The new reporting framework

AUDIT & ASSURANCE Tel: +44 (0)1534 880088 www.moorestephens-jersey.com UK GAAP for Jersey Entities PRECISE. PROVEN. PERFORMANCE The new reporting framework Introduction UK GAAP in its current form is disappearing. Its replacement consists of: FRS 100 Application of Financial Reporting Requirements; FRS 101 Reduced Disclosure Framework; FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. FRS 103 - Insurance Contracts The Financial Reporting Council (FRC) has virtually finalised its overhaul of UK GAAP with the publication of FRS 102 in March 2013 and FRS 103 in March 2014. FRS 100 and FRS 101 had already been published in November 2012. The new framework is effective for accounting periods beginning on or after 1 January 2015, but early adoption is allowed. What does this mean? There will be no change for entities that do not apply UK GAAP or to small entities that apply the FRSSE. The entities that will be most affected are those that currently prepare accounts under UK GAAP. They will have a number of options to consider in deciding which reporting framework to use in preparing their financial statements in the future. FRS 100 is the standard that outlines which financial reporting framework can be used by entities. The options are summarised as follows: Reporting Framework / Type of Entity FRSSE FRS 102 FRS 101 Reduced Disclosure Framework applying EU adopted IFRS EU adopted IFRS Qualifying entities eligible for the small companies regime Non-qualifying entities eligible for the small companies regime Qualifying entities that are neither small or required to apply EU adopted IFRS Non-qualifying entities that are neither small or required to apply EU adopted IFRS Required to apply EU adopted IFRS

Note that Companies (Jersey) Law 1991 requires companies to prepare financial statements in accordance with generally accepted accounting principles and that the financial statements of a Jersey Certified Fund must be prepared in accordance with IFRS, UK GAAP or US GAAP or another standard agreed with the JFSC. This fact sheet applies to those entities that have chosen to prepare their financial statements in accordance with UK GAAP. FRS 101 Reduced Disclosure Framework FRS 101 is intended to help groups. It basically allows entities to apply the recognition and measurement requirements of EU adopted IFRS without having to provide all of the disclosures that are normally required. The framework is intended for subsidiaries, including intermediate parents, and ultimate parents. There are certain conditions that need to be met, such as having to notify shareholders and giving them the right to object. The standard is aimed at companies in groups which have to, or have chosen to, apply EU adopted IFRS. It is important to note that FRS 102 provides an exemption from preparing consolidated financial statements where it is not required by the applicable statutory framework. As Jersey s laws do not require the preparation of consolidated financial statements then the application of FRS 101 for Jersey entities is dependent upon whether they are part of a larger group producing consolidated financial statements under EU IFRS either voluntarily or because the parent undertaking is required to do so. FRS 101 allows subsidiaries to produce financial statements which are prepared on the same basis as the group accounts, but without the vast amount of disclosure that applying EU adopted IFRS normally entails. For ultimate parents, they will also be able to produce their standalone financial statements on the same basis as the group accounts, without having to provide all of the information at both company and group level. This should reduce the time spent dealing with consolidation adjustments and avoid subsidiaries having different reporting requirements to the group. FRS 101 is strictly part of UK GAAP. As a result, it does have to meet the requirements of the Companies Act 2006 and EU Directives, so there are a few differences from EU adopted IFRS. Jersey entities are not required to comply with either the Companies Act 2006 or EU Directives but should apply FRS 101 if their financial statements are intended to give a true and fair view. On the presentation side: UK Companies Act formats may be followed instead of the requirements in IAS 1 Presentation of Financial Statements for the profit and loss account and balance sheet. On measurement and recognition: Negative goodwill on a business combination will be disclosed separately on the balance sheet immediately below goodwill, instead of taken to profit or loss as required by IFRS 3 Business Combinations. Contingent consideration should be recognised at the acquisition date when it is probable and can be reliably measured, which is a higher hurdle than that required by IFRS 3 Business Combinations. Changes after the acquisition date will be treated as an adjustment to the consideration instead of being recognised in profit or loss. Impairment of goodwill can be reversed in a subsequent period if the reasons for the impairment loss have ceased to apply, whereas IAS 36 Impairment of Assets prohibits this. Government grants relating to a non-current asset cannot be off-set against the related asset. Instead, the grant is initially recognised as deferred income. While there will continue to be a few areas where the amounts recognised under FRS 101 will not be the same as those under EU adopted IFRS, there are still far fewer than would arise under current UK GAAP.

The key disclosure exemptions that will be available are: IFRS 2 Share-Based Payments reduced disclosures where the entity is a subsidiary and the arrangement concerns another group entity s equity instruments, or where the entity is the ultimate parent and the arrangement concerns its own equity instruments. The only disclosures required are a description of the arrangements, details of the average exercise price of options remaining and the average term left, in addition to the average share price of options exercised in the period. IFRS 3 Business Combinations some of the disclosure requirements will continue to apply but there are exemptions with regards to details on contingent consideration and contingent liabilities recognised. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations cash flows relating to a discontinued operation will not need to be separated. IFRS 7 Financial Instruments: Disclosures most entities will not have to provide the voluminous disclosures normally required by this standard, although they will still be needed for financial institutions or if an entity holds certain financial instruments at fair value. IFRS 13 Fair Value Measurement as with IFRS 7, the exemptions are very wide ranging, but will not apply to financial institutions where the disclosure relates to financial instruments. IAS 1 Presentation of Financial Statements certain comparative information relating to share capital, property, plant and equipment, intangible assets, investment property and agricultural assets will not be required. Nor will a third balance sheet be needed where there has been a change from the amounts previously presented. Details of capital management will not be required, other than for a financial institution. IAS 7 Statement of Cash Flows no such statement will be needed. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors no details will be needed for standards in issue but not yet effective. IAS 24 Related Party Disclosures details will not be required for key management personnel compensation and related party transactions involving wholly owned subsidiaries. IAS 36 Impairment of Assets while some details will still be needed, there are exemptions related to details on assumptions used in determining the recoverable amount and details of any headroom between the carrying amount and the recoverable amount. Some of the exemptions are conditional on the details being included in the consolidated accounts of the group of which the entity forms part.

The exemptions can be summarised as follows: Currently not required by UK GAAP Must be provided in the consolidated group to take the exemption Other exemptions Exemptions that cannot be taken by a financial institution Cash flow statement and related information (IAS 7 & IFRS 5) Share-based payment (IFRS 2) Third balance sheet (IAS 1) Capital disclosures (IAS 1) Business combinations (IFRS 3) Standards in issue but not yet effective (IAS 8) Capital disclosures (IAS 1) Comparative information (IAS 16, IAS 38, IAS 40 and IAS 41) Financial instruments (IFRS 7) with exceptions Financial instruments (IFRS 7) Group related party transactions (IAS 24) Fair value measurement (IFRS 13) with exceptions Fair value measurement (IFRS 13) Key management compensation (IAS 24) Impairment (IAS 36) Entities applying FRS 101 will have to provide some additional disclosure covering: the disclosure exemptions taken; matters required by any relevant regulations; a statement of compliance with UK GAAP FRS 101 As FRS 101 was issued in November 2012, an entity with a December 2012 year end can apply the standard if all the relevant conditions are met. FRS 102 The Financial Reporting Standard applicable in the UK and ROI FRS 102 has condensed UK GAAP, currently consisting of over 1,700 pages, into about 250 pages. This standard contains 35 sections addressing the recognition, measurement, presentation and disclosure requirements for a set of financial statements whether they are individual or consolidated. FRS 102 is based on the IFRS for small and medium-sized entities (IFRS for SMEs), but has been amended to ensure compliance with the UK Companies Act and EU directives, as well as incorporating some of the options that exist in current UK GAAP. An entity that could take the exemptions under FRS 101 will also be able to apply reduced disclosures when applying FRS 102. This is potentially an attractive option to those eligible, as FRS 102 is a much smaller version of current UK GAAP and likely to reduce costs after initial application. The disclosure exemptions offered are similar to those given in FRS 101. FRS 102 is effective for accounting periods beginning on or after 1 January 2015. Early adoption will be allowed for accounting periods ending on or after 31 December 2012. Some of the key differences between FRS 102 and current UK GAAP Format of financial statements entities will be able to have one or two performance statements, either a single statement of comprehensive income or an income statement and a statement of comprehensive income. They will also have a balance sheet, a statement of changes in equity and a statement of cash flows. Some simpler entities

without any items of other comprehensive income will be able to prepare a combined statement of income and retained earnings. Statement of cash flows if an entity is required or elects to present a statement of cash flows more information is required than just the movement in cash. Movements in cash and cash equivalents will need to be presented within operating, investing and financing activities. Deferred tax this will be recognised on a timing difference plus approach. Unlike current UK GAAP deferred tax will be recognised on revaluations and on business combinations. Discounting will also be banned. In general, there will be larger deferred tax balances than at present. Investment property revaluation gains or losses will be recognised in profit or loss, but only when fair value can be measured reliably without undue cost or effort. Business combinations more intangible assets are likely to be recognised separately, where these may have been previously subsumed into goodwill. Merger accounting will only be permitted for group restructurings and public benefit entities. Consolidated financial statements a subsidiary can be excluded from consolidation if it is held exclusively with a view to subsequent resale including those held as part of a investment portfolio, which should then be measured at fair value through profit or loss. Financial instruments a new regime has been established, which will see all derivatives appear on an entity s balance sheet. Defined benefit schemes there is greater emphasis on push down accounting for multi employer schemes for participating entities, so some entities will no longer be able to treat their involvement in a defined benefit scheme as if it were a defined contribution scheme. In addition, the recognition of costs and income on defined benefit schemes is on a different basis, with current service costs and the net interest costs recognised in profit or loss, and remeasurement changes taken to other comprehensive income. Specialised activities reporting requirements for specialised sectors are included within a specific section of FRS 102. Some of the specialised sectors include agriculture, service concession arrangements (for both parties) and public benefit entities. Financial institutions are required to provide additional disclosures. (see our separate Factsheet for Financial Services). Cross references to EU adopted IFRS there are a number of instances where entities adopting FRS 102 may, or are required to, refer to EU adopted IFRS. These are primarily: - an option to apply IAS 39 or IFRS 9 to financial instruments for measurement and recognition criteria instead of the relevant sections in FRS 102; - entities whose ordinary shares or potential ordinary shares are traded on a public market, or who are trying to get such a listing, will have to comply with IAS 33 Earnings per Share and IFRS 8 Segmental Reporting. IFRS 8 will also need to be complied with if a entity has debt traded on a public market or who are trying to get such a listing; - entities involved in the exploration for, or evaluation of, mineral resources will have to apply IFRS 6 Exploration for and Evaluation of Mineral Resources. What will happen to existing UK GAAP? With the new reporting framework, existing UK GAAP is withdrawn.

Many of the SORPs are to be retained, albeit they will need to be updated for the new reporting framework. This may take some time as the relevant SORP making bodies make the necessary amendments, making early application of the new reporting regime impracticable for those within the scope of SORPs. The FRSSE will be retained for now, albeit with some minor amendments introduced by the new framework, such as incorporating references to FRS 102 and changing the definition of a related party to be consistent with the UK Companies Act. Upon the finalisation of the planned changes at an EU level to the reporting requirements for smaller entities the future of the FRSSE will be reconsidered. What next? It may appear daunting at first in assessing the implications the new reporting framework may have, but if consideration is given early on, this will make the transition a lot easier. Consideration will need to be given to which framework to apply. It is not as simple as deleting some disclosures when applying FRS 101 for those entities that already apply EU adopted IFRS, as some hurdles have to be met and there are some measurement and recognition changes. The impact of the new framework on reported results will need to be assessed for their effect on covenants and other regulatory requirements. Early assessment of the impact will help in making necessary amendments to agreements and educating users of the financial statements. The new framework is effective for accounting periods beginning on or after 1 January 2015. So for an entity with a December year-end they will first have to comply in the year to 31 December 2015. This results in a transition date of 1 January 2014, therefore 31 December 2013 year end will be crucial in establishing what changes will be required to reported amounts. An entity may even decide, if eligible, to apply the FRSSE where previously they have applied full UK GAAP. How can Moore Stephens help? Moore Stephens has significant experience helping companies deal with changes in reporting requirements. Please contact your local Moore Stephens adviser for more information on how we can help. For further information please contact: Phillip Callow, Partner phillip.callow@moorestephens-jersey.com David Green, Partner david.green@moorestephens-jersey.com Telephone: +44 (0)1534 880088 Website: www.moorestephens-jersey.com First published by Moore Stephens London, April 2014. We believe the information contained herein to be correct at the time of going to press, but we cannot accept any responsibility for any loss occasioned to any person as a result of action or refraining from action as a result of any item herein. Printed and published by Moore Stephens, a member firm of Moore Stephens International Limited, a worldwide network of independent firms. Moore Stephens is registered to carry on audit work in the Jersey by the Institute of Chartered Accountants in England and Wales. Regulated by the Jersey Financial Services Commission for the provision of trust company business.