Companies in the UK are being urged to ensure that they are fully prepared for the effect that new financial reporting standards will have on their year end accounts.
The new standards
Existing standards have been swept aside by new financial reporting standards (FRS), heralded as the most significant change in accounting standards in the last 10 years.
As a result of piecemeal alignment with international requirements, the old standards were viewed as no longer fit for purpose. The Financial Reporting Council embarked on a lengthy process of review and consultation with the resulting new standards applying on a mandatory basis to all UK and Republic of Ireland companies from 1 January 2015.
The new standards comprise:
- FRS 100 Application of Financial Reporting Requirements - which identifies how the framework applies to different entities
- FRS 101 Reduced Disclosure Framework - which sets out a reduced disclosure framework for qualifying entities that otherwise apply EU-adopted financial reporting standards
- FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland - which sets out a single standard of reporting and includes a reduced disclosure framework for qualifying entities
- FRS 103 Insurance Contracts - which sets out the accounting and reporting requirements for insurance contracts.
FRS 102 is based on EU-adopted international financial reporting standards (IFRS) and will therefore help to establish consistency across accounts. The FRS for Smaller Entities (FRSSE) will remain available for small companies (as defined in the Companies Act 2006) but, again for consistency, it has been modified to align with the new standards.
Companies which are required, or choose, to apply IFRS and those which remain eligible, and choose, to apply FRSSE will see very little change in requirements. However, large and medium-sized companies will see considerable change and will need to engage with advisers early to analyse the implications of the new standards, not only in terms of preparedness for preparation of financial statements but also in relation to their effect on tax and existing or proposed corporate transactions.
Reduced disclosure regime
A qualifying group company (essentially one which forms part of a group whose publicly available accounts are prepared on a consolidated basis and which are intended to give a true and fair view) will have a choice as to whether they adopt IFRS or FRS 102 and will be able to choose a reduced disclosure regime.
The company will need to have notified its shareholders in writing that it intends to apply the reduced disclosure regime and must not have received objections against the same. Objections can be made by:
- the immediate parent of the company
- a shareholder or shareholders holding, in aggregate, 5% or more of the total allotted shares in the company
- a shareholder or shareholders holding, in aggregate, more than half of the allotted shares which are not held by the immediate parent
Companies may wish to engage with significant shareholders in advance and, where appropriate, consider including this notification in their next AGM communications. Private companies which are not required to hold AGMs will need to take steps to notify their shareholders for this purpose. At this stage, it is not clear whether this notification should be an annual requirement.
The company will also need to disclose in the notes to its accounts, a brief narrative summary of the disclosure exemptions adopted and identify the name of the parent of the group in whose financial statements its financial statements are consolidated and from where those statements may be obtained.
A more robust framework will no doubt help to provide assurances to investors that key elements of companies' financial controls and systems have been assessed and reported on and the improved consistency will enable comparisons on a like for like basis to be more easily made. It is hoped that the new regime will also prove to be more operationally stable, with a proposed 3 year cyclical review and, otherwise, amendments only as and when required to align with new legislation.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.