Financial Reporting
Likely developments in FRS 102 from the triennial review by Robert Kirk
Likely developments in FRS 102 from the triennial review
by Robert Kirk
FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland has been effective since 2015 but the Financial Reporting Council (FRC) agreed that it should be subject to periodic review.
The first review took place in 2016-17 and over 150 amendments were introduced at that time, effective from January 2019. The FRC commenced their latest review in March 2021 with a target of publishing an exposure draft in late 2022. Once the exposure draft has been subject to public consultation, a revised standard will likely be issued in early 2023 with the objective of it being effective from January 2025 at the earliest.

Although FRS 102 is subject to a major review every 5 years, some minor changes have been reflected in the standard during the interim years. These are usually caused by developments in the external environment and have to be incorporated expediently into the standard. Recent examples of this are the amendments to accounting for rent concessions caused by Covid 19 and to interest rate benchmark reform caused by the demise of LIBOR. These changes have been incorporated in the latest edition of FRS 102 published in January 2022.

The current periodic review commenced with an outreach to stakeholders as to their views on how the standard should be progressed. This ‘Request for Views’ phase ended on 31 October 2021 and over 450 stakeholder comments were recorded during this phase.

Initial feedback suggested that the FRS 100-105 standards have been working well, but stakeholders have raised issues on various subjects including accounting for government grants, for climate-related issues and other targeted amendments.

Apart from the above there are a number of sources from which the revised standard will be developed:

  • Major changes in international financial reporting standards (IFRS), particularly IFRS 16, IFRS 15 and IFRS 9 (ECL model)
  • Other recent minor changes in IFRS
  • Developments emerging from the second comprehensive review of the IFRS for SMEs; and
  • Wider developments in corporate reporting
Major changes in international financial reporting standards (IFRS)
IFRS 16 Leases

IFRS 16 has resulted in the demise of balance sheet reporting of operating leases for lessees. The feedback from stakeholders supports the view that FRS 102 should follow the same treatment and thus all leases, with one or two exceptions for low value and short-term leases, should be capitalised together with their associated liabilities.

However, there was an expectation that it would be a simplified version. The IASB have tentatively decided not to change lease accounting in the IFRS for SMEs, but the FRC have decided, based on stakeholder feedback to develop a simplified version of IFRS 16 into FRS 102.

That will lead to a major difference emerging between FRS 102 and the IFRS for SMEs.

A photograph of four students talking amongst each other
IFRS 15 Revenue from contracts with customers

Stakeholders were adamant that the current rules in Section 23 of FRS 102 were not up to adequately covering the more complex revenue activities of recent years. That has been accepted by both the IASB and the FRC so both standards will probably incorporate the single five step model that was introduced in IFRS 15 into IFRS from 2018. The expectation is that these would be simplified versions of IFRS 15.

IFRS 9 Financial instruments – ECL model

In 2018 the IASB introduced a new model for assessing impairment of financial assets known as the expected credit loss model. In essence it required reporting entities to provide in advance for expected losses rather than waiting until the losses were incurred before reporting them in profit and loss. It was designed to address the problems that emerged during the financial crisis of 2008.

However, it is a fairly complex model and stakeholders have generally been opposed to its inclusion in FRS 102. The IASB have looked at the possibility of introducing a hybrid model into the IFRS for SMEs so that the model would apply to all financial assets with the exception of trade receivables and contract assets. The FRC are waiting to see what will finally emerge from the IASB’s review before committing itself to a final decision to on how to amend FRS 102.

Other minor changes to IFRS
The IASB has made a number of minor changes to IFRS over the last few years, and they have to decide whether or not to incorporate these within the IFRS for SMEs. The FRC are very likely to follow the approach taken by the IASB when amending FRS 102.

Some of the more important changes are:

  • The IASB have proposed amendments to Section 28 of the IFRS for SMEs to align the recognition requirements for termination benefits with the 2011 amendments to IAS 19 Employee Benefits and to retain the accounting policy option to recognise all actuarial gains and losses in either profit and loss or other comprehensive income.
  • The IASB also have tentatively decided to propose amendments to align with Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41), with an exemption so that if, at initial recognition, separation of the bearer plants from the produce growing on bearer plants would involve undue cost or effort, an entity would not be required to separate bearer plants from the produce growing on bearer plants.
  • They have also proposed amendments to align the IFRS for SMEs with a package of amendments to IAS 1:
    • Definition of Material (Amendments to IAS 1 and IAS 8);
    • Disclosure Initiative (Amendments to IAS 1); and
    • Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2)
In addition, the IASB have decided to propose amendments to Section 10 Accounting Policies, Estimates and Errors of the Standard to align it with the definition of ‘accounting estimates’ as set out in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (as amended in February 2021). The amendments to be proposed would also include the application guidance relevant to entities applying the IFRS for SMEs set out in IAS 8.
Developments arising from the second comprehensive review of the IFRS for SMEs
The objective of the IFRS for SMEs is to achieve alignment with IFRS Accounting Standards as the starting point, and applying the principles of relevance, simplicity and faithful representation, including the assessment of costs and benefits. Apart from IFRS 16 Leases, the IASB have also decided not to align IFRS 14 Regulatory Deferral Accounts.

The IASB has proposed amendments to Section 19 Business Combinations and Goodwill of the IFRS for SMEs. The proposals would align the definition of a business in the IFRS for SMEs with the amended definition of a business issued in the amendments to IFRS 3 Business Combinations in October 2018 by reproducing, in a new appendix to Section 19, application guidance that includes:

  • the optional concentration test to permit a simplified assessment of whether an acquired set of activities and assets is not a business;
  • a decision tree to assess whether an acquired process is substantive;
  • the application guidance for the assessment of what elements qualify as a business, alongside some illustrative examples.
  • partially align Section 19 requiring an entity to recognise acquisition-related costs as an expense at the time of the acquisition.
  • to recognise contingent consideration at fair value and subsequently measure it at fair value, with changes in fair value recognised in profit or loss unless it would involve undue cost or effort, an entity would be required to measure the contingent consideration using a ‘best estimate’ (the most likely outcome)— with changes in the subsequent measurement being recognised in profit or loss.
  • add the requirements set out in IFRS 3 on accounting for an acquisition achieved in stages (step acquisitions).
  • introduce guidance (in the new appendix to Section 19) for a new entity formed in a business combination and the associated application guidance set out in
    IFRS 3.
The IASB have also proposed amendments to Section 9 Consolidated and Separate Financial Statements of the IFRS for SMEs to align partially with IFRS 10 Consolidated Financial Statements, by:
  • aligning the definition of control in Section 9 with that in IFRS 10; and
  • retaining and updating the rebuttable presumption in paragraph 9.5 of the IFRS for SMEs relating to the assessment of control i.e. normally more than half of the voting power of an entity creates control, but that presumption may be overcome in exceptional circumstances if it can be clearly demonstrated that such ownership does not constitute control.
However, they have decided not to introduce in the IFRS for SMEs the requirement that an investment entity measures its investments in subsidiaries at fair value through profit and loss.

They have also proposed amendments to Section 9 to align it with the requirements:

  • for step-disposals that result in loss of control—an SME would measure any retained interest at fair value when control is lost; and
  • for changes in a parent’s ownership interests in a subsidiary without losing control, – such changes are treated as equity transactions.
In addition, the IASB have proposed amendments to Section 15 Investments in Joint Ventures of the IFRS for SMEs to align partially with IFRS 11 Joint Arrangements, by aligning the definition of joint control in Section 15 with that in IFRS 11.

The IASB have proposed changes to bring the IFRS for SMEs in line with IFRS 13 Fair Value Measurements by:

  • aligning the definition of fair value with that in IFRS 13;
  • aligning the guidance on fair value measurement with that in IFRS 13 by including the principles of the fair value hierarchy set out in IFRS 13;
  • including examples relevant to SMEs that illustrate how to apply the hierarchy; and
  • moving the guidance and related disclosure requirements for fair value to a new section of the standard.
Finally, the IASB have decided to propose;
  • retaining Section 2 Concepts and Pervasive Principles as part of the IFRS for SMEs;
  • aligning Section 2 with the 2018 Conceptual Framework and emphasise that other sections of the IFRS for SMEs take precedence over Section 2; and
  • retaining the concept of ‘undue cost or effort
Wider developments in corporate reporting
The most important current issue in corporate reporting is sustainability and already the FRC has published Factsheet 8 Climate related matters in November 2021. The guidance sets out the ways in which financial statements prepared under FRS 102 should take into account both:

  • The impact the entity has on climate change (e.g. investment in carbon-reducing technology); and
  • The impact climate change has on the entity (e.g. the measurement of individual assets or on the long-term viability of the business).

Some of this could be incorporated in a revised version of FRS 102 or in a separate standard along the lines that the new International Sustainability Standards Board are proposing new separate sustainability standards.

There are likely to be substantial developments to FRS 102 and its associated standards, FRS 101 and 105, over the next couple of years so all stakeholders should ensure they are kept up to date as they will require substantial changes to current financial reporting.
A black and white photographic headshot of Robert Kirk
Robert Kirk
CPA, Professor of Financial Reporting at the University of Ulster.
Robert is also author of the CPA Ireland Skillnet publication, A New Era for Irish and UK GAAP – A Quick Reference Guide to FRS 102.