The long awaited replacement to UK GAAP has finally arrived in the form of FRS 102, the last and most important of the trio of new UK GAAP standards. We consider specifically the impacts of this on the manufacturing sector.
What is FRS 102?
In March 2013 the Financial Reporting Council (FRC) published Financial Reporting Standard (FRS) 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland for accounting periods beginning on or after 1 January 2015. FRS 102 is a single accounting standard which replaces all current UK standards which make up the current UK GAAP. The new FRS 102 is broadly based on the International Financial Reporting Standards (IFRS) for Small & Medium Sized Entities (SMEs).
It is quite simply, the biggest change to reporting for the last 40 years.
How does FRS 102 compare with current UK GAAP and EU IFRS for manufacturing companies?
Applying FRS 102 should not lead to significant recognition and measurement differences for many manufacturing companies in respect of the following areas:
- Turnover (Revenue)
- Stocks (Inventories)
- Short term trade receivables and payables
- Plant, machinery and equipment
- Provisions, contingent assets and contingent liabilities
How will it affect manufacturers?
- The possibility of amortising goodwill over a much shorter useful life
- Obtaining valuations of intangible assets in order to recognise them separately from goodwill arising in a business combination
- A complete set of requirements for financial instruments accounting requiring derivative financial instruments and other specified financial instruments to be recorded on balance sheet at fair value
- Changes to how a group defined benefit pension scheme is accounted for in the separate financial statements of group entities
- More comprehensive deferred tax accounting rules potentially leading to more deferred tax liabilities being reported
- Recognition of liability of the balance sheet for any unused holiday entitlement due to all staff
- Increased disclosures of related party transactions in relation to key management personnel and close family members of key management personnel
- Re-statement of prior period results where differences in accounting treatment between FRS 102 and previous UK GAAP used
- Investment property definition changes under FRS 102. Current UK GAAP excludes properties being used by other group companies as Investment Properties. FRS 102 does not include any such exclusion. This could impact manufacturing groups
Why should manufacturing companies act now?
The implications of FRS 102 are complex and the devil is in the detail. Decisions you make now could have implications for the future. We can give you the support and advice you need to get it right, including:
- A preliminary discussion on FRS 102 and what it means to you
- Help with gathering information at transitional balance sheet dates
- A review of key accounting differences
- An assessment of the impact on all areas of your business, including the tax and cash flow impacts
- Advice on how to minimise the impact of conversion
- Drafting converted accounts once FRS 102 is adopted
It is expected that reporting under FRS 102 will not only change reported profits and net assets but could also result in increased volatility in reported earnings. These changes will need to be managed with all key stakeholders, including banks. Implementing FRS 102 might present a significant challenge to many manufacturing companies. FRS 102 is not just an issue for the annual accounts but could have consequences for budgets and forecasts, tax planning strategies and tax charges and payments.