01923224411 |
By Ian Meaburn
Posted on: 16 December 2015

The Changes to Accounting Standards: FRS 102 and FRS 105

What You Need to Know about FRS 102 and FRS 105: The Changes to Accounting Standards

The Financial Reporting Council has published its new Financial Reporting Standard 102 (FRS 102). This will be effective for periods commencing 1 January 2015 (e.g. financial years ending 31 December 2015). This new standard is a single standard that replaces existing UK GAAP for entities that are not entitled to report as small companies and are not required to report under IFRS.

In addition, for periods commencing 1 January 2016 (e.g. financial years ending 31 December 2016), small companies will be within the scope of FRS 102. This, along with the increase in thresholds determining the size of small companies, will mean changes in the accounting options for entities.

Definition of Micro-Entity and Small Company from 1 January 2016:



Balance Sheet Total


Accounting Options





FRS 102 1A or FRS 105

Small Company – Individual




FRS 102 1A

Small Company – Group

£12.2m (gross)

£10.2m (net)

£6.1m (gross)

£5.1m (net)


FRS 102

What Changes can be Expected?

Definition Amendments:

The new FRS 102 will see a number of definitions broadened. This will include tangible and intangible assets; financial assets and liabilities, and their treatment; investment properties; and cash.

The widening of investment property is likely to have the most impact because it no longer excludes owner-occupied properties or properties let to other group companies. It could result in the reclassification of some investment properties as property, plant and equipment.

Similarly, the criteria for intangible assets and goodwill have been widened to include those which are identifiable and measureable. This is likely to result in more individual intangibles assets being identified. This will mean the amount of goodwill is decreased.

There will also be changes to the requirements for accruing holiday pay and the amortisation of goodwill. The amortisation of intangibles will be completed over their useful life, but justification will be required should the life be over ten years. Useful life refers to the time an asset will be useful to a business, not how long the asset will last.

For small companies, FRS 102 1A states that particulars of related party transactions only need disclosing where they have not been concluded under normal market conditions.

The final definition change is to ‘cash’, which now encompasses both cash and cash equivalents. 

Reporting Profits:

The way which fair value movements are presented could have a significant effect on reported profits. Where revaluations are required and the valuation increases, the gains will need to be reported as profit. However they will not be subject to tax or form part of the distributable profits. This will affect;

  • Investments (other than subsidiaries, associates and joint ventures)
  • Forward change contacts
  • Future and interest rate swaps

In addition to this, entities will need to determine the effective interest rate (EIR) for loans payable and receivable under FRS 102, including inter-company and directors’ loans. The new standard states that arrangement fees, premiums or discounts on the redemption must be considered when determining the EIR. If an entity has entered into a ‘financing agreement’, typically through an interest-free loan to a subsidiary or director, the present value of the loan should be recorded.

Also under FRS 102, deferred tax will need to be recognised on all revaluations and sometimes on unremitted earnings from a subsidiary.

This method of reporting profits also applies to lease incentives, which are now required to be spread over the term of the lease rather than to the date when the rent is next renewed.

Options for Transition:

Entities are required to restate the opening comparative balance sheet to reflect the new standard. Entities are permitted to freeze the net book value at transition of a revalued asset or revalue at transition and treat it as the ‘deemed cost’ in the new regime. This will then reduce the need to prepare a value in subsequent years and indeed the need to pay for a revaluation.

For an entity which has never revalued its property, plant and equipment, a one-off revaluation could be calculated at transition and also treat this as the deemed cost.

Accounts Formatting:

The format for the financial statements will for the most part remain the same as they are driven by legislative requirements. The new FRS 102 requires entities to produce a ‘statement of change in equity’ as a primary statement. This will include information about share capital, share premium and reserves and accumulated profits together with comparative information.

The formatting of the cash flow statement will be different; it will now need to account for the inclusion of cash and cash equivalents. Additional disclosures are permitted should an entity wish to disclose further information; for example, providing the information on the operating profit atop of the profit and loss account.

Impact and Considerations:

We encourage you to fully assess the impact of the changes on your financial reporting. Whilst the tax timings will remain the same as UK GAAP, some of the changes will affect the timing of profit and loss movements. This should be fully communicated to any of your affected shareholders.

Companies will need to be sure that dividends are paid out of distributable profits. Similarly, movement in the fair value of assets and liabilities could impact on budgeting and cash flow. Entities will need to establish whether their budgets and management accounts should reflect these movements or whether they will be dealt with as period-end adjustments only.

Further to this, a change in the recognition criteria of assets and liabilities as well as profits and losses could have an impact on the credit rating of an entity.

All transition options should be carefully considered. Some of the strategies are complex, but it is imperative that the company’s individual needs are attended to, rather than selecting the simplest option. 

 If you have any questions or concerns regarding the changes to the Financial Reporting Standard and how it might impact your business, please get in touch on 01923 224411.

frs_102_changes.pdf103.18 KB
Ian Meaburn

Since qualifying in 2003 and becoming a director in 2015, I have developed many skills which enable me to support my wide-ranging portfolio of clients, both in terms of business size and industries. My role is equally varied; I assist clients