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On 15 December 2022, the Financial Reporting Council (FRC) issued FRED 82 Draft amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs Ė Periodic Review.

The main focus of change is in respect of on-balance sheet lease accounting and revenue recognition. However, there are some other changes that preparers need an awareness of as follows:

Section 2 Concepts and Pervasive Principles

The entire Concepts and Pervasive Principles in FRS 102, Section 2 has been revised and updated to reflect the IASB's Conceptual Framework for Financial Reporting which was issued in 2018. This redrafted section is structured as follows:

  • The objective of financial statements
  • Qualitative characteristics of information in financial statements
  • Financial statements and the reporting entity
  • The elements of financial statements
  • Recognition and derecognition
  • Measurement
  • Presentation and disclosure

There is also an additional Section 2A Fair Value Measurement which replaces the Appendix to FRS 102, Section 2 in the January 2022 edition.

Going concern

There is a new paragraph 3.8A proposed which states that when an entity prepares its financial statements on a going concern basis, it must disclose that fact. In addition, the entity must also disclose confirmation that it has also considered information about the future to comply with paragraph 3.8. Keep in mind that the entity is required to consider all available information about the future, which is at least, but not limited to, 12 months from the date when the financial statements are authorised for issue.

In addition, paragraph 3.8A will also require an entity to disclose any significant judgements made in assessing the entity's ability to continue as a going concern.

Accounting policies

Currently, FRS 102 requires an entity to disclose a summary of its significant accounting policies (FRS 102, para 8.5). The term 'significant' was not defined in FRS 102 and the FRC propose changing this paragraph to require an entity to disclose its material accounting policies. The paragraph goes on to clarify that accounting policy information is material if, when considered together with other information included in the financial statements, it can reasonably be expected to influence decisions that the users of the financial statements make on the basis of those financial statements. The disclosure must also include the measurement basis (bases) used when preparing the financial statements.

A new paragraph 8.5B is also proposed which provides further clarification on when accounting policy information is material. It states that an entity is likely to consider accounting policy information material if it relates to material transactions, other events or conditions and:

  1. the entity has changed an accounting policy during the period which has resulted in a material change to the information in the financial statements;
  2. the entity chose the accounting policy from one or more options permitted by FRS 102;
  3. the accounting policy was developed in line with FRS 102, Section 10 Accounting Policies, Estimates and Errors in the absence of a specific section of FRS 102 which would otherwise apply;
  4. the accounting policy relates to an area that requires significant judgement or assumptions in applying an accounting policy (and the entity discloses those judgements or assumptions in accordance with FRS 102, paras 8.6 and 8.7); or
  5. there is complex accounting required and the users would otherwise not understand those material transactions, other events or conditions (for example if an entity applies more than one section of FRS 102 to a class of material transactions).

Accounting estimates

The FRC have included an additional paragraph 10.14A which provides examples of accounting estimates as follows:

  • Estimated selling price less costs to complete of inventory
  • Recoverable amount of a fixed asset
  • Depreciation expense for a fixed asset
  • Fair value of asset or liability, applying FRS 102, Section 2A Fair Value Measurement
  • A provision for warranty obligations

New paragraph 10.14D clarifies that an entity will need to change an accounting estimate if changes arise in the circumstances on which the accounting estimate was based, or as a result of new information, new developments or more experience.

Financial instruments

There is a new paragraph 11.14A which clarifies when a dividend receivable is recognised in profit or loss which is when:

  • The entity's right to receive payment is established
  • It is probable (i.e. more likely than not) that the economic benefits associated with the dividend will flow to the entity
  • The amount of the dividend can be reliably measured

An equivalent new paragraph has been included in Section 12 Other Financial Instruments Issues at paragraph 12.9A.

There are additional paragraphs 11.48ZA and 11.48ZB which relate to financial institutions and retirement benefit plans. These new paragraphs require quantitative and qualitative information to be disclosed concerning amounts that have arisen due to expected credit losses. This would apply where the financial institution or retirement benefit plan has used the accounting policy option to apply IFRS 9 Financial Instruments.

Investments in associates

A new paragraph 14.3A provides examples of situations when significant influence can usually be evidenced as follows:

  1. Representation on the board of directors or equivalent governing body
  2. Participation in the policy-making processes (including participation in decisions concerning dividends or other distributions)
  3. Material transactions between the investor and its associate
  4. Interchange of managerial personnel
  5. Provision of essential technical information

Investment property

A new paragraph 16.2A is proposed which clarifies that an entity must use its professional judgement in determining whether the acquisition of investment property is the acquisition of an asset or a group of assets or a business combination which would fall in scope of Section 19 Business Combinations. Hence reference will need to be had to both FRS 102, Section 16 and Section 19 in this respect.

There are also consequential amendments proposed to Section 16 as a result of on-balance sheet lease accounting for lessees. For example, the amendments proposed to paragraph 16.7 clarify that when the lessee uses the fair value model to measurement investment property that is held as a right-of-use asset, it must measure the right-of-use asset and not the underlying property at fair value.

Intangible assets other than goodwill

A new paragraph 18.3B is proposed which clarifies the accounting treatment for an intangible asset that may be contained in, or on, a physical asset. The paragraph cites an example of software for a machine that cannot be operated without that specific software and confirms that this is an integral part of the related hardware and hence is treated as property, plant and equipment (FRS 102, Section 17). The same treatment would apply to the operating system of a computer or mobile device.

If the software is not an integral part of the related hardware, the software is treated as an intangible asset.

Business combinations

There is a new paragraph 19.11B proposed that confirms that a transaction that remunerates employees or former owners of the acquiree for services in the future is not part of the cost of a business combination.

There are more paragraphs proposed which clarify the accounting treatments for provisions and contingent liabilities. Proposed paragraph 19.15F states that contrary to paragraphs 21.4(b) and 21.12, the acquirer must recognise a contingent liability assumed in a business combination at the date of acquisition, even if it is not probable that the acquirer will be required to transfer economic benefits in settlement.

There are also consequential amendments to Section 19 in respect of the on-balance sheet lease accounting treatment as well as additional disclosure requirements for business combinations.

There is a new appendix proposed in Section 19 which is an integral part of Section 19 and provides guidance on identifying an acquirer. This appendix replaces the guidance provided in paragraph 19.10.

Share-based payment

There is a new paragraph 26.1B proposed which confirms that equity instruments issued in a business combination in exchange for control of the acquiree are not within the scope of Section 26. However, equity instruments granted to employees of the acquiree in their capacity as employees are within the scope of the section.

There is also clarification in proposed paragraph 26.1C which confirms that the term 'fair value' is used differently in Section 26. For the purposes of Section 26, fair value is the amount for which an asset could be exchanged, a liability settled or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an armís length transaction.

Proposed paragraph 26.13A clarifies that the settlement of an equity-settled share-based payment transaction may involve an entity transferring cash or other assets as an alternative (or partial alternative) to the transfer of equity instruments. In such cases, the payment made is treated as a deduction from equity. The exception to this would be where the payment exceeds the fair value of the equity instruments. In such cases, any excess is recognised as an expense.

Paragraph 26.15B is proposed to be changed to clarify that where a counterparty has a choice of settlement of a share-based payment in cash or equity, the transaction is treated as wholly cash-settled unless:

  • the choice of settlement in cash or other assets bears no commercial substance; or
  • the choice of settlement relates only to a net settlement feature.

In these cases, the entity accounts for the transaction as a wholly equity-settled transaction.

Taxation

There is additional clarification in proposed paragraphs 29.17A to 29.17C which clarifies the treatment of uncertain tax treatments.

Related parties

Paragraph 33.9 is proposed to be changed to require the amount of outstanding balances and commitments to be disclosed in addition to the terms and conditions and details of any guarantees given or received. Currently, the paragraph just requires the amount of outstanding balances, terms and conditions and guarantees given or received.

Specialised activities

There is a new paragraph 34.9A which clarifies the elements of cost of a biological asset.

There is clearer guidance on when an asset is a heritage asset. In addition, separate disclosure is required of heritage assets held by a lessee as a right-of-use asset.

For public benefit entities, there is clearer guidance in proposed paragraph PBE34.70A in respect of donations and legacies.

Appendix B to Section 34 is deleted as much of this has been moved into the main body of the section.

Transition to FRS 102

Paragraph 35.10(a)(ii) is proposed to be amended to confirm that where goodwill was previously assessed as having an indefinite useful life under the entity's previous financial reporting framework, it must be re-assessed to determine its remaining useful life and then subsequently measured in accordance with FRS 102, para 19.23.

There is an additional transitional exemption proposed in paragraph 35.10(lA) in respect of decommissioning liabilities included in the cost of right-of-use assets.

The optional exemption in respect of lease incentives is proposed to be deleted.

In addition, there are additional optional exemptions in respect of development costs, leases, revenue from contracts with customers and cost determined under a previous financial reporting framework as deemed cost.

There are also additional disclosure requirements for an entity transitioning to FRS 102 for the first time.

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