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When FRS 102 replaced existing UK GAAP back in January 2015, the new financial reporting framework for the UK and Republic of Ireland came with the promise of further assessments every three years.   Two years after that initial implementation, the Financial Reporting Council (FRC) has now published its first of these triennial reviews.

Taking into account feedback from various stakeholders, the FRC has developed a series of amendments that are aimed at clarifying the accounting treatments laid forth in the original text. While many of these changes are editorial in nature, there some key adjustments which could affect financial statements moving forward into the new year.

Here are some critical takeaways for accounting and finance professionals.

Simplified Measurement for Directors’ Loans to Small Companies

Originally FRS 102 required companies to account for any financing transactions to be measured at the present value of future payments, discounted at a market rate of interest. However, small entities often face significant difficulty in obtaining commercial financing for their expansion, and in these cases directors’ loans are an invaluable tool for bridging the finance gap. Accounting for these loans at a market rate of interest, creates an inaccurate representation of a company’s debt burden.

With that in mind, the new amendment allows loans from directors who are either small entity shareholders, or close relatives to shareholders to be accounted for at transaction price, rather than at market value.

Separation of Intangible Assets in Goodwill during Business Combinations

In the old GAAP framework, most intangible assets were simply subsumed under the category of goodwill during a business acquisition or merger. However, the initial implementation of FRS 102 created new definitions of intangible assets which created far more stringent reporting requirements for these assets.

One the biggest issues created due to this change was the increased difficulty in accurately reporting the value of these assets. To address these concerns the FRC has now allowed the recognition of intangible assets on a case-by-case basis, based on whether the recognition provides useful information about the entity.

Any decision to recognize must be made consistently across the class of asset, and the reason for recognition must be disclosed within the financial statements.

Investment Property Measurement

Under the original text of FRS 102, any business-owned property that was let out to other businesses within the group within the group would be accounted for in the businesses’ accounts as an investment property. This change would then be reversed in the consolidated group accounts to more accurately reflect the economic substance of the transaction.

This complex treatment created significant difficulties for many groups, so the FRC has now released an amendment clarifying the policy choice investment properties.

Under the new amendment, organizations can now choose to measure investment properties at the cost provided, rather than at fair market value.  This allows two groups within the same entity to let property between them without recognizing the deal as an investment transaction.

Classification of Financial Instruments

Under current FRS 102 definitions financial instruments are split into two distinct categories.

* Basic financial instruments (bank loans) measured at an amortized cost

* Complex financial instruments (derivatives, interest rate swaps, forward contracts, nonbasic loans) which are measured at fair value.

However qualifying criteria for basic and complex instruments is incredibly complicated and difficult to discern. To clarify matters the FRC has released a clearer description of basic financial instruments to help distinguish between the two classes.

Essentially if a debt gives rise to regular cash outflows at specific dates with the expectation of a consistent interest rate based on time value, credit risk and other lending costs; then this instrument can be classified as basic.