FRS 102  Groups, Associates and Joint Ventures

The key changes to UK Generally Accepted Accounting Principles (GAAP) with the introduction of Financial Reporting Standard 102 (FRS 102).

Background

For accounting periods commencing on or after 1 January 2015, current UK GAAP has been replaced by a single standard. The transition requires all UK company’s financial information to be prepared in accordance with FRS 102.

The only exceptions will be those applying International Financial Reporting Standards (IFRS) or Financial Reporting Standard for Smaller Entities (FRSSE).

Below is a summary of the key changes to accounting for groups including associates and joint ventures under the new standard.

Investments in associates

The definition for an associate is largely unchanged and comprises significant influence, which is the power to participate in the financial and operating policies of an entity.

There is a rebuttal presumption for significant influence to exist at an equity stake of 20%, or more. In consolidated financial statements, accounting for an associate continues to be the equity method and is therefore unchanged.

FRS 102 does clarify that where an entity’s share of losses in an associate exceed their investment, the deficit does not need to be recognised on the consolidated balance sheet unless there is a constructive obligation to meet the liabilities.

Accounting for associates in individual financial statements is clarified. The investment may be recognised at:

  • cost less any impairment losses
  • fair value with gains and losses recognised through other comprehensive income
  • fair value through profit and loss.

To use a fair value model, a reliable method for measuring fair value must be available.

As in FRS 9, certain additional disclosures of the financial information of associates are required in the individual financial statements. However, the requirements of FRS 102 are less detailed than FRS 9s.

Investments in joint ventures

The definition of a joint venture remains an economic activity subject to joint control. The expression ‘joint control’ means the unanimous consent of the parties sharing control.

A joint venture can be by way of an entity, or jointly controlled assets or operations, without legal control.

For jointly controlled assets or operations, an entity recognises those assets or liabilities entered into in their own right and then their proportion of joint assets, income or expenses. Most joint ventures comprise jointly controlled entities. In consolidated financial statements, the joint venture is accounted for under the equity method, as opposed to the gross equity method required by FRS 9. This will have little impact but is a welcome simplification and means accounting for associates and joint ventures will be consistent in consolidated financial statements.

The accounting for joint ventures in individual financial statements is clarified. The investment may be recognised at:

  • cost less any impairment losses
  • fair value with gains and losses recognised through other comprehensive income
  • Fair value through profit and loss.

To use a fair value model, a reliable method for measuring fair value must be available.

Certain additional disclosures of the financial information of joint ventures are required in the individual financial statements, although the requirements of FRS 102 are less detailed than those of FRS 9.

Consolidated financial statements

Consolidated financial statements are required to be prepared by a parent entity, that is, an entity that has control over one or more subsidiaries.

The definitions determining whether you have control of an entity are largely unchanged and include direct control, indirect control and the power to exercise control.

Subsidiaries can be excluded from consolidation where there are severe long-term restrictions in an entity’s ability to exercise control.

Subsidiaries that are held exclusively with a view to resale and that have never been consolidated may be excluded from consolidation. This option will be attractive to venture capital companies, which may hold an equity stake for several years.

The previous requirements for excluding subsidiaries held for resale from consolidation were much more onerous.

Exemption from preparing consolidated accounts is also available if:

  • the parent entity and the group below it qualify as small under the relevant company law conditions
  • the parent is a subsidiary of another entity and certain conditions are met, primarily that consolidated financial statements for the larger group are publically available
  • all subsidiaries can be excluded from consolidation.
Special purpose entities

FRS 102 specifically addresses special purpose entities.

The basic principle is that where there is control, or a right to exercise control, or the activities are conducted on behalf of the entity according to its specific business needs, the special purpose entity will need to be included in the consolidated financial statements.