Oliver Holt explains the various amendments to FRS 102 to date, and highlights aspects that ought to be considered by preparers of Irish company financial statements.
The Financial Reporting Council (FRC) first issued FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland over three years ago. It represents a fundamental and overdue modernisation of UK and Irish accounting standards and was stated to be a “stable platform” with triennial revisions. Necessary and welcome amendments have been made to FRS 102 since publication in March 2013. As Table 1 shows, the latest amendment to date was made in March 2016 albeit of application to financial institutions and retirement benefit plans only.
July 2015 amendments
Effective from April 2015, the UK transposed the EU Accounting Directive. Among other things, this introduced a special regime for the statutory financial statements of small entities and led to the July 2015 amendments to FRS 102 – essentially the addition of Section 1A Small Entities with other consequential amendments. These amendments are also reflected in the September 2015 version of FRS 102. Ireland has yet to transpose this directive. Care is therefore needed by the preparer of Irish company financial statements, especially when dealing with small companies, to ensure the appropriate version of FRS 102 is applied.
Statements of cash flows
Preparers must ensure that the appropriate version of FRS 102 is applied when it comes to the statement of cash flows. Old GAAP, FRS 1 paragraphs 5(f) and (g), provided an exemption for small reporting entities from the statement of cash flows.
For accounting periods commencing on or after 1 January 2016, the revised September 2015 version of FRS 102, Section 7 Statement of Cash Flows paragraph 7.1B states: “A small entity is not required to comply with this section”. But this could be misleading for Irish preparers as this amendment is not yet available to Irish companies that qualify as ‘small’. Instead, the August 2014 version of FRS 102 applies, which is applicable for accounting periods commencing on or after 1 January 2015, and a statement of cash flows is a requirement.
Early adoption of the small company exemption in the September 2015 version of FRS 102 (paragraph 7.1B) is subject to certain conditions.
A small UK company that adopts the small company regime set out in UK law in full can adopt the September 2015 version of FRS 102 early and therefore, maintain the status quo of not having to include a statement of cash flows in the first statutory financial statements under FRS 102. Clearly, early adoption is attractive for those small companies wishing to avoid the costs of the first-time preparation of a statement of cash flows with comparatives on transition to FRS 102. Of course, there will be no requirement for a statement of cash flows in the 2016 financial statements of the small company and thereafter.
In contrast, early adoption of the exemption from the preparation of a statement of cash flows is not yet available to small Irish companies. As noted above, this is because the EU Accounting Directive has yet to be transposed into Irish law and, therefore, Irish law has not been updated for the small company regime therein.
At present, an Irish company that qualifies as ‘small’ under law is required by FRS 102 to prepare the statement of cash flows and can only avoid the requirement by either:
- Meeting the conditions of a “qualifying entity” and availing the disclosure reduction in Section 1 of FRS 102 from presenting a statement of cash flows; or
- Adopting FRSSE (2015) as a statement of cash flows is not required under this standard. This will require transitioning from full Irish GAAP to the FRSSE and it will put off transitioning to FRS 102 for a year. On adoption of FRS 102 for financial years commencing on or after 1 January 2016, the Section 7 exemption should be available assuming the EU Accounting Directive has by that stage been transposed into Irish law; or
- Delay finalising statutory financial statements in the hope that the EU Accounting Directive is transposed into Irish law. This would then allow the early adoption of the exemption in relation to the statement of cash flows. The downside is that there is no committed timetable for this transition and there is no guarantee that the Irish Government will choose the exact same member state options as those chosen by the UK. This could lead to complications in applying the FRS 102 (September 2015) regime to an Irish company. And even if transition were to occur with the same member state options as the UK, delay may or may not be feasible given the interaction of CT1 tax filing deadlines, annual return date and annual general meeting dates.
Additional expense
The typical small Irish company that does not fall into the first two bullet points above will incur the expense of preparing a statement of cash flows on first adoption of FRS 102 in the knowledge that it was not a requirement previously and won’t be a requirement in the next financial year, assuming the EU Accounting Directive is transposed into Irish law.
This ‘in/out’ of the statement of cash flows needs careful flagging in advance to ensure that the relevant stakeholders understand that this cost is not of the FRC’s or the practitioner’s making. Simply put, had the EU Accounting Directive transposed into law on schedule (the latest date permitted was 20 July 2015), Irish business could have avoided this cost.
Version to apply
Preparers of Irish company statutory financial statements using FRS 102 for periods commencing on or after 1 January 2015 should refer to the August 2014 version of FRS 102 but adjusting for the following matters:
- The February 2015 pensions obligations amendment, which applies to defined benefit schemes with agreed schedules of employer contributions;
- The March 2015 amendment by FRS 104 to paragraph 3.25 of FRS 102 to refer to FRS 104 (interim financial statements);
- The April 2015 editorial amendments to Section 12 (hedge accounting) and Section 29 (deferred tax in business combinations);
- The July 2015 amendments in relation to share-based payment transactions with cash alternatives; and
- The March 2016 change to the fair value hierarchy disclosure when dealing with the financial statements of financial institutions or retirement benefit plans (this can be early adopted for periods commencing on or after 1 January 2015).
Oliver Holt FCA is Director of Financial Reporting Advisory Services at Deloitte.