However in contrast to SSAP 19, FRS 102 section 16 requires those fair value movements to be recognised in the P&L. Note that where HMRC considers that there is, or may have been, avoidance of tax the analysis as presented wont necessarily apply. Section 872 doesnt apply to a chargeable intangible asset in respect of which a fixed rate election has been made under section 720 (see CIRD 12905). It may also assist individuals (and other entities) that are within the charge to income tax as many of the accounting and tax issues will be similar. other transactions to extent entered into under terms which is not under normal market conditions with the below with the exception of transactions with 100% owned companies: holders of associate interest or more in Company. See CFM64500 onwards for further details. In particular, see: For further guidance on the transitional provisions applying to hybrid instruments see Part B of this paper. If either of these methods are used no ongoing adjustment is required for tax purposes. On transition FRS 102 section 35 requires that the balance sheet presented in respect of the accounting transition date: The transition date, for accounting purposes, is the first day of the earliest accounting period presented in the accounts. The same approach will continue where Section 25 of FRS 102 is applied. movement on fair value reserves to be disclosed, In order to cover off the above requirements it would make sense to include a SOCE, disclose a change in accounting policy in the accounting policy section, equity at date of transition, and end of comparative year under old GAAP reconciling to, equity at each period under FRS 102 with notes on the reasons for adjustments; and. Section 12 does however apply, for example, to all derivative financial instruments. The FRS 102 Section 1A compliance pack contains the mandatory primary statements and disclosures, and the encouraged primary statements and disclosures by default. You can change your cookie settings at any time. There are no significant differences between Section 21 of FRS 102 and FRS 12. In particular the following are examples of instruments which will now be held at fair value in accordance with Section 12 of FRS 102: The requirements of Section 12 of FRS 102 represent a significant change from Old UK GAAP (both where FRS 26 has and has not been adopted). The COAP Regulations also include provision for some further cases where transitional adjustments will never be brought into account. FRS 5 application note G requires that, on recognition, revenue is measured at the fair value of the consideration received or receivable. For ease of reference commentary in this paper which refers to FRS 102 will also apply to those companies that apply Section 1A of FRS 102 unless otherwise stated within that section of the paper. Instead such companies will need to transition to one of the New UK GAAP alternatives. Adjustments on loan relationships as a result of changes in accounting policy can arise under 2 separate parts of the regime. PK ! (1) Convertible loans and asset-linked instruments (pre-2005). This ensures that there is continuity of treatment. Investment property to be shown separately. However, there are significant differences between the 2 tax regimes which arent reflected in this paper. 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. The amounts will be brought into account under the Disregard Regulations in priority to the COAP Regulations. Consolidated accounts/seperate financial statements, investments in associates and joint ventures, Accounting policies, estimates and errors, Check benefits and financial support you can get, Find out about the Energy Bills Support Scheme, Accounting standards: the UK tax implications of new UK GAAP, Summary of the changes to the accounting standards, PART A Comparison between Old UK GAAP and FRS 102, PART B - Transitional adjustments (Old UK GAAP to FRS 102), nationalarchives.gov.uk/doc/open-government-licence/version/3, Corporation Tax: Disregard Regulations for derivative contracts, Statement of total recognised gains and losses, Statement of comprehensive income (sometimes referred to a statement of other comprehensive income), Reconciliation of movements in shareholders funds, Part A of this paper provides a comparison of the accounting and tax differences that arise between Old UK, Part B of this paper provides a summary of the key accounting and tax considerations that arise on transition from Old UK, additional commentary in relation to non-interest bearing loans, updated commentary on the application of the Disregard Regulations and Change of Accounting Practice Regulations, reflecting the changes made to these statutory instruments in December 2014, accounting commentary updated to reflect the amendments to, where applicable it has been updated for any commentary specific to section 1A of, proposed changes to the tax rules, for example changes to the loan relationship and derivative contract rules and changes to the intangibles legislation included in Finance (No.2) Act 2015, Micro-entities: companies that meet the eligibility criteria may prepare and file abridged accounts, with effect for periods commencing on or after 1 January 2016 these requirements are contained in, assets and liabilities at the accounting transition date will be identified, recognised and measured in line with the requirements of the new standards, thereafter profits and losses will be recognised in accordance with the new standards - these may differ from those profits and losses that would have been reported had Old UK, UK Generally accepted accountancy practice generally accepted accountancy practice in relation to accounts of UK companies (other than, a single statement of comprehensive income, in which case the statement presents all items of income and expense recognised in the period, 2 statements; an income statement and a separate statement of comprehensive income, application of Section 11 and Section 12 of, application of the recognition and measurement criteria of, all derivatives (including interest rate swaps, a forward commitment to purchase a commodity that is capable of being cash-settled, and options and forward contracts), loans that arent plain vanilla debt where, for example, the amount repayable can vary or where non-standard interest rates are used, investments in convertible debt where the return to the holder can vary with the price of the issuers equity shares rather than just with market interest rates, assets and liabilities held for trading purposes or speculatively, assets and liabilities designated at the outset by the company as at fair value through profit and loss, the tax treatment of derivatives is explained at, as noted above, financial instruments are required to be fair valued under Section 12 for all but basic instruments - loans previously recognised on an amortised cost basis may therefore be measured at fair value in accordance with Section 12, as noted above, Sections 11 and 12 dont permit the bifurcation of embedded derivatives (although the issuer of compound instruments will still separate out the equity component under Section 22) - for example the holder of a hybrid financial instrument is required under, Section 17 requires that residual values are based on current prices rather than historic prices, because of the difference in the definition of an intangible asset an acquisition under, there is a change in the measurement of the consideration given where that consideration is contingent, the look back period in which provisional fair values can be amended is different (, a change in step acquisitions in some circumstances, a grant that doesnt impose specified future performance-related conditions on the recipient is recognised in income when the grant proceeds are received or receivable, a grant that imposes specified future performance-related conditions on the recipient is recognised in income only when the performance-related conditions are met, grants received before the revenue recognition criteria are satisfied are recognised as a liability, it removes the multi employer exemption on defined benefit schemes such that the scheme position is reported in the solus accounts of the entity contractually or legally responsible for the plan, the calculation of the net interest on defined benefit schemes is different. Consequently there may be differences in respect of the period over which such incentives are recognised. As a result, the company may be required to derecognise / recognise the debt. This chapter of the paper concentrates on those companies which dont currently apply FRS 26 as its likely that these companies will see the biggest change. Income and expenditure of foreign operations (including branches) are translated from the functional currency of the foreign operation into the companys functional currency at actual or average rates not at closing. Any excess on the loan that cannot be offset is taken to profit and loss account. Alternatively, its possible that the permanent as equity loan is retranslated at the year end, but with exchange movements recognised through reserves. In general, reporting of revenue in accounts is followed for tax purposes. The rules apply in a number of different circumstances and they also contain particular elections that may be made. The relevant other paragraphs are section 723 (gain on revaluation CIRD 13050), section 725 (reversal of accounting loss CIRD 13090) and section 732 (reversal of accounting gain CIRD 12560). 1) Basic Loans As a result, where the accounts measure the instrument at fair value, either with profits going to profit or loss, or as items of other comprehensive income, these fair value movements will typically be brought into account for tax. 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. Therefore the PPA is in this example ignored. There is no separate disclosure of turnover, cost of sales and other operating income. However, Application note G of FRS 5 provides revenue recognition guidance in respect of the sale of goods and services as well as other specific revenue recognition scenarios, SSAP 9 provides guidance in respect of long term contracts and UITF 40 addresses service contracts. Further guidance on abridged accounts can be found in the helpsheet Abridged accounts for small companies. This part of the paper provides a summary of the key accounting and tax considerations that arise on transition from Old UK GAAP to FRS 102. Are the circumstances so unique you thought it might give away the identity of your client? Are there disclosure exemptions under FRS 102? operating leases etc.) In contrast, FRS 102 requires that where modification is considered substantial the original debt instrument will be derecognised and the new instrument recognised at its fair value. This could have a significant impact on the calculation of the profits recognised in the companys accounts. Under Old UK GAAP, UITF 32 provides guidance on how to account for Employee benefit trusts. 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). Note that a fixed rate election must be made within 2 years of the end of the accounting period in which the expenditure was incurred and cannot be reversed. For Corporation Tax purposes, adjustments are treated as receipts or deductions in computing the trade profits. In certain situations it may be appropriate to adopt a no gain/no loss policy, so that the value of the equity issued is treated as being equal to the carrying value of the debt given up. Where a fundamental error is identified FRS 3 requires that this is accounted for by restating the prior period comparative figures. Instead the depreciation is adjusted prospectively to reflect the revised useful economic life. FRS 102 includes two sections on financial instruments. Disclose the amount of interest income recognised on loans to group companies in the P&L, Disclose the amount of interest expense recognised on loans from group companies in the, Disclosures for credit institutions & specific disclosures (Section 310 -313 CA 2014), Disclosure of average number of employees in year (Section 317(1)(a) CA 2014). Entities that adopt FRS 102 will apply the recognition and measurement requirements of Section 20. Indeed, as mentioned above, disclosures over and above those required by Section 1A will often need to be made in order that the financial statements give a true and fair view. Under IAS, FRS 101 and FRS 102, derivative contracts will typically be measured at fair value in the companys accounts. For tax purposes Sections 871-879 of Part 8 CTA 2009 provide a comprehensive set of rules for changes in accounting for intangibles and especially for cases where what is included entirely as goodwill under Old UK GAAP is disaggregated into different types of intangible property with different amortisation rates or impairment factors under 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). The amount of the debit or credit is the difference multiplied by the fraction tax written-down value/accounting value, where both these values are those at the end of the earlier period. The loan relationship would normally be taxed in line with the amount recognised in the accounts. Such specialised activities arent addressed within this paper. providing disclosures of adjustments made on transition if applicable; providing a statement of comprehensive income if items go through other comprehensive income previously called the STRGL under old GAAP. The use of the fair value model is likely to represent a significant change in the measurement basis of stock and hence the timing of profits/losses on such stock. Section 1A outlines the presentation and disclosure requirements only. Under both Section 12 of FRS 102 and the IAS 39 option, hedge accounting is only permitted where certain criterion are met. The above treatment doesnt apply where it can be demonstrated that the sponsoring entity wont obtain future economic benefit from the amounts transferred or it doesnt have control of the right or other access to the future economic benefit. As such, the Regulations are applicable to transitions to FRS 101 and FRS 102 in the same way as they applied to transitions to IAS or FRS 26. This is a further example of a hedging relationship where under FRS 102 the hedged item and the hedging instrument need to be recognised separately in the accounts. authorised investment firm, insurance intermediary of any other company carrying on of business by which is required to be authorised by the Central Bank); or, a company that is a credit institution or insurance undertaking; or, a company with securities regulated on a regulated market; or. It remains the responsibility of the entity or individual to ensure that it prepares accounts in accordance with relevant GAAP and submits a self assessment in line with UK tax law. Where reasonable assurance is present grants are then recognised in the accounts based on the relationship between the grant and the related expenditure. It will take only 2 minutes to fill in. Second, capitalised expenditure in respect of an intangible asset will be relieved under the rules in Part 8 CTA 2009 as its written down in the accounts (subject to the normal exclusions, including the pre-FA 2002 rule). Potentially the company may apply hedge accounting in respect of the hedging relationship in its accounts. 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. Consolidated financial statements can be prepared under Section 1A. Guidance on many of these issues is in HMRCs CIRD Manual (in particular see CIRD12300 which address changes in accounting policies for intangible assets within Part 8 CTA 2009). However, a sale of a small number of such assets prior to maturity can result in all the HTM assets becoming tainted, such that the assets would be required to be accounted for as being AFS. However, consideration should be given to the facts which led to the transaction price differing from fair value. Further detail on specific transactions involving financial instruments where the requirements of FRS 102 differ from the requirements of Old UK GAAP are set out below. No taxable credit or allowable debit is to be brought into account under Chapter 15 to the extent that its already brought into account by section 723 (revaluations), section 725 (reversal of accounting loss) or section 732 (reversal of accounting gain). Note there are particular tax rules, the herd basis, that can be applied to particular farm animals. The right to consideration typically derives from the performance of its obligations under the terms of the exchange with the customer. S;E 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. ICAEW.com works better with JavaScript enabled. No because hopefully the payments were made under normal market conditions. In accounting terms transition to FRS 102 is addressed in Section 35 of FRS 102. The effect of this regulation is to disregard for tax purposes the amounts recognised in the statement of equity (as items of other comprehensive income) until they are recycled to the income statement. The closing rate as at the balance sheet date should be used instead. Neither successive Companies Acts nor successive FRSSEs have specified dividends to directors in their capacity as shareholders as being disclosable items. When Should I Be Using FRS 105 or FRS 102 1A? Although IAS 39 doesnt distinguish between basic and other financial instruments in the same way it does share some similarities with Section 12 of FRS 102; for example in both cases, a company will typically be required to account for all financial instruments separately whereas synthetic or composite instruments are relatively common under old GAAP (where FRS 26 isnt adopted). An online consultancy business serving EU customers, incorporated in Ireland has a virtual business address, can they VAT register? Old GAAP, where FRS 26 has not been adopted, requires derivatives that are entered into as part of a companys hedging strategy to be accounted for on an historic cost basis equivalent to that used for the underlying asset, liability, position or cash flow. Entity has claimed exemption from reporting comparative information on certain items of share capital in line with FRS 102 1.12(a) [true/false] . The Institute of Chartered Accountants in England and Wales, incorporated by Royal Charter RC000246 with registered office at Chartered Accountants Hall, Moorgate Place, London EC2R 6EA. 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). Advise clients of the additional choices available with regard to accounting standards (Section 1A FRS 102/full FRS 102) on enactment of this Bill and the benefits this will provide with regard to the reduced disclosure requirements.Review their client listing to assess which companies can apply Section 1A of FRS 102. For fixed assets detailing impairments netted against cost where assets held at cost less impairment (Sch3A(45)). Access to our exclusive resources is for specific groups of students, users and members. UK tax law provides in general that the accounting treatment of these types of instruments is followed for tax purposes. However, bifurcation isnt typically permitted under Old UK GAAP (where FRS 26 isnt applied) or under Sections 11 / 12 of FRS 102 (although in both cases the issuer of compound instruments will still separate out the equity component in accordance with FRS 25 or Section 22 respectively). As before provide details of the arrangements, the names of the directors, terms of the arrangements etc. [Content_Types].xml ( Mo0][i02lWEmDm(1i#J"-! gDu0/km~S~FC-6btg{(~ These example financial statements have been prepared to show the The accountancy and tax treatment of hedging relationships is discussed above (see chapter 4.6). 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. For accounting periods commencing on or after 1 January 2016 there are changes to the loan relationship and derivative contract rules which may affect the tax treatment. However it should be noted that SSAP 21 includes a presumption that if the present value of the minimum lease payments is 90% or more of the fair value of the leased asset that it would typically be classified as a finance lease. FRS 102 requires that investment property is initially recognised at cost[footnote 7] and subsequently measured at fair value. Furthermore, the reduced disclosure requirements permitted by Section 1A of FRS 102 would not typically have any effect on the companys tax position. For further details of net investment hedging see CFM 62000 onwards. For further guidance on the transitional provisions applying to financial instruments see Part B of this paper.