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Where Next for UK GAAP?

It’s been quite a while since the FRS 102 (and FRS 105) ‘triennial amendments’ were implemented for periods commencing on or after 1 January 2019. The next revision isn’t far away though. Here are some of the questions we are commonly getting about the future direction of travel.

When is the next revision of FRS 102 due?

When the new UK GAAP regime came into effect for periods commencing on or after 1 January 2015 the expectation was that we would get three yearly updates. That now seems to have fallen away. The next ‘periodic’ update will be for periods commencing on or after 1 January 2024.

What will the process be?

An initial FRC consultation required feedback by 31 October 2021. Feedback received will now be reflected on. Any changes to accounting standards that are proposed will be subject to public consultation. This is not expected to be before 2022.

What specific changes can we expect?

This remains to be seen. The view of many is that the ‘triennial amendments’ did a good job of plugging existing gaps, so it might be that the next iteration of FRS 102 doesn’t move things forward that much. One increasingly common area of discussion that we come across is accounting for cryptocurrency assets. There’s not a large amount of guidance on this in either UK GAAP or IFRS so this would usefully be a topic that the FRC would address.

What about changes to IFRS?

There have been some major changes to IFRS in recent years which aren’t currently addressed by FRS 102 and it will be interesting to see if, when and to what extent these are addressed by future changes to the UK GAAP reporting regime. IFRS 15 (Revenue from Contracts with Customers) introduces a new five step model for income recognition. IFRS 9 (Financial Instruments) introduces a new ‘expected loss’ approach to asset value provisioning which results in a  more prudent approach than the one currently adopted. More radical still, IFRS 16 (Leases) brings most operating leases on balance sheet. To bring an IFRS 16 approach into UK GAAP would impact hugely on many sets of accounts.

Is implementation of these IFRS changes likely for 2024?

Many feel that it isn’t. FRS 102 is broadly modelled on the IFRS for SMEs and whilst revisions are currently being contemplated for this standard too, the ‘big three’ IFRS standards (IFRSs 9, 15 & 16) aren’t actually yet reflected in the IFRS for SMEs rules.

IFRS 16 was only introduced for IFRS preparers for periods commencing on or after 1 January 2019. It is perhaps a bit early to say what real impact it has had – and therefore to determine whether and how it should apply within a UK GAAP reporting framework. Periods commencing on or after 1 January 2024 might seem a long way off but don’t forget that the ‘transition date’ for any revisions will be 1 January 2022 (day one of the comparative period). With that in mind as well, it seems more likely that the FRC will delay the inclusion of IFRS 16 principles for now.

There is surely no obligation to apply IFRS rules in UK GAAP anyway?

This is correct – and of course IFRS and UK GAAP do have some important differences. If the forthcoming consultation reveals little appetite for the implementation of these new IFRS rules then going forward UK GAAP may end up looking much like it currently does.

For ordinary trading businesses IFRSs 9 and 15 would seem to be reasonably straightforward to implement, albeit with possible simplifications. IFRS 16 is a different proposition altogether and it will be interesting to see whether and how it gets implemented in UK GAAP.

What about FRS 105?

FRS 105 is a bit of a ‘marmite’ standard. Many practitioners love it. Some loathe it because very little information gets filed where filleted FRS 105 financial statements are submitted to Companies House. However when FRS 105 was first introduced in 2013, it was a central tenet of the ‘think small first regime.’ There was no obligation for it to be adopted in the UK. It would therefore be a major volte face for it now to be abandoned. More likely, it will continue to be used much as it currently is. It will also be interesting to see if the eligibility thresholds (currently £632K turnover; £316K gross assets and 10 employees) are increased to bring more entities into scope.

It may be a step too far to bring operating leases on balance sheet for micro entities so perhaps if UK GAAP does, going forward, change to embrace the principles of IFRS 16 this might be for entities applying FRS 102 but not for those applying FRS 105. Time will tell.

How do the imminent Companies House revisions tie in?

Major reforms to Companies House processes are expected in the not too distant future. Three white papers were consulted on in late 2020 / early 2021. The consultation closed on 3 February 2021 and we still await the outcome with bated breath!

One recurring issue that Companies House has is that there are now so many different versions of accounts that can be filed, particularly when it comes to small entities, that it’s very hard to keep track of what a compliant set of filed financial statements actually looks like. As a result they are keen to simplify the process. Might this be the death knell for adapted accounts or abridged accounts? Might it even mean that small companies need to file a profit and loss account in order to make information on the public record vaguely helpful to analysts? Keep an eye out for the outcome of the consultation here. It might actually be more impactful for those preparing statutory accounts than any revisions to FRS 102 or FRS 105 are.

What next?

The message for UK GAAP reporters is to carry on as normal for now. Keep an eye out for further consultations or exposure drafts and respond as you see fit when the time comes.

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