UK GAAP Requiements Flashcards
What accounting standards do UK Companies have to follow?
Hint:
Size of group or company
- IFRS
- Frs100
- Frs101
- Frs102
- Frs105
FRS 100 Application of Financial Reporting Requirements. gives guidance on UK accounting standards The rules are as follows:
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Listed GROUPs must prepare their accounts under IFRS Standards.
- – However, SUB’s can take advantage FRS 101 reduced disclosures & FRS102.
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All Other UK companies must apply:
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FRS 102 The Financial Reporting Standard Applicable in the UK and the Republic of Ireland
- or Voluntarily choose to apply IFRS,
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FRS 102 The Financial Reporting Standard Applicable in the UK and the Republic of Ireland
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A small entity that applies FRS 102:
- – Does not have to show OCI
- – Does not have to produce a statement of cash flows
- – Exempt from many disclosure requirements of FRS 102.
- If micro-entity may choose to apply FRS 105 The Financial Reporting Standard Applicable to the Micro-Entities Regime.
Discuss the key principles of FRS 101 Reduced Disclosure Framework?
FRS 101 Reduced Disclosure Framework
- FRS 101 permits exemptions from many of the disclosure requirements found in IFRS
- FRS 101 can only be applied in the individual financial statements of subsidiaries and parent companies that fully apply IFRS
- Some public interest entities, such as banks, cannot take advantage of all of the exemptions they must still make disclosures with regards to financial instruments and fair value.
Background discussion:
- The application of FRS 101 results in cost-savings and time-savings for entities without severely impacting the quality of financial reporting.
- Moreover, full disclosures on a group level can be found in the consolidated statements, which are likely to be of greater use for investors and lenders.
Discuss FRS 105 key principles?
What entity qualifies as a micro-entity?
Example of accounting transactions specifically prohibited?
- *FRS 105 The Financial Reporting Standard Applicable to the Micro-entities Regime**
- *A micro-entity if it satisfies two of the following three requirements:**
- Turnover of not more than £632,000 a year
- Gross assets of not more than £316,000
- An average number of employees of 10 or less.
FRS 105 is based on FRS 102 but with some amendments to satisfy legal requirements and to reflect the simpler nature of micro-entities. For example, FRS 105:
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Prohibits accounting for:
- Deferred Tax
- Equity-Settled Share-based payments BEFORE the issue of the shares
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Prohibits Capitalisation of:
- Borrowing costs.
- Development expenditure as an intangible asset.
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Prohibits revaluation model for:
- Property, Plant and Equipment,
- Intangible Assets
- Investment Properties
- Simplifies the rules around classifying a financial instrument as debt or equity.
- Removes the distinction between functional and presentation currencies.
There are very few disclosure requirements in FRS 105.
Discuss the contents of FRS 102:
Objectives
Qualitative characteristics
Elements
Recognition
Measurement
Accruals basis
Offsetting
FRS 102 is a single standard organised by topic, based on IFRS for Small and Medium Entities (the SMEs Standard), although there are some differences.
The objective of financial statements
- “provide information about an entity’s financial position, performance and cash flow
- - As well as the results of the stewardship of management.
- - This information should be useful to a range of users.”
Qualitative characteristics of information
- - Understandability – to users with a reasonable knowledge of business and accounting.
- - Relevance – capable of influencing the economic decisions of users.
- - Materiality – information is material, therefore relevant if its omission or misstatement could influence the decisions of users.
- - Reliability – free from material error, bias, and offers a faithful representation
- - Substance over form – economic substance rather than their legal form.
- - Prudence – caution should be exercised when making judgements.
- - Completeness – information should be complete, within the bounds of cost and materiality.
- - Comparability – users should be able to compare financials through time, and different entities.
- - Timeliness – information is more relevant if it is provided without undue delay.
- - Balance - between benefit and cost
Elements - The definitions of the elements are as follows:
- - Assets – a resource controlled by an entity from a past event from which future economic benefits are expected to flow to the entity.
- - Liabilities – a present obligation of an entity from a past event, the settlement of which is expected to result in an outflow of economic benefits.
- - Equity – the residual interest in the assets of the entity after deducting all its liabilities.
- - Income – increases in economic benefits in the reporting period that result in an increase in equity (other than contributions from equity investors).
- - Expenses – decreases in economic benefits in the reporting period that result in a decrease in equity (other than distributions to equity investors).
Recognition: An element should be recognised in the financial statements if:
- *- It is probable that economic benefits will flow to or from the entity
- Its cost or fair value can be measured reliably.**
Definitions and recognition criteria are based on the 2010 Conceptual Framework. As such, the definitions of assets and liabilities and the recognition criteria outlined in FRS 102 differ from those in the 2018 Conceptual Framework
Measurement - FRS 102 says that there are two common measurement bases:
- Historical cost – the amount of cash and cash equivalents paid to acquire an asset, or the amount of cash and cash equivalents received in exchange for an obligation.
- - Fair Value – the amount for which an asset could be exchanged, or a liability settled, between knowledgeable parties in an arm’s length transaction.
- Accruals basis*
- *FRS 102 emphasises that financial statements, other than statements of cash flow, are prepared using the accruals basis.**
- Offsetting*
- *An entity should not offset assets and liabilities unless required to or permitted by FRS 102**.
What Factors to Consider when choosing between FRS 105 to FRS 102?
FRS 105 requires fewer disclosures than FRS 102. This means:
- Reduced the time and cost burden of producing financial statements.
- However, consideration should be given to whether the users of the financial statements will find this lack of disclosure a hindrance to making economic decisions. This is unlikely in the case of such a small company.
FRS 105 does not permit PPE, Intangible Assets or Investment Properties to be held at fair value.
- This will have an impact on the perception of the company’s financial position, particularly if carrying amounts of assets are materially lower than other companies as a result.
Accounting policy choices allowed in FRS 102 have been removed in FRS 105. e.g Borrowing Costs and R&D costs must be expensed.
- Profits reported under FRS 105 may be lower than if FRS 102 was applied.
- If competitors prepare financial statements in accordance with FRS 105 then it will be easier to compare and benchmark performance against them.
If the company is expected to grow quickly:
- might be easier to simply apply FRS 102 from the outset. That way, it will avoid the burden of transitioning from FRS 105 to FRS 102 at a later date.
Key differences between FRS 102 and International Financial Reporting Standards?
Concepts and principles
Financial statement presentation
- True and Fair Override
- SFP Layout
- Income statement
- Statement of Cashflows
Concepts and Principles
Two commonly used measurement bases. These are:
- Historical cost, and
- Frs102 Fair value VS IFRS = Current Value.
Financial statement presentation
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True and Fair Override
- To comply with the Companies Act, FRS 102 allows a ‘true and fair override’. If compliance with FRS 102 is inconsistent with the requirement to give a true and
fair view,thedirectors must depart from FRS 102.Details of any departure, and the reasons for it and its effect are disclosed.
- To comply with the Companies Act, FRS 102 allows a ‘true and fair override’. If compliance with FRS 102 is inconsistent with the requirement to give a true and
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SFP Layout
- The format is set out as: Assets – Liabilities = Equity
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Income statement
- Refers to the statement of financial performance as the ‘income statement’ (as opposed to ‘the statement of profit or loss).
- Its format is dictated by the Companies Act.
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Statement of Cashflows
- Under FRS 102, small entities, mutual life assurance companies, pension funds and certain investment funds are not required to produce a statement of cash flows.
- This exemption does not exist in the IAS 7 Statement of Cash Flows.
What are the differences between FRS102 and conceptual framework for the definitions of elements?
Main Changes
Assets:-
- Original =“Economic benefits are Expected to flow to the entity”
- Now = An economic resource is a right that has the Potential to produce economic benefits
Meaning of change -
- - Clarifies an asset is an economic resource
- - Might affect the recognition of some assets
Liabilities:-
- Original =“A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits”
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Now =
- “A present obligation of the entity to transfer an economic resource as a result of past events,
- An obligation is a duty or responsibility that the entity has no practical ability to avoid”
Meaning of change -
- Clarifies that liability is the obligation to transfer the economic resource, not the ultimate outflow of economic benefit
- Deletion of ‘expected flow ’— might affect the recognition of some liabilities
- Introduction of the ‘no practical ability to avoid’ criterion to the definition of obligation
Explain the FRS 102 Differences with IAS2 Inventories?
FRS 102 provides more guidance than IAS 2 Inventories about what costs should be included in production overheads.
For example:
- FRS 102 permits the reversal of inventory impairments, whereas IAS 2 does not.
- Production overheads to include a share of restoration cost of PPE
- it says that production overheads should include the costs of any obligation to restore a site on which an item of property, plant and equipment is located that are incurred during the reporting period as a consequence of having used that item of property, plant and equipment to produce inventory.
Explain the FRS 102 Differences with the measurement of Financial Instruments?
FRS 102 adopts a simplified approach to financial instruments:
- - Investments in shares are measured at fair value through profit or loss, if their fair value can be reliably measured. Otherwise, they are measured at cost less impairment.
- - Simple debt instruments (whether receivable or payable) are measured at amortised cost.
- - Commitments to make or receive a loan are measured at cost (if any) less impairment.
- - More complicated debt instruments (whether receivable or payable) are measured at fair value through profit or loss.
Explain the FRS 102 Differences with Impairments of a financial instrument?
FRS 102 adopts an incurred loss model.
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Impairment loss is only recognised in respect of financial assets (Loan’s given out) if objective evidence of impairment has occurred
– such as the bankruptcy of a credit customer. - For an Asset measured at amortised cost,
- *Impairment loss is calculated as the difference between its carrying amount and the present value of the expected future cash flows**
- (discounted at the original effective rate of interest).
In contrast,
- IFRS 9 Financial Instruments adopts an ‘expected loss’ model for financial asset impairments.
- This involves recognising a loss allowance for all financial assets measured at amortised cost or fair value through other comprehensive income (except equity instruments) based on the level of credit risk.
Explain the FRS 102 Differences with the derecognition of a financial instrument?
Derecognition:
FRS 102 contains simpler rules than IFRS 9 for deciding whether or not to derecognise a financial instrument.
Explain the FRS 102 Differences with Joint Ventures?
Joint ventures
FRS 102 uses the term ‘joint venture’ with regards to any arrangement whereby an economic activity is subject to joint control.
FRS 102 says that there are three types of joint ventures:
- Jointly controlled operations – this is where each venturer contributes its own assets for use by the joint venture.
- Jointly controlled assets – this is where the venturers jointly control or jointly own the assets used by the joint venture.
- Jointly controlled entities – this involves the establishment of a separate entity that is under joint control. In the consolidated financial statements, such investments are accounted for using the equity method.
IFRS 11 Joint Arrangements classifies activities subject to joint control in one of two ways:
- Joint operations – where the venturers have rights to the assets, and obligations for the liabilities, of the operation.
- Joint ventures – where the venturers have rights to the net assets of the arrangement, usually as a result of a separate entity is established.
Explain the FRS 102 Differences with Investment Property?
FRS 102 requires Investment Property to be accounting policy:
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- The use of the fair value model
- Unless the fair value cannot be determined reliably.
In contrast, IAS 40 Investment Property allows entities to measure investment property using either the cost model or the fair value model.
- FRS 102 allows an entity that Rents investment property to another company in the same group to account for it as PPE in its separate financial statements. If so, it is measured at cost less depreciation.
IAS 40 does not permit this treatment.
- FRS 102 does not cover Property that is held to earn a rental income with ancillary services.
IAS 40 States that a property that is held to earn a rental income should be treated as PPE if ancillary services are provided that are significant to the arrangement e.g. the services provided to hotel guests.
Explaining FRS 102 differences with intangible assets.
R&D Costs
Intangible assets gained Via grants
Useful Life of asset.
- **Intangible assets*
- R & Development Costs***
- FRS 102 says that the capitalisation of development expenditure is optional.
In contrast, IAS 38 Intangible Assets requires that development expenditure is capitalised if certain criteria are met.
- Grants*
- *FRS 102 specifies that an intangible asset acquired by way of:**
- - Grants shall be recognised at their fair value on the date that the grant is received or receivable.
Useful life
- FRS 102 specifies that intangible assets should be considered to have a definite useful economic life.
- FRS 102 says that if the useful life of an intangible asset cannot be measured reliably then it must be estimated. The estimate used should not exceed ten years.
IAS 38 allows entities to regard an intangible asset as having an indefinite useful economic life if they cannot foresee an end to the period over which the asset will generate economic benefits.
Explain frs102 differences regarding Non-current assets.
Assets Held for sale
Borrowing costs
Estimate Review
- *Non-current assets
- Held for sale***
FRS 102 does not contain the concept of ‘held for sale’.
- - As such, assets are depreciated or amortised up to the date of disposal.
- - However, FRS 102 identifies the decision to sell an asset as a potential indicator of impairment, meaning that an impairment review should be performed.
Borrowing costs
- Under FRS 102, an entity may adopt a policy of capitalising borrowing costs.
- FRS 102 is more specific than IAS 23 about the capitalisation rate to be used.
IAS 23 Borrowing Costs requires that borrowing costs attributable to a qualifying asset are capitalised.
Estimate reviews
- FRS 102 only requires entities to review the useful economic life of assets if evidence exists that they have changed.
IAS 16 PPE and IAS 38 Intangible Assets require that an entity reviews residual values and useful lives annually.