You have probably already heard of FRS 102. The new financial reporting standard for annual accounts caused quite a stir when it was introduced last year. Also known as the “new UK GAPP”, it is compulsory for most British entities and aims to align British reporting with International Financial Reporting Standards.  

The new standard applies to accounting periods commencing on or after 1 January 2015, so its effect has begun to be felt. Companies and limited liability partnerships with a 31 December 2015 year-end are likely to have prepared their first set of accounts under the new rules already. Meanwhile, those with a March year-end will now be in the midst of preparing their accounts in accordance with the new system for the first time.

FCA-registered businesses typically have to submit statutory accounts to the FCA within 80 working days of their year-end, even though they have a longer nine-month period within which to send these accounts to Companies House.

Presentation rather than profit at stake

Straightforward FCA-registered businesses - such as those without complex financial instruments or investment properties - can rest assured that the new accountancy standard is unlikely to affect their profits significantly. However, it will change the way they compile and present their accounts dramatically.

If you are a straightforward wealth manager or a specialist financial service provider, the main presentation and measurement changes likely to affect your business are as follows.

• Some terminology has changed. A balance sheet, for example, is now called a statement of financial position and the profit and loss account is known as the income statement. You can continue to use the old terminology if you want to.
• A new 'primary statement' has been introduced and others modified. A new statement - the statement of changes in equity - dealing with changes in such items as share capital and reserves has been introduced to give greater prominence to information that had previously been disclosed in various notes to the accounts. In addition, although the statement of cash-flows includes much the same information as under old UK GAAP, various
• More extensive accounting policy disclosures. This includes more disclosures of how ‘financial instruments’ held by the company are accounted for. Most debtors and creditors are now included in the definition of 'financial instruments.'
• classifications have been modified.
• Revenue recognition - or how revenue appears in the accounts. The whole transition is a golden opportunity to review your accounting practices, especially when it comes to performance fees and management fees. You must exercise judgement here, so would be wise to obtain professional advice in this area.
• Leasing property. If a company is renting offices and takes on a new lease, it will usually get a rent-free period (possibly a few months) as an incentive. Under the old GAAP, you would spread this saving to the next rent review. The new rules state that this saving should be spread over the entire lease period. This will result in profit (and tax) fluctuations in individual accounting periods although, all in all, the company will end up in pretty much the same financial position by the end of lease.
• Holiday pay accruals. The new standard explicitly states that any holidays accrued but not taken by the financial year-end should be reflected in the accounts. This can have accounting and tax implications as a provision for holidays that are not taken can reduce profits and tax.
• Long-term loans to a company. This could include loans from directors or shareholders that are interest-free or below market interest rates. There are implications when such loans are for longer than one year. Previously, such loans would just be shown at face value (i.e. a £100,000 ($144,215) loan would appear as a £100,000 liability). Under the new system, for any loan longer than a year, you need to perform a discounted cash flow calculation to establish the carrying value of the loan – and the accountancy can get quite complicated. The change will have tax implications in some cases and the amounts could be significant. It may be beneficial to amend the terms of existing loans.
• Business combinations. Where one company buys another, acquisition accounting must now be used. Previously, you could use merger accounting for the merging of two broadly equal entities – which was a simpler form of accounting. Now you must always identify an acquirer – typically the larger entity. The fair value of assets and liabilities of the acquired business may be worked out differently, which could mean you end up with a different value for goodwill (the difference between the cost of the acquisition and the fair value of net assets acquired).

FRS 102 heralds a number of important changes and you will have to take time to prepare for many of them. It is crucial for all businesses to identify the specific items that are likely to have the greatest effect on their accounts as early as possible.