FRS 102 Format and Layout of Accounts

The key changes to UK Generally Accepted Accounting Practice (UK 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For accounting periods commencing on or after 1 January 2015, current UK GAAP has been replaced by a single standard.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 changes to the format and layout of accounts under the new standard.

Primary statements

The format of accounts prepared in accordance with FRS 102 will look similar to existing UK GAAP financial statements. The primary statements of a statement of financial position, an income statement and statement of total comprehensive income (or a combined statement of comprehensive income), a cash flow statement, and a statement of changes in equity, will be presented for all financial statements. The nomenclature of an income statement and a statement of financial position is not necessarily required if the alternatives are not misleading.

Cash flow statement

A cash flow statement will be required for all entities preparing accounts under FRS 102, except for certain subsidiary entities (more detail on this is provided in the document on groups). In particular, it is important to note there is no exemption from preparing a cash flow statement for small companies preparing financial statements under FRS 102, although if they used the FRSSE, a cash flow would not be required. The format of cash flow statements will be simplified with cash flows being identified as resulting from operating activities and financing activities, as opposed to the eight different categories currently used in FRS 1. The treatment of foreign currencies will be IFRS style rather than existing UK GAAP.

Statement of comprehensive income and statement of financial position

The existing regulations in company law on the format of accounts will continue to apply to financial statements prepared under FRS 102. The format of the statement of comprehensive income and statement of financial position will be similar to existing financial statements. These regulations will now apply to all entities preparing financial statements under FRS 102, not simply companies and limited liability partnerships. There is not a requirement under FRS 102 to disclose the operating profit of an entity. However, if an entity chooses to disclose its operating profits, the entity needs to ensure this includes all relevant operating costs. Therefore, exceptional costs will need to be carefully assessed as to whether they result from operating activities and if so, included within the entity’s operating results.

Other primary statements

The other primary statement presented with financial statements will change completely. There will no longer be a statement of total recognised gains and losses (STRGL) or a statement of historical profits and losses. The STRGL will be replaced by a Statement of Comprehensive Income and Expenditure, either as a separate statement of other comprehensive income or immediately after the profit and loss account.

There will also be a new primary statement, the Statement of Changes in Equity (SOCIE). This will replace the ‘Reconciliation of Movements in Shareholders’ Funds’ that was usually presented as a note to the financial statements. For entities the only changes that would be included in other comprehensive income or the SOCIE are dividends paid and changes for prior period adjustments, these can both be replaced by a single Statement of Income and Retained Earnings.

Notes to the financial statements

The notes to the financial statements will be extended under FRS 102. The new recognition criteria for financial instruments (dealt with in more detail in a separate document) will result in much more disclosure on their nature and measurement in entities which have financial instruments. Forward currency contracts and interest rate swaps are regarded as ‘complex’ financial instruments. In addition to the normal notes on accounting policies, FRS 102 will require more disclosure on significant judgement made in the process of applying accounting policies and key assumptions affecting estimates that have a significant risk of materially affecting the carrying amounts of assets or liabilities.

These disclosures will increase the narrative notes in many entities’ financial statements, with notes more in line with current IFRS requirements.

Other matters

Prior period adjustments

One other change that may have an effect on reported results will be a change to prior period adjustments. Currently, under UK GAAP a prior period adjustment only occurs if there is a change in accounting policy or a fundamental error in the financial statements. Under FRS 102, as well as changes in accounting policy, prior period adjustments will be required for correction of material errors. A material error is considered to be a much lower requirement than a fundamental error. Material errors include the effects of fraud. It is expected that there will be more prior period adjustments in financial statements.

This can be important because a prior period adjustment corrects the error retrospectively, i.e. the comparatives are amended to recognise the adjustment in the previous period and correction of the error does not affect the current year’s profit and loss account (although it is reported in other comprehensive income for the period).

Discontinued operations

When an entity ceases or disposes of a significant business element, the turnover and profit (or loss) before tax attributable to that business element will need to be shown on the face of the profit and loss account.

Other components of the results of the discontinued operation will need to be disclosed, either on the face of the profit and loss account or by way of a note. The treatment of discontinued operations adopted in IFRS (to strip out all revenue and costs of the discontinued operation and to show them as a single line item in the income statement) will not apply.

Going concern

When preparing financial statements the directors are currently required to assess going concern for a period not less than 12 months from the date of approval of the financial statements. This is a longer period than IFRS which only requires a period of 12 months from the accounting date. FRS 102 will keep the current requirement in UK GAAP for assessing going concern i.e. 12 months from date of approval.