In contrast, both Section 12 of FRS 102 and the IAS 39 option typically require all derivatives to be accounted for separately and to be measured at fair value. For trading profit Chapter 14 Part 3 CTA 2009 provides that where there is a change from one valid basis on which the profits of a trade are calculated to another valid basis (for example on a change of accounting policy), an adjustment must be calculated to ensure that business receipts will be taxed once and once only and deductions will be given once and once only. as a deduction from capital and reserves. Under Section 28 of, recognises all assets and liabilities whose recognition is required by, doesnt recognise assets and liabilities if, reclassifies assets, liabilities and components of equity to ensure presentation is consistent with, measures all recognised assets and liabilities in accordance with, a loan relationship which comes to a natural end in the accounting period that the transition takes place because its repaid or redeemed on the date which is the latest date on which, under its terms, it falls to be repaid or redeemed, an embedded derivative that is bifurcated out of a loan asset or liability described in the first bullet, a derivative contract which hedges a loan asset or liability described in the first bullet. (2) Embedded derivatives where the host instrument isnt a loan relationship. While FRS 102 differs from Old UK GAAP in this regard it should be noted that for companies adopting FRS 102 the format requirements of the Companies Act still apply. There are strict deadlines for making these elections. The changes made to the tax statute arent generally restricted to companies that have IAS accounts. What is new and common to all entities applying Section 1A for the first time? However, consideration should be given to the facts which led to the transaction price differing from fair value. In terms of recognition and measurement of amounts in the financial statements, the provisions of full FRS 102 apply. Section 10 of FRS 102 requires that, to the extent practical, an entity shall correct material errors retrospectively in the first financial statements authorised for issue after the error is discovered, through restating the prior period comparative figures. This publication is available at https://www.gov.uk/government/publications/accounting-standards-the-uk-tax-implications-of-new-uk-gaap/frs-102-overview-paper-new. The amounts will be brought into account under the Disregard Regulations in priority to the COAP Regulations. In some cases these affect the timing of income for tax purposes, for example, where Schedule 12 Finance Act 1997 applies. However, in contrast to SSAP 20, FRS 102 also specifically requires consideration of the influence of the parent on the companys operations and activities. Where such costs did not relate to bringing an item of IT into use they would typically have been written off direct to the P&L. Any other disclosures required in order to allow the financial statements to show a true and fair view S.289 CA 2014. For companies not applying FRS 26 there is no specific, comprehensive standard for financial instruments in Old UK GAAP. Nevertheless the emphasis on the transfer of risk and rewards is such that in most cases the classification of leases will be consistent between Old UK GAAP and FRS 102. Section 872(5) caps the amount of any credit to the net amount of previous debits on the asset less previous credits on the asset. GAAP (FRS 102) and IFRS with reduced disclosures (FRS 101) are all within the Companies Act 2006 framework. Change in presentation from the prior year (Sch 3A(5)) inc. reasons for change. A further rule ensures that where a profit or a loss from a loan relationship or derivative contract is recognised directly to equity, then this would be brought into account in the same way as if it was recognised to profit or loss or through reserves. Where an equity investment denominated in a foreign currency is hedged by a loan, SSAP 20 allows a company to re-translate the investment at the balance sheet date as if it were a monetary item. The main exclusions are for transitional adjustments in respect of: A company has a designated a financial instrument as AFS with maturity in 6 months. The COAP Regulations (reg 3C(2)(b)) requires that amounts that arise on the transition to FRS 102 on such contracts are never brought into account. In most cases such amounts will be brought into account for tax. Any impairment from written up cost will be deductible. Whether applying Section 12 of FRS 102 or under the IAS 39 option, the mechanics for hedge accounting are significantly different to the accounting for synthetic instruments under Old UK GAAP (where FRS 26 isnt applied). Therefore, the company law requirement for use of a consistent accounting framework will still be met, even if adoption of the new standards is staggered. Old UK GAAP, where FRS 26 isnt applied, typically requires that financial instruments are initially recognised at cost. Adobe Connect Users Mailing Address Database, How to avoid leaving nearly 70k on the table, Getting started with client engagement letters, Working environment in Account / Audit Practise. Determination of functional currency under FRS 102 requires consideration of the currency of the primary economic environment in which the entity operates. In particular, there are specific regulations for derivatives dealing with currency, commodities, debt and interest rates. In particular, it provides an overview of the key accounting changes and the key tax considerations that arise for those companies that transition from Old UK GAAP [footnote 1] to FRS 102. Pat Doyle ACIS, Corporate Law & Company Secretarial Practice Welcome to Relate-software.com! For periods commencing on or after 1 January 2016 small companies wont be permitted to prepare their accounts in accordance with the FRSSE. If presented must include non-KPI, environmental & employee matters where necessary for understanding (this was not previously required), disclosure of reason for acquisition of own shares and % held as a proportion of total, possibly the statement of changes in equity if not presented. You can change your cookie settings at any time. Whats the best way to process invoices in Sage? Investment properties and biological asset movements including disclosure of valuation method and amount recognised in P&L. This permission is strictly limited to ICAEW members only who are using the helpsheet for guidance only. The helpsheet is to be reproduced for personal, non-commercial use only and is not for re-distribution. Where this happens, the COAP Regulations (reg 3C(2)(d)) disregards any loan relationship adjustment as well. ; and, Companies etc. The requirement to apply the policy retrospectively is similar between Old UK GAAP and FRS 102, but there is a difference in how this is presented. Note that where the forward contract is taken out as a hedge of qualifying expenditure, the amount of capital allowances is based on the amount of actual qualifying expenditure incurred (for example, translated at the spot rate at the date of that the expenditure is incurred) - see CA11750. Adjustments on loan relationships as a result of changes in accounting policy can arise under 2 separate parts of the regime. Generally, the effect of these regulations is that the tax treatment of such contracts follows the Old UK GAAP accounting treatment. What is new if moving from FRSSE/old UK & Irish GAAP to Section 1A? But accounts figures (including where appropriate consolidated accounts) are recognised for the purposes of Chapter 2 Part 9 CTA 2010 and Chapter 2 Part 21 CTA 2010 which deal with leasing and finance leases with return in a capital form. A reference in statute to the income statement, for example, will take its normal accounting meaning. For example, company law considerations regarding realised profits and share premium accounts will need to be considered and may impact on the accounting treatment. Under Old UK GAAP it measures the loan and derivative on an historic cost basis. Given that many UK companies will be adopting FRS 102 for the first time in 2015, the paper has not been updated for these changes. Consolidated financial statements can be prepared under Section 1A. Such specialised activities arent addressed within this paper. As such, where the company prepares IAS accounts, these will be used to calculate profits; and in other cases the profits will be calculated on the basis of UK GAAP (as it would be applicable for such a company). Where a company is a UK investment company it may be eligible to make a designated currency election. UK tax law isnt entirely consistent with SSAP 21 (see Statement of Practice 3/91). FRS 102 also requires that a statement of changes in equity is presented which captures an entitys profit or loss for a reporting period, other comprehensive income for the period, the effects of changes in accounting policies and corrections of material errors recognised in the period, and the amounts of investments by, and dividends and other distributions to, equity investors during the period. Guidance on this and the valuation of farming stock is in the Business Income Manual. ; and, the exemption in Section 35.10(u) not to apply the fair value requirements of Section 11 and 12 until the start of the current year (i.e. Under current UK tax law, sections 196, and 246 FA 2004 and sections 1290-6 CTA 2009 provide relief on a contributions paid basis. In these cases sections 315 to 319 CTA 2009 will apply. FRS 102. When the reporting entity is controlled by another party, there should be disclosure of the: Disclose change in accounting estimate, reason for same and impact (Sch3A(19), Details of indebtedness (Sch 3A(50)) disclose: amounts which are repayable after 5 yrs of period end, Detail useful life on development expenditure capitalised and goodwill and the reason for, Disclose impairment/reversal of impairments on all fixed assets (Sch 3A(23(2), Details of guarantees and other financial commitments inc contingencies (Sch 3A(51)), Details of events after year end (Sch 3A(56). In particular, the tax treatment now follows the amounts recognised in profit or loss. For companies which have adopted FRS 23 (and FRS 26) the transition to FRS 102 and Section 30 isnt expected to result in any significant changes. In particular, see: For further guidance on the transitional provisions applying to hybrid instruments see Part B of this paper. Companies will be able to prepare consolidated financial statements in line with Section 1A, the small companys regime and Schedule 3A and 4A of Companies Act 2014. The mechanics of hedge accounting, whether applying Section 12 of FRS 102 or under the IAS 39 option are thereafter comparable. In Section 11 it provides three accounting options: Sections 11 and 12 within FRS 102 provide specific guidance on accounting for financial instruments. Chapter 4 of Part 2 CTA 2010 provides detailed rules as to how the companys profits are to be calculated for tax. where consolidated accounts can be obtained from if applicable. This paper reflects the current thinking of HM Revenue and Customs (HMRC) and its based on the law as it stands as the date of publication. Where transition adjustments arise include a note in line with full FRS 102 (i.e. Under both approaches, its necessary to consider the interaction with the requirements of company law as regards the amount of share premium to be recorded and the requirements as regards realised profits[footnote 5]. Amounts on such contracts are brought into account on an appropriate accruals basis. FRS 102 requires that investment property is initially recognised at cost[footnote 7] and subsequently measured at fair value. The transaction price (or cost) will typically, but may not always, equate to the present value / fair value of the instrument. The COAP Regulations (reg 3C(2)(c)) means that no transitional adjustments arising on such contracts are to be brought into account under these Regulations. Exceptional item disclosures (Sch 3A)(53). Reduced related party transaction disclosures. However, even with such exceptions and exemptions its expected that on transition there may be a significant number of adjustments both to the carrying value of assets and liabilities recognised previously under Old UK GAAP and in terms of newly recognised assets and liabilities. In September 2015, FRS 102 was amended to include a new Section 1A (S1A). Under FRS 101 its required to measure the derivative at fair value. Companies will be able to prepare Section 1A consolidated financial statements for a small group. This ensures that there is continuity of treatment. Monetary amounts in these financial statements are rounded to the nearest . These exchange amounts are disregarded and brought back into account on disposal of the loan instrument (in line with the treatment under the old accounting). In contrast, FRS 102 requires that, where the modification or restructuring to the debt is considered substantial, the original debt instrument will be derecognised and the new debt instrument recognised at its fair value. All intangibles and goodwill are presumed to have a finite life and the period over which they are subject to amortisation should reflect this. These calculate the transitional adjustment by comparing the opening accounting value in the current accounting period with the closing accounting value for the previous accounting period. Consequently either on transition (where the exemption to retain previous GAAP figures isnt used) or on subsequent business combinations, more intangible assets may be recognised under FRS 102 than would have been recognised under Old UK GAAP. For Corporation Tax purposes, adjustments are treated as receipts or deductions in computing the trade profits. Update History. On transition, the difference between the closing value for the previous period and opening value in the current period is to be brought into account in full in the current period. Under Old UK GAAP where FRS 26 doesnt apply, where debt is restructured or have its terms modified, no gain or loss would be recognised in the accounts. For a large majority of accountants that had entities that met the thresholds of and therefore applied the FRSSE (Financial Reporting Standard for Smaller Entities) this will be the first year transitioning to FRS 102 as the FRSSE is abolished for all periods beginning on or after 1 January 2016. Note that FRS 102 section 16 does permit the use of the cost model where the fair value cannot be reliably measured without undue cost or effort. foreign exchange contracts, interest swaps), extent and nature of the instruments including significant terms and conditions. Without special rules, hedge relationships would not typically be effective for tax purposes, whether or not they were designated as a hedge for accounting purposes. Triennial Review 2017 There is now an option to early adopt the amendments to FRS 102 Section 1A contained in the Triennial Review 2017. The closing rate as at the balance sheet date should be used instead. Dividends paid/declared (Sch 3A(48) split by amounts included in accruals at period end. Its optional for all other entities, and they can take advantage of the option to use fair value accounting that is part of UK company law. The extent of the disclosures to be included in a small entity set of accounts is ultimately a decision for the directors and professional judgement should be applied in determining which disclosures are necessary in order to give a true and fair view. UK tax law provides in general that the accounting treatment of these types of instruments is followed for tax purposes. Access to our exclusive resources is for specific groups of students, users and members. ICAEW.com works better with JavaScript enabled. Note that its not envisaged that s.53 FA11 will apply to entities on transition to Section 20 of FRS 102 by virtue of subsection 3 of s.53 FA11. Since the accounting is followed where the incentive isnt capital (for example, a rent free period) the difference may alter the timing of income recognition for tax purposes. ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm accesscan discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat. It is not intended to be a definitive statement covering all aspects but is a brief comment on a specific point. This is in line with the accounting adopted by companies which currently apply SSAP 20. S.1A does not deal with any measurement or recognition criteria instead the measurement and recognition criteria under FRS 102; Sections 2 to 35 of FRS 102 must be complied with (i.e. We use some essential cookies to make this website work. As I understand it, a share capital note under 102 1A is not required - the fact that the issued share capital has altered is irrelevant. The abridged profit and loss account starts with a single figure for gross profit or loss and other operating income. In all cases the issuer will be required to account for the debt and the equity components separately (see CFM21260). These days I am really useless re the what must/must not be done re accounts, bring back SSAPs and the CA, even the FRSSE I beg, rather than FRS102. The disclosure requirement in Section 1A are the minimum required. Links to the relevant guidance is set out in chapter 18 (liabilities and equity) of this paper. ICAEW cannot accept responsibility for any person acting or refraining to act as a result of any material contained in this helpsheet. As noted above, for companies applying Old UK GAAP the accounting for financial instruments can be segregated into 2 camps those that apply FRS 26 and those that dont. The relevant legislation is in CTA 2009 at Part 8, Chapter 15. Accounting policies, estimates and errors See CFM 33200 onwards for further details of this exemption. Exchange differences on the hedging loan are also taken to reserves, and offset against the gain or loss on the shares. Very occasionally an issue can arise where transitional adjustments represent the reversal of previous exchange gains and losses, typically where the company treats the loan as an equity instrument. In addition the assets and liabilities of the intermediary will be accounted for by the sponsoring entity as an extension of its own business. These are measured at amortised cost. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: psi@nationalarchives.gov.uk. Under the accruals model grants relating to revenue are recognised in income on a systematic basis over the periods in which the entity recognises the relevant grant costs. Approval by directors on financial statements noting that they show a true and fair view (Section 324 CA 2014). In accounting terms transition to FRS 102 is addressed in Section 35 of FRS 102. First accounts case with EMI share options and considering whether the EMI share options should be recognised in FRS102 s1A accounts. There may be differences in the timing of income recognition under the 2 bases. You only need to disclose - see section 28 of FRS 102 for the details. Assess whether their companies can avail of the reduced disclosures in Section 1A of FRS 102. A company has a loan with non-vanilla terms in an unconnected company which is due to be repaid in 5 years. In May 2016, the FRC issued amendments to FRS 105 to reflect the fact that the micro-entities regime has been extended to qualifying partnerships and LLPs in the United Kingdom only. The proposal is that the exclusion would apply to modifications and releases from 1 January 2015. In both cases, accounting for such exchange differences is only possible where companies have adopted SSAP 20 (and not FRS 23) and isnt permitted for companies applying FRS 102. For further guidance on the transitional provisions applying to financial instruments see Part B of this paper. This part of the paper provides a comparison of the ongoing accounting and tax differences that arise between Old UK GAAP and FRS 102. Where the loan arises between connected companies, the amounts to be brought into account on the basis of an amortised cost basis of accounting as required by sections 313 and 349 CTA 2009 - in particular this requires the tax treatment to be based on the loan shown in the accounts at cost and adjusted for amortisation and impairments. Assuming the property is held, for tax purposes, as an investment, the income arising on the property is bought into tax as its recognised in the accounts (for example rental income would be bought into tax as recognised in profit or loss). Guidance on the application of this is available at CFM 57000 onwards. Where a company has a loan liability or a derivative to act as a hedge of the exchange risk from holding an investment in shares, regulations 3 and 4 of the Disregard Regulations (SI 2004/3256) would typically mean that the exchange gain or loss on the loan or derivative would be disregarded for tax.