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Are you on top of your FRS 102 conversion project?


FRS 102 financial statementThis month’s Business Briefing looks at the changes that you need to make to your company’s balance sheet if it is going to comply with FRS 102. This new standard expects you to restate the net asset value of your company so that it is more in line with what you expect to be its realisable value.

For a little while those who set the accounting standards have been moving the reporting of assets and liabilities away from a historical cost basis to a fair value basis. This has led to some interesting definitions which affect the content of a Balance Sheet – or what FRS 102 would prefer to call a Statement of Financial Position.

What are these new definitions?

An asset is now defined as a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.  This is a very challenging definition which contrasts significantly with the common understanding that an asset is something that the organisation owns and has a realisable value.

While a liability is now defined as a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.  This is quite different to considering a liability to be a payment that the organisation has to make to a third party in the future.

The consequence of these definitions is that we need to take a long, hard look at the balance sheet that we currently prepare in accordance with existing UK GAAP and establish the impact they have on the reporting of the assets and liabilities.  The objective of the review should be to identify those assets and liabilities that need their values modifying so that they are in accordance with their fair values.

Fair value is defined as the amount for which an asset could be exchanged, or a liability settled, or an equity instrument granted could be exchanged between knowledgeable, willing parties in an arm’s length transaction.  This is another challenging definition which requires us to consider methods of recognising the ‘market’ values of our assets and identify items that we might not currently record as assets.  Similarly we need to ensure we are stating the values of all of our liabilities at values at which they are most likely to be settled.

Are there other issues that we need to consider?

The impact of these changes needs carrying through to the value of the company’s equity - which we traditionally refer to as Capital and Reserves or Shareholders Worth.  You need to note that the standard setters expect such things as revaluation surpluses that relate to investment properties and listed investments to increase the Profit and Loss Reserve not a Surplus on Revaluation Reserve. 

This is an interesting aspect of FRS 102 - it is now considered acceptable to report unrealised gains in the Profit and Loss Statement or what the standard would prefer to call a Statement of Comprehensive Income.  There are many other aspects, such as the marking up or marking down at financial year ends of debtors and creditors established in foreign currencies, that will challenge you as you go through the difficult task of converting from UK GAAP to FRS 102.

You should already have addressed these issues at the beginning of your current financial year because you should have converted the balance sheet at the date of transition.  For those companies that have a financial year end of 31st December, their date of transition is 1st January 2014. If your company has yet to do this, you could be seriously challenged by the new requirements. 

All is explained in Preparing for FRS 102 - The New UK GAAP

Stephen Smith
Managing Director
UK Training (Worldwide) Limited

 

 
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