BUSINESS FINANCE & BANKING
Time to get ready for ‘new GAAP’ KPMG’s Dominic Mudge on why companies need to understand the FRS102 accounting standard.
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ollowing the recent publication by the Financial Reporting Council of FRS102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”, we now know the full shape of the new financial reporting framework to be applied in the UK and Republic of Ireland. FRS102 is the latest in a suite of standards which includes FRS100 and FRS101. The release of this suite of standards, the replacement of all existing UK accounting standards, represents the culmination of ten years’ consultation on how best to bring UK and Irish GAAP (Generally Accepted Accounting Principles) up-to-date. The key challenges in that period have been to maintain consistency with the requirements of company law and to achieve proportionality with the needs of the users of financial statements. The new framework is applicable for accounting periods commencing on or after 1 January 2015 and work must begin in earnest as a transition balance sheet will be required at 1 January 2014 (for 31 December year ends) – just a few months away!
What is new GAAP? FRS100 “Application of financial reporting requirements” sets out the applicable financial reporting framework for entities preparing financial statements. Under the new framework existing UK and Irish GAAP preparers will generally have a choice of: • Voluntary applying EU IFRS. • Adopting FRS101 “Reduced Disclosure Framework” which allows reduced disclosures from EU IFRS in certain, limited, circumstances. • Migrating to FRS102, the new standard containing the detailed requirements that were previously included in the body of SSAPs and FRSs. • Applying the Financial Reporting Standard for Smaller Entities (FRSSE), assuming that the small company size criteria is met. What should I choose? FRS102 will be the most likely choice for the majority of existing UK and Irish GAAP preparers. Depending on the nature of their operations, entities adopting FRS102 will face many changes in key areas of financial reporting. Undoubtedly, the most challenging issue will be the increased use of fair value measurement – particularly for financial instruments, which will now be recognised on balance sheet. With simple foreign exchange contracts, trade debtors and trade creditors now being classified as financial instruments, this no longer is the sole domain of financial institutions! Changes to the requirements in respect of business combinations (recognition of more intangible assets such as customer lists and licences), leases and other arrangements, deferred tax (on revaluations and rolled over gains) and investment properties will also need detailed consideration. Implementation This new GAAP is more than just a finance issue, it will fundamentally change the way in which the business is managed and how you communicate with the marketplace. Senior management within an organisation need to be actively involved in the implementation process and understand the impact on the bottom line. An organisation needs to consider: • What are the possible tax implications? • How will distributable reserves be affected? • Will our existing processes and systems be sufficient? • Are stakeholders aware of the changes? • What is the likely impact on banking covenants? • What is the likely impact on employee remuneration that is linked to profit and loss measures? A new GAAP is an exciting and challenging prospect; it has been ten years in the making but allows rather less time for entities to get to grips with it. Whilst there will clearly be challenges for entities upon transition, conversion may also provide the trigger to grasp opportunities for simplifying group structures and undertaking further tax planning strategies. Now is the time to start tackling the financial reporting and commercial challenges which the impending change will inevitably bring! For further information please contact Dominic Mudge, Director, KPMG on Tel: 028 9024 3790 or email: dominic.mudge@kpmg.ie
62 OCTOBER 2013