FRC defers major changes to FRS 102
The Financial Reporting Council (FRC) has announced it will delay the release of a further exposure draft amending FRS 102 to reflect major changes in IFRS, in a move that is likely to garner a mixed reaction from the accounting community.
The FRC is currently undertaking the first triennial review of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, details of which were announced in the FRED 67 draft amendments to FRS 102 Triennial Review 2017 – Incremental improvements and clarifications.
The comment period on FRED 67 closed on 30 June 2017 and if the proposals are finalised as drafted in FRED 67, they will be effective for accounting periods starting on or after 1 January 2019. The key changes noted in FRED 67 are as follows:
- Simplifications in the accounting for loans to a small company from a director-shareholder, or close family member of that person.
- Removal of some undue cost or effort exemptions.
- Introduction of a description of a basic financial instrument.
- Recognition of fewer intangible assets in a business combination.
- Amending the definition of ‘financial institution’.
- Allowing investment property in a group to be measured under historic cost principles.
In September 2016, the FRC issued a consultation document asking for views on whether FRS 102 should be kept up to date with developments in IFRS – especially where significant changes are made to IFRS: for example, IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers, IFRS 16 Leases and IFRS 17 Insurance Contracts.
Originally, the FRC intended to issue a further exposure draft towards the end of 2017 outlining proposals to align FRS 102 to reflect major changes in IFRS, such as aligning the lease accounting provisions in FRS 102 to those of IFRS 16.
The feedback received by the FRC showed support for consistency with IFRS, but in the longer-term. Respondents also questioned the proposed timetable, which would have seen major changes such as implementation of an incurred credit loss model and lease accounting potentially becoming effective for periods starting on or after 1 January 2022.
The FRC has taken on board feedback received from respondents to the consultation document that suggested further evidence-gathering and analysis needs to be undertaken before any proposed changes are made to FRS 102, especially where major changes are concerned in respect of the expected credit loss model for financial instruments and lease accounting.
As a consequence, the FRC has confirmed it will not be issuing a phase two exposure draft later in 2017 as originally planned.
IFRS 17 Insurance Contracts was issued by the IASB after a very drawn-out process, and the FRC has stated in FRS 103 Insurance Contracts that it intends to review FRS 103 at a suitable time. This review will be carried out once more IFRS implementation experience is received.
The FRC’s decision to defer a phase two exposure draft will be welcome news for many in the accountancy profession, particularly where lease accounting is concerned. The changes to lease accounting in IFRS 16 are major and effectively result in the vast majority of operating leases appearing on a lessee’s balance sheet rather than the lease rentals simply being charged to profit or loss.
Unsurprisingly, some reporting entities that will be required to apply IFRS 16 are unhappy about the prospect of having to recognise additional lease assets and liabilities on their balance sheets, and implementation of IFRS 16 is going to cause a considerable amount of difficulty for some entities.
The FRC has not provided any target dates of when it plans to issue an exposure draft proposing changes to FRS 102 to reflect the provisions of new IFRSs/amendments to IFRSs, but has said that any detailed proposals will be consulted on in due course.
The FRC will monitor implementation experience where the new IFRSs are concerned to identify if, and how, FRS 102 should be amended to reflect the revised accounting requirements.