FRS 102 is a single standard that replaces existing UK GAAP for entities that are not entitled to report as small, and is applicable for periods commencing on or after 1 January 2015. For small companies, the FRSSE will be removed for periods ending on or after 1 January 2016, bringing small companies within the scope of FRS 102. At the same time, a new, simplified financial reporting standard applicable to micro-entity companies (FRS 105) will be introduced.

Companies must be prepared for changes arising on first implementation of new UK GAAP. Adoption of the new standard could mean a change in reported profits, and the balance sheet position could be significantly affected. In addition, the format of the accounts themselves will be different. On the plus side, transition to FRS102 presents some opportunities to overhaul accounting policies and address existing practices which may be irksome.

Companies will need to assess the impact of changes affecting their reported profits and communicate to affected stakeholders. Where entities pay bonuses out of profit or have profit-related pay schemes, the basis of these calculations may need to be reconsidered. With FRS 102 adopters seeing changes in fair value reflected in the profit or loss for the period, entities will need to take more care when determining taxable profits and companies will need to ensure that dividends are paid out of distributable profits too. And, as FRS 102 requires more items to be included at fair value in the accounts with movements reflected in the profit and loss account, entities will need to establish whether their budgets and management accounts should reflect these movements or whether they will be dealt with as period end adjustments only.

From a balance sheet perspective, changes to the recognition criteria for assets and liabilities, as well as profits and losses could have an impact on the credit rating of an entity. Where loan covenants are calculated based on profit or balance sheet measures, a move to FRS 102 could have an impact on the headroom of those covenants.

It is likely that companies will need to gather more information for the preparation of their financial statements, both on an on-going basis, but also as at the date of transition to cover the comparative period in the first set of financial statements. Companies will also need to consider whether their current systems and software will be sufficient to prepare accounts under the new UK GAAP.

The key thing to remember is that departure from the old UK GAAP standards is mandatory, and will require restatement of prior period comparatives in the transition year, so considering the impact should not be delayed. We can support you through the transition, from evaluating the impact, through calculating the required adjustments to preparing the first set of financial statements under the new standard.

If you would like to discuss this subject and how we might be able to help, please get in touch with Steve or Anna.