United Kingdom Generally Accepted Accounting Practice (“UK GAAP”) for companies not currently preparing their accounts under International Financial Reporting Standards (“IFRS”) has changed for accounting periods beginning on or after 1 January 2015. Since Jersey generally follows UK GAAP, being United Kingdom Accounting Standards and applicable law, the financial reporting regime for local companies will change.
The existing plethora of Statements of Standard Accounting Practice, Financial Reporting Standards and Urgent Issue Task Force abstracts will be replaced by a single Financial Reporting Standard (FRS 102). However, there could be some confusion for those smaller companies (currently turnover less than £6.5 million and total assets not exceeding £3.26 million) preparing accounts in accordance with the Financial Reporting Standard for Smaller Entities (“FRSSE”) as the new version of the FRSSE, also effective from 1 January 2015, is to be withdrawn and replaced by FRS 102 with reduced disclosures in respect of accounting periods beginning on or after 1 January 2016. With the recognition and measurement criteria for items to be included in the accounts of smaller companies following FRS 102 from the start of 2016 should the move to full FRS 102 be brought forward a year to avoid adopting the new FRSSE for only one accounting period?
The transition from existing UK GAAP to FRS 102 will have similar, but hopefully not as onerous, additional matters to consider as the transition to IFRS. For a company with a 31 December financial reporting date the transition date is 1 January 2014 so its balance sheet at 31 December 2013 will have to be restated in accordance with the requirements of FRS 102. This allows the comparative 2014 figures in the profit and loss account (or income statement), included in the initial FRS 102 accounts for the year ending 31 December 2015, to be presented in accordance with FRS 102. Since the company’s balance sheet (or statement of financial position) at 31 December 2014 will also have to be restated in accordance with the requirements of FRS 102 it could be a useful exercise to compute the FRS 102 figures at the time of completing the accounts for the year ended 31 December 2014 under “old” UK GAAP.
Accounts will need to include a cash flow statement (until the reduced disclosures for small companies from 1 January 2016) and the primary statements could be re-named as the statement of financial position and income statement. However, we believe that most companies will continue to adopt the UK Companies Act terminology for individual items within the accounts, especially in the balance sheet. Time will tell whether tangible fixed assets become property, plant and equipment and stocks are replaced by inventories? The first accounts prepared under FRS 102 will require a transition reconciliation note summarising the effect of transition on previously stated balance sheet amounts at 1 January 2014 and 31 December 2014, and income and expenses for the year ended 31 December 2014, for a company with a 31 December 2015 reporting date.
What will the adoption of FRS 102 mean for Jersey?
The changes in recognition and measurement of items under FRS 102, which we believe are most likely to have an effect on Jersey companies, include the accounting treatment of investment properties and basic financial instruments of which we have specifically identified shareholders loans.
Under FRS 102 the definition of investment properties now includes property let to and occupied by another group company. Investment properties will be included in the balance sheet at fair value with any changes in fair value recognised in the profit and loss account and not direct to the revaluation reserve via the statement of total recognised gains and losses. A cumulative record of unrealised gains or losses arising on annual revaluations of investment properties included in the retained balance of the profit and loss account will need to be maintained.
The future accounting treatment of loans from shareholders is currently causing some concern as it was hoped that such interest free loans with no specified date of repayment would be specifically excluded from the scope of section 12 of FRS 102 and identified as basic financial instruments, thus avoiding the need for annual fair value measurement through the profit and loss account. Under the current provisions of FRS 102 it would seem that such interest free long term loans have to be discounted at each balance sheet date using a market interest rate to compute the present value of future cash flows. A task made more complicated by the unknown nature of future movements on a shareholder’s loan to his/her company.
A possible solution to the annual re-measurement of interest free loans from shareholders is to treat them as repayable on demand. However, this could result in a weakened balance sheet with the repayable on demand loan included under creditors payable in less than one year creating a net current liabilities position. Alternative solutions being considered are to designate the loan as repayable in a year and a day so that it remains under creditors payable in more than one year, with any discounted amount being deemed immaterial, or attach a market rate of interest to the debt, which alleviates the need for any discounting adjustment. This topic is likely to remain fluid until an accepted treatment becomes locally established during the initial practical application of FRS 102.
How ready are you for the introduction of new UK GAAP?
- Will your staff be sufficiently trained to start preparing accounts in accordance with FRS 102 from the beginning of 2016?
- Should accounting information and documentation, necessary for the restatement of figures contained in the 2014 accounts, beobtained in conjunction with the preparation of such accounts in 2015, to facilitate the computations required for the transition accounts?
- Have you decided on the accounting framework and terminology to be used – full FRS 102 from 1 January 2015 or FRSSE (2015) replaced by FRS 102 with reduced disclosures (if a small company) from 1 January 2016?
- Should you change accounting policies in advance of transition to FRS 102 and review agreements, contracts and other issues for possible beneficial amendment prior to transition?
- Have you established pro-forma FRS 102 accounts, including a cash flow statement, for preparation of clients’ accounts?
The final whistle is fast approaching, so a time table for the staged implementation of new UK GAAP, over the course of the next twelve months, should now be in place and should include sufficient time to roll out training for all accounts preparers.