What is the FRS 102?

The introduction of the FRS 102 signalled a major overhaul in UK financial reporting standards. Use our handy guide to expand your knowledge of the topic, to stay compliant and to enhance your practice.

Overview of FRS 102

First implemented in 2015, the FRS 102 is a financial reporting standard used in the UK and the Republic of Ireland. It was developed as the result of a long, complex consultation and development process and was designed to simplify the previous UK GAAP standards and ensure consistency with International Financial Reporting Standards.

FRS 102 applies to most UK companies and is all about giving a true and fair view of a company’s accounts. It came about after the UK was required to incorporate an EU Accounting Directive into its legislation – despite Brexit – to ensure greater consistency and, in time, reduce the accounting burden faced by smaller businesses.

Importance of FRS 102 for Accountants

For accountants, it’s vital to know which financial reporting standard to use for clients. While many businesses will require the full FRS 102, others may use the FRS 102 Section 1A (with reduced disclosure), and others may require the FRS 105.

While some of your clients may be small enough to qualify for FRS 105, they may find that using this standard impairs their ability to obtain credit. For that reason, they may require a switch to FRS 102, a switch that will involve greater complexity and disclosure. However, depending on the client you may be able to apply Section 1A: using exemptions and reducing the disclosure burden to make accounting practices easier.

Key Provisions of FRS 102

There are nine key areas of change that the introduction of the FRS 102 brought with it, namely:

1. Stock valuations. The “last in, first out” approach is no longer allowed as a stock valuation method as it does not accurately reflect a business’ profit.
2. Foreign exchange forward contracts. Forward contracts and interest rate swaps are classed as financial instruments on a company’s balance sheet under FRS 102. As such, they must be re-measured to fair value on every reporting date.
3. Investment properties. Investment properties must be revalued every year at fair value, with any changes in fair value noted on the income statement. The definition of an “investment property” also changed with the introduction of FRS 102.
4. Goodwill (and additional intangible assets). Goodwill and other intangible assets can no longer be deemed to have indefinite useful lives; they now need to be amortised under FRS 102.
5. Employee benefits. Employee benefits are now recognised as a cost due to their entitlement needing to be earned. As such, if any employees have untaken holidays at the balance sheet due date, the business will need to make an accrual for any untaken holiday days to be paid for in the next financial year.
6. Leases and their classifications. As with UK GAAP, the FRS 102 class leases are either finance leases or operating leases. However, the classification of some leases may have changed due to FRS 102 definition changes.
7. Lease incentives. Under UK GAAP, the value of a lease incentive was spread to the date of the first rent review. Under FRS 102, incentives are spread across the full term of the lease.
8. Deferred tax. Deferred tax movements need to be accounted for under three conditions: fair values on merger and acquisition activity, unremitted earnings on overseas associates/subsidiaries, and revaluations of non-monetary assets.
9. Investments in shares. These must be measured at fair value when the shares are either publicly traded or where fair value can be reliably measured.

Transitioning to FRS 102: What You Need to Know

If you are planning on adopting the FRS for the first time, the main principles that you should follow are:

1. Recognising all of the assets and liabilities that you need to recognise under this standard.
2. Avoid recognising items as liabilities or assets if not permitted by the FRS.
3. Reclassify liabilities, assets, or components of equity that need to be reclassified under FRS 102.
4. Apply the FRS 102 to measure all recognised liabilities and assets.

There are also various exceptions and exemptions that must be taken into account when transitioning to FRS 102. The biggest challenge is understanding the requirements for different company sizes, whether FRS 102 applies, and the elements of existing accounting standards that need to be amended. With this in mind, it is vital that the person handling the transition has a good understanding of this Financial Reporting Standard in order for it to be done correctly. In many cases, this may require external support.

Why Join the ICPA for FRS 102 Compliance Guidance

While anyone can read an FRS 102 explanation online, you’ll want to be sure that you get it right the first time. One of the many benefits of ICPA membership is professional help in navigating FRS 102.

Even the most seasoned accountants need a helping hand from time to time, and that’s precisely what our technical support team is all about. Whether you’re looking for an FRS 102 explanation that covers a specific element of the standard or a sounding board for your thinking on the subject, we’re here to help.

For robust FRS 102 compliance support – and plenty more – join the ICPA today.

FAQs on FRS 102

If you have further questions on the FRS 102, our FAQs may be able to help

What is FRS 102, and why is it important?

The FRS 102 replaced the old UK GAAP reporting standards to simplify reporting and ensure consistency with international standards. It is important because it enables the users of financial reports – such as creditors and debtors – to make more informed decisions.

How does FRS 102 impact small accounting firms in the UK?

FRS 102 may require more complex reporting than the old standards, but it ensures consistency across the board. Accounting firms may need to switch between the FRS 102 and other standards depending on the size of their clients’ businesses.

What are the key provisions within FRS 102?

The FRS 102 explanation of a “provision” differs from the regular definition. In this Financial Reporting Standard, it is essentially “a probable liability where the timing or the amount is uncertain”. This definition sets provisions apart from contingencies.

How does FRS 102 differ from previous UK GAAP standards?

Certain liabilities and assets may be recognised under FRS 102 but not under previous standards, and vice versa. This may result in certain elements of a client’s accounts needing to be reclassified under FRS 102.

What resources does ICPA provide for understanding FRS 102?

The ICPA provides a technical support service which allows members to access professional advice about FRS 102 and more.

How frequently is FRS 102 updated, and how can I stay updated?

FRS 102 is required to be reviewed at least every five years. As an ICPA member, we will keep you updated about any changes to the standard.

Are there penalties for non-compliance with FRS 102?

Accountancy firms that are proven to be non-compliant with FRS 102 can be referred to disciplinary committees. This could result in either fines or even withdrawal of audit registration.

How does FRS 102 impact tax computations?

FRS 102 impacts tax computations in two areas: the way that deferred tax assets and liabilities are calculated and how corporation tax liabilities for the current tax year are calculated.