Terry O’Rourke draws on his early experience of applying FRS 102 to identify some differences and similarities with Old Irish GAAP.
There is no doubt in my mind that FRS 102 is the accounting story of 2016. It has become the centrepiece of New UK and Irish GAAP with effect for financial years that commenced on or after 1 January 2015. Consequently, the directors and accountants in many Irish companies with 31 December 2015 year-ends have already grappled with this new framework or are about to do so.
While there are a lot of similarities between FRS 102 and the familiar Old Irish GAAP, it is inevitably the areas of difference that need to be identified, understood and applied in the first accounts prepared under FRS 102. Several areas of difference have come from the IFRS framework which, of course, provided the original starting point from which FRS 102 was developed. On the other hand, a few areas of difference are unique to FRS 102.
At this point, I should recall that FRS 102 is “the Financial Reporting Standard applicable in the UK and Republic of Ireland”. Hidden behind that rather uninspiring title, however, lies the complete replacement for all the SSAPs, FRSs and UITFs that comprised the Old Irish GAAP which we used for decades but is now defunct. Figure 1 overleaf depicts the various areas of accounting in FRS 102 that are:
- Similar to Old Irish GAAP (top box in orange);
- Similar to IFRS (third box in orange-red);
- Similar to both IFRS and Old Irish GAAP (second box in dark red where the abovetwo boxes overlap); and
- Applicable to FRS 102/New Irish GAAP (the bottom box in yellow).
Similarities and differences
As Figure 1 shows, quite a number of areas of FRS 102 are similar to both Old Irish GAAP and IFRS, while a few areas are similar to Old Irish GAAP but differ from IFRS. It is important to note that similar does not mean identical, and there are nuances in areas of FRS 102 that, while similar to Old Irish GAAP, may result in differences.
Areas of similarity include those well-established accounting practices that give rise to limited controversy or difficulty such as stating stocks at the lower of cost and estimated net selling price; measuring tangible fixed assets at cost less depreciation and impairment, with the option to use up-to-date revaluations; and accounting for provisions when there is an obligation that is expected to give rise to a cash or other outflow. Other areas of similarity include retaining the Old Irish GAAP option either to expense or capitalise certain development and borrowing costs, although the more modern accounting rules of IFRS require capitalisation where certain conditions are met. FRS 102 requires goodwill to be amortised over a finite useful life, in contrast to IFRS which currently requires an annual impairment review rather than amortisation.
It is notable that some areas unique to FRS 102 require fair value accounting through profit and loss account (FVTPL). These include the FRS 102 requirements to state both investment property and investments in quoted shares at fair value, and to account for changes in fair value through the profit and loss account rather than through other comprehensive income, which is more prescriptive than either Old Irish GAAP or IFRS. This will inevitably increase the volatility of reported profits, which many directors and accountants may consider undesirable – particularly when it has little to do with what they regard as the company’s underlying business. Similar considerations apply to the FRS 102 requirement that borrowings with certain complex terms should also be measured at FVTPL.
Other key areas of accounting difference between FRS 102 and Old Irish GAAP include accounting for business combinations; aspects of employee benefits, such as holiday pay and defined benefit pensions; financial instruments, particularly derivatives; and deferred tax. The accounting in these areas prescribed by FRS 102 has been heavily influenced by the equivalent accounting requirements of IFRS. These areas may well give rise to additional liabilities being recognised, such as accruals for holiday pay; provisions for defined benefit pensions being required on individual company balance sheets (as well as consolidated); and deferred tax being provided on revaluations and fair value adjustments arising on acquisitions. The FRS 102 requirement to recognise derivatives, such as forward exchange contracts, at fair value will also result in many companies having to recognise new assets and liabilities on their balance sheets.
More complex areas
FRS 102 requirements in areas such as corporate restructurings; exemptions from the general rules on consolidation; accounting for acquisitions and disposals of subsidiaries and non-controlling interests (minority interests); service concessions; and complex financial transactions are quite intricate and did not lend themselves to the summarised descriptions in Figure 1.
FRS 102 also addresses – in more detail than Old Irish GAAP – the specific accounting requirements that apply to a number of specialised activities including agriculture and biological assets, public benefit/charity entities, pension plans and extractive industries. FRS 103, meanwhile, addresses insurance business.
Transition to FRS 102
FRS 102 offers a number of options to entities preparing accounts under FRS 102 for the first time, including the option to use an existing valuation or fair value for tangible fixed assets (and certain intangible fixed assets) in the opening balance sheet.
Nonetheless, many companies have found that adjustments have to be made to their previously reported results to reflect the areas where FRS 102 and Old Irish GAAP differ. These accounting adjustments may also have consequences for the tax payable by companies and for the amount of profits available for distribution.
I expect that, in a few years’ time, we will look back on the first year of FRS 102 and wonder what all the fuss was about. But for this year, as Rod Stewart sang in 1977 when SSAP 13 was arriving and again on MTV Unplugged in 1993 as FRS 3 was being put into practice, “The First Cut is the Deepest”.
Terry O’Rourke FCA is an Accounting Consultant at PwC and Chair of the Institute’s Accounting Committee.