS, although with some amendments which are discussed further in this bulletin. The purpose of this FRS is to make the annual financial statements preparation process more cost effective in IFRS groups, by allowing the entity (but not the consolidated group accounts) to omit many if the detailed disclosure requirements set out in the IFRS. FRS 101 therefore sets out a reduced disclosure framework (RDF) that is available to qualifying entities. A qualifying entity is defined as a member of a group where the parent of that group prepares publicly available consolidated financial statements which are intended to give a true and fair view (of the assets, liabilities, financial position and profit or loss) and that member is included in the consolidation.*frs 101 Glossary+. The definition goes on to state that a charity may not be a qualifying entity. Therefore, a charity cannot use FRS 101. The disclosure exemptions cover a wide range of topics, from cash flow statements, financial instruments and fair value measurement, to share based payments and related party transactions. Not all are available to all qualifying entities. We will deal with each disclosure exemption in turn in the main body of the bulletin.
2 THE FUTRUE OF UK GAAP Although financial statements prepared under FRS 101 will be using the recognition and measurement requirements of the EU-adopted IFRS, they will not comply fully with EUadopted IFRS. Accordingly, there must not be any statement claiming compliance with such standards. For this reason and others, these financial statements will be Companies Act individual accounts and not IAS individual accounts as defined by s 395(1) (b) of the CA 2006. Unfortunately, given the overall objective of cost effectiveness for preparers, the FRC has been obliged to proceeded on the basis of granting primacy to the Companies Act, rather than seeking to override the Act s detail and creating a maximally simplified RDF. Since statutory accounts prepared in accordance with FRS 101, the RDF, are Companies Act individual accounts the primary statement formats in IAS 1 cannot be used unless (by chance) they (also) comply with formats required by CA 2006. Hence, in some circumstances, amendments* will be needed to make sure the FRS 101 financial statements comply with the Companies Act and The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 ( the Regulations ). *Amendments: In order to understand and appreciate the requirements of FRS 101 it is perhaps easiest to imagine that the qualifying entity has first prepared draft accounts fully in compliance with EU-adopted IFRS. Amendments to these notional draft accounts are then required as follows. Amendments may be required for (some) measurement and recognition changes, to comply with the Act and so with FRS 101. Amendments may be required for (some) presentation changes (to the layout of the individual financial statements, the grouping of certain items, and, where permitted, to the captions used for line items) again to comply with the Act, and so with FRS 101. And only then Amendments may be made to delete unwanted disclosures permitted by FRS 101 in order to take advantage of the RDF. Of course a preparer that has elected to adopt FRS 101 will establish the permitted format for its RDF accounts, and choose which disclosure exemptions to take without going through the intermediate and elaborate step of preparing fully compliant IFRS accounts, but the above analysis will always be required.
THE FUTRUE OF UK GAAP 3 An entity adopting FRS 101 may choose which disclosure exemptions to apply. These may be subject to additional criteria being met in some cases. When an entity takes advantage of the reduced disclosure framework, it must include in the notes to the financial statements a brief description of the disclosure exemptions taken, together with the name of the relevant parent undertaking and details of where the consolidated financial statements in which the entity is included can be obtained. The reduced disclosures are available to subsidiaries (including intermediate parents) and also to parent companies in their individual financial statements, irrespective of whether the consolidated accounts of which these companies form part of are prepared under EUadopted IFRS, UK GAAP or any other GAAP provided that the consolidated accounts are intended to give a true and fair view. In order to be able to take advantage of these disclosure exemptions, all shareholders of a qualifying entity must be notified in writing and they must not have objected (after having been given reasonable opportunity to do so). Where there are a large number of shareholders, notifying all of them might be particularly difficult. The ICAEW, in its factsheet on the reduced disclosure framework, recommends that in order to take advantage of disclosure exemptions in its 2013 financial statements, a company includes a notice to shareholders in the 2012 annual report or in other documents to be presented at the AGM. A reduced disclosure framework is also available to the individual financial statements of qualifying entities applying FRS 102. We will discuss that in our future technical releases on FRS 102.
4 THE FUTRUE OF UK GAAP THE REDUCED DISCLOSURES The disclosure exemptions available under FRS 101 are summarised below: IFRS reference IFRS 2 Share-based payments P45(b), 45-52 Summary of the principal exemptions No requirements to make the IFRS s detailed disclosures about share-based payments in respect of: Equity instruments of another group entity (for example in a subsidiary s financial statements for share-based payments involving the parent s equity instruments) In the ultimate parent s separate financial statements, for its own equity instruments provided that the accounts are presented alongside the consolidated financial statements of the group. This exemption therefore does not apply where a qualifying entity has share-based payments involving its own equity instruments. IFRS 3 Business Combinations P62, B64(d)(e)(g)(h)(j)-(m). B64(n)(ii),(o)(ii),(p), (q)(ii), B66 and B67 No requirement to make many of IFRS 3 s detailed disclosures about business combinations. IFRS 5 Non current assets held for sale P33(c) No requirement to disclose cash flows relating to discontinued operations. IFRS 7 Financial instruments: Disclosure The entire standard. No requirement to make any of IFRS 7 s disclosures about financial instruments provided the reporting entity is not a financial institution. However, for non-financial institutions that have certain financial instruments held at fair value, some disclosures will be required to comply with company law. IFRS 13 Fair value measurement P91-99 No requirement to make any of IFRS 13 s disclosures about fair values provided the reporting entity is not a financial institution. In that case the exemptions do not apply to disclosures in respect of financial instruments.
THE FUTRUE OF UK GAAP 5 IFRS reference IAS 1 Presentation of Financial Statements P38 IAS 1 Presentation of Financial Statements P 10(d), 10(f), 16, 38A-D, 40A-D, 111, 134-136 Summary of the principal exemptions No requirement to show movements between the beginning and the end of the comparative period in: property, plant and equipment intangible assets investment properties biological assets number of shares outstanding No requirement to produce a third balance sheet when an entity makes a prior year adjustment No requirement to make an explicit and unreserved statement of compliance with IFRS No requirements to make disclosures about the entity s objectives, policies and processes for managing capital. IAS 7 Cash Flow Statement The entire standard IAS 8 Accounting Policies, Changes in Accounting estimates and Errors P30-31 IAS 24 Related party Disclosures P17 IAS 24 Related party Disclosures IAS 36 Impairment of assets P124(d)-(f) and135(c)-(e) No requirement to produce a statement of cash flow. No requirement to include a list of the new standards and interpretations that have been issued but not yet adopted. No requirements to make disclosures about key management personnel compensation. However, directors remuneration disclosure in accordance with the Act is still required. No requirement to disclose related party transactions entered into between two or more members of a group, provided that any subsidiary that is party to the transaction is wholly owned by such a member. This RDF exemption is similar to the exemption in company law and in current (FRS 8) and new (FRS 102) UK GAAP. No requirement to make many of the IAS 36 disclosures regarding assumptions used to determine the recoverable amount of cash generating units containing goodwill or indefinite life intangible assets.
6 THE FUTRUE OF UK GAAP AMENDMENTS TO EU -ADOPTED IFRS As explained in the introduction, above, one of the conditions for availability of the disclosure exemptions in FRS 101 is that the qualifying entity applies IFRS recognition and measurement criteria but makes amendments where necessary to comply with the Act and the Regulations. These amendments are set out in the application guidance of FRS 101 and are summarised below: IFRS reference Reason for amendment Amendment in the FRS 101 IFRS 1 First time adoption of IFRSs PD16,D17 IFRS 1 permits a subsidiary that becomes a first time adopter later than its parent to measure its assets and liabilities at the carrying amounts that would be included in the consolidated financial statements, based on the parent s date of transition to IFRS. Entities preparing their financial statements under FRS 101 have to comply with the measurement requirements of the Act, which may be inconsistent with some of those of IFRS applied in the consolidated financial statements. The application of the first time adoption exemptions in paragraphs D16 and D17 of IFRS 1 is restricted to situations where the measurement of assets and liabilities in the subsidiary s or parent s individual financial statements would also comply with FRS 101. IFRS 3 Business combinations P 34, 39, 40 and 58 Paragraph 34 of IFRS 34 requires that negative goodwill is recognised as a gain in the profit or loss at the acquisition date. Under the Regulations, only realised profits can be included in profit or loss, which makes the requirement in IFRS 3 inconsistent with the company law. IFRS 3 requires the measurement of contingent consideration at fair value. Contingent consideration classified as a financial asset or liability is remeasured based on fair value, Under FRS 101, qualifying entities will instead recognise an amount of negative goodwill in the balance sheet, which will be released to profit or loss in the periods in which the acquirer benefits and the non-monetary assets acquired are recovered. Under FRS 101, consideration is included in the cost of the acquisition only when payment is considered probable and the amount can be measured reliably. The obligation to pay the contingent consideration is classified as a liability. Any
THE FUTRUE OF UK GAAP 7 IFRS reference Reason for amendment Amendment in the FRS 101 IFRS 3 Business combinations P 34, 39, 40 and 58 continued with fair value movements recognised in the profit or loss. Under the Regulations, measurement of consideration that is a financial asset at fair value is not permitted. additional consideration (that is recognised later) is treated as an adjustment to the cost of the combination (against goodwill). IFRS5 P33 Paragraph 33 of IFRS 5 allows the analysis of post tax results of discontinued operations to be presented on the face of the statement of comprehensive income or in the notes. The Regulations require an entity to show totals for turnover, profit or loss before taxation and tax arising from ordinary activities on the face of the profit or loss account. The option in paragraph 33 of IFRS 5 is removed under FRS 101. The information relating to discontinued operations has to be presented on the face of the statement of comprehensive income in a separate column. IAS 1 Format The format and presentation requirements of IAS 1 may conflict with those in company law, as follows: Differences in the definition of fixed assets (company law) and non current assets (IFRS) Differences in the definition of creditors falling due within or after one year (company law) and current and non-current liabilities (IFRS). Company law requires presentation of debtors falling due after more than one year within current assets. Under IFRS those items would be presented as non-current assets. FRS 101 is clear that financial statements prepared in accordance with this standard shall comply with the format required in the Companies Act 2006. For some captions there will be a simple replacement (e.g. fixed assets rather than non-current assets). For some of the headings specific to IAS 1 and different to the Act, captions may be kept. (The Act permits only minor headings labelled in the formats given in the Regulations with an Arabic numeral to be adapted.)
8 THE FUTRUE OF UK GAAP IFRS reference Reason for amendment Amendment in the FRS 101 IAS 1 continued Extraordinary items Paragraph 87 of IAS 1 does not permit the presentation of extraordinary items. Realised profits Paragraph 88 of IAS 1 requires the recognition of all income and expenses in profit or loss, unless otherwise required or permitted by an IFRS. The Regulations, in paragraph 13(a), require that only profits realised at the balance sheet date are included in the profit and loss account. This is partially overridden by the requirements of the paragraph 40(2) whereby movements in the fair value of financial instruments, investment properties or living animal and plants are also recognised in the profit and loss account. Alternatively it could mean that some items classified in accordance with IFRS (in those hypothetical draft accounts) will have to be re-classified in order to be re-positioned within a permitted Companies Act caption in the balance sheet or the profit and loss account formats in the Companies Act 2006. This could apply to disposal group and other available for sale assets, for example. This has been amended for entities adopting the FRS 101, with the definition of extraordinary activities carried forward from FRS 3 Reporting Financial performance. However, extraordinary items are extremely rare. Under FRS 101, the primacy of the law is recognised by amending paragraph 88 of IAS 1 for this purpose as follows: a qualifying entity should recognise all items of income and expense arising in a period in profit or loss unless an IFRS requires or permits otherwise, or unless prohibited by the Act. An example of the prohibition having an impact is given by the treatment of negative goodwill required by FRS 101, described above against IFRS 3
THE FUTRUE OF UK GAAP 9 IFRS reference Reason for amendment Amendment in the FRS 101 IAS 16 Property, plant and equipment p28 IAS 20 Accounting for Government Grants and Disclosures of Government Assistance p 24-29 IAS 16 permits the carrying amount of property, plant and equipment to be reduced by government grants in accordance with IAS 20 (p 24). Paragraph 24 of IAS 20 permits government grants related to assets to be deducted from the asset. Paragraph 29 permits grants related to income to be deducted in reporting the related expense. Offsetting assets against liabilities and income against expenditure is prohibited under the Regulations, unless specifically permitted or required. This option in the IFRS is not compliant with company law. Under FRS 101, the gross amount of an item of property, plant and equipment, subject to a government grant must be presented. Also, grants related to income are presented as part of profit or loss, either separately or under a general heading as Other income. They are not deducted in reporting the related expense. IAS 36 Impairment of assets P124 Paragraph 124 of IAS 36 prohibits the reversal of impairment losses recognised on goodwill. The Regulations require the reversal of a provision for diminution in value of a fixed asset, if the reason for the provision has ceased to exist. Under FRS 101 this requirement in IAS 36 is amended so that the measurement criteria are aligned with the requirements in FRS 102. Impairment losses recognised for goodwill are reversed in subsequent periods if, and only if, the reasons for the impairment loss have ceased to apply. POTENTIAL CONFLICT BETWEEN FRS 101 AND CA 2006 IFRS reference Reason for amendment Amendment in the FRS 101 IFRS 3 Non amortisation of goodwill Qualifying entities preparing FRS 101 accounts may have goodwill that is not amortised under IFRS 3. This conflicts with paragraph 22 of Schedule 1 of Regulations which requires acquired goodwill to be depreciated. There is no amendment to IFRS in this respect. This will usually be a departure from the legal requirements for the overriding purpose of giving a true and fair view. The particulars of the departure, the reason for it and its effect will need to be given in the notes to the financial statements.
10 THE FUTRUE OF UK GAAP TRANSITION TO FRS 101 The transition date is the beginning of the earliest period for which the comparative period is presented. The entity s first FRS 101 financial statement will have to comply with the measurement and recognition rules of the EU-adopted IFRS which are effective at the end of the first reporting period. Qualifying entities that are transitioning from EU-adopting IFRS to FRS 101 will have to restate their financial statements to the extent that the amendments in the FRS 101, which were described above, affect them. Qualifying entities that are transitioning from current UK GAAP to FRS 101 will have to apply the transition requirements of paragraphs 6 to 33 of IFRS 1 First time adoption of International Financial reporting Standards, amended as appropriate to comply with Companies Act 2006. There are some significant differences between current UK GAAP and EU-adopted IFRS, however, they are not the subject of this bulletin. They have been discussed in the related technical release, Similarities and differences IFRS and UK GAAPTR 120. BALANCE SHEET AND PROFIT AND LOSS ACOUNT FRS 101 financial statements are Companies Act accounts rather than IAS accounts. Therefore, qualifying entities must comply with the balance sheet and profit and loss account formats required by Companies Act 2006. If the accounts are really simple, the IAS 1 presentation may be compatible with the CA 06 formats and no adjustments will be required. FRS 101 however, whilst using the language of IAS 1, does not contain any explicit recommendation for the title of the financial statements and neither does Companies Act 2006. IAS 1 is clear that alternative titles are permitted; therefore a statement of financial position may be called a balance sheet if the entity wishes so. Our view is that the primary financial statements may be called either Balance Sheet and Profit and Loss Account, or Statement of Financial Position and Statement of Comprehensive Income or a combination of the two, as long as they don t offend the Companies Act format rules. The standard is open ended on what the entities should do with Other Comprehensive Income (OCI) items, permitting both a one statement approach ( Total comprehensive Income or Profit and loss account extended to include OCI items ) or two statements ( Income Statement and Statement of other comprehensive income which we can envisage traditionalists referring to as Profit and loss account and Statement of Total Recognised Gains and Losses for some time to come).
THE FUTRUE OF UK GAAP 11 CONSIDERING THE ALTERNATIVES UNDER THE NEW REGIME Qualifying entities now have a choice between EU-adopted IFRS, (new) UK GAAP (FRS 102), which itself has a reduced disclosure package for qualifying entities, and FRS 101, Reduced Disclosure Framework. The new regime, and particularly the RDF element, presents various alternatives that on examination require very careful consideration and where decisions will generally need to be made on a case by case basis, having regard to: the GAAP adopted by the parent undertaking that prepares the overlying consolidated -adopted IFRS. Hence consideration will need to be given to the extent of consolidation adjustment or additional consolidation information that would be required for group purposes (under the different alternatives) and the way group requirements are requested and conveyed, and the ease with which this material can be prepared (and within that) the extent and nature of monitoring for differences that would be required going forward; and the value attributable to the privacy and efficiency savings available from the application of a reduced disclosure framework It is also worth highlighting here that FRS 102 is in essence a simplification of IFRS and accordingly that much of it (but not all) is consistent with full IFRS; accordingly the extent of difference between UK GAAP and IFRS will be reduced by adopting FRS 102. This alone may reduce the attractiveness of, and potential advantages to be had from, adopting FRS 101, the RDF. We set out below the key features of the alternatives. Conclusions drawn may well also depend on matters such as the scale of the group, and the number of individual UK entities, and the nature and extent of complex transactions undertaken within the group. EU-ADOPTED IFRS FINANCIAL STATEMENTS An IFRS template with extensive disclosures required for each entity, including entity level cash flow statements; Familiarity with EU-adopted IFRS required; However, (within an IFRS group) the accounting methods and the disclosure information will all have been required in the past for group consolidation purposes, so this will be established knowledge and routine; Complete consistency of UK entity accounts with the group accounts (where the group accounts are produced in compliance with EU-adopted IFRS).
12 THE FUTRUE OF UK GAAP FRS 101, REDUCED DISCLOSURE FRAMEWORK FINANCIAL STATEMENTS A UK Act template with reduced disclosures required for each entity, for example excluding entity level cash flow statements; Familiarity with EU-adopted IFRS and with FRS 101 and the Act required; Depending on circumstances, some differences in accounting methods and presentation will have to be monitored and applied; Possible differences between the UK entities and the group accounts arising from the differences between FRS 101 and EU-adopted IFRS /group GAAP. (NEW) UK GAAP (FRS 102) FINANCIAL STATEMENTS A UK Act template required for each entity, Including entity level cash flow statements (The disclosure requirements of FRS 102 are less onerous that those of full IFRS.) Familiarity with parent accounting requirements (which may be, but might not be EU-adopted IFRS) and with FRS 102 and the Act required; Continue to separately apply accounting methods and prepare additional disclosure information in order to supply group consolidation returns. (For IFRS groups the extent of difference is potentially reduced by FRS 102 being closer to IFRS than was old UK GAAP ); Potential differences with consolidated accounts, arising from the differences between FRS 102 and EU-adopted IFRS /group GAAP. (NEW) UK GAAP (FRS 102) FINANCIAL STATEMENTS AND ADOPTING FRS 102 S REDUCED DISCLOSURE FRAMEWORK A UK Act template with reduced levels of disclosure required for each entity, for example excluding entity level cash flow statements; Familiarity with parent accounting requirements (which may be, but might not be EU-adopted IFRS) and with FRS 102 and the Act required; Continue to separately apply accounting methods and prepare additional disclosure information in order to supply group consolidation returns. (For IFRS groups the extent of difference is potentially reduced by FRS 102 being closer to IFRS than was old UK GAAP ); Consistency of UK entity accounts across the group but importantly differences with consolidated accounts, based on the differences between FRS 102 and EUadopted IFRS / group GAAP.
THE FUTRUE OF UK GAAP 13 QUALIFYING ENTITIES THAT CURRENTLY APPLY UK GAAP Subsidiaries currently preparing (old) UK GAAP accounts are likely to find it beneficial to adopt one of the reduced disclosure arrangements, particularly if the disclosure savings are considered valuable. The attractiveness of adopting FRS 101 is essentially based on the idea that the same GAAP (EU-adopted IFRS) is applied in preparing group consolidation information and in preparing entity statutory accounts. However, the level of detailed consideration and perhaps correction that is required to ensure that the entity s statutory accounts comply with the Act does seem to undermine this advantage. Accordingly, qualifying entities that currently apply UK GAAP would be well advised to fully assess whether adopting FRS 102 would of itself simplify group reporting to the point where adopting FRS 101 would offer little or no practical benefit. QUALIFYING ENTITIES THAT CURRENTLY APPLY IFRS Subsidiaries that currently prepare EU-adopted IFRS accounts might well find it beneficial to adopt FRS 101 because this will mean reduced disclosures. However, significant time might need to be invested in the first year making sure that all the amendments (to IFRS) required by adopting FRS 101 have been considered adequately, and any subsequent changes in the Act or in FRS 101 will have to be applied. If the group has strong financial reporting processes and controls in place, so that producing entity level IFRS accounts is already very straightforward, and if the disclosure exemptions are not considered particularly advantageous, the benefits of moving to FRS 101 might not outweigh the cost of doing so.
14 THE FUTRUE OF UK GAAP OUR VIEW The objective of FRS 101 was clearly sound. If the RDF had been (or could have been) implemented much more simply whereby a qualifying entity could straightforwardly strike out large amounts of IFRS-driven disclosure from its draft IFRS accounts, and file such accounts at Companies House, then we think it would have been attractive to a higher proportion of IFRS groups. However, to repeat the substance of our comments above, given that FRS 101 Reduced Disclosure Framework in fact requires accounts to be prepared in compliance with the measurement and recognition provisions of full EU-adopted IFRS but subordinately to and simultaneously in careful compliance with the fine detail of the Companies Act, it feels more like the worst of both worlds, and an opportunity missed. RESOURCES FRS 101 (from the FRC) http://www.frc.ora.uk/aetattachment/e3a3738d-18c2-4be2-98f7-81dee001815d/frs-101-reduced-disclosure-framework.aspx The following are only available to subscribers FRS 101 http://www.bloomsburvprofessionalonline.com/view/uk-accountingstandards/frs101.xml ICAEW commentary http://www.icaew.com/~/media/filesytechnical/financialreportina/factsheets/uk-gaap/new-uk-aaad/reduced-disclosure-framework-orefrs-102-14032013.pdf
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