The new standards are more than simply a piece of tidying up. There are a number of issues that need to be addressed.
UK GAAP vs IFRS
With all listed entities and the whole of the public sector transferring to IFRS in the last decade, UK GAAP has become accounting’s Cinderella. Now it’s back, and with the new standards now mandatory for periods commencing on 1st January 2015, accountancy bodies have instructed firms with clients making the transition to begin collecting data now.
It should be clear that the new UK GAAP has moved in the direction of IFRS, not least in terms of the reporting burdens it places on entities. Nigel Sleigh-Johnson, head of the ICAEW’s financial reporting faculty, identifies that “the transition to the new reporting standards is perhaps the greatest accounting change non-listed UK companies have faced for about 40 years.”
There are a number of key differences between old UK GAAP, new UK GAAP and IFRS, but the main areas to consider are:
1. Fixed assets
Do you have any clients who have subjected any of their assets to the revaluation model?
They have the option of not doing so under FRS 102 and so avoid the cost of commissioning valuations.
2. Investment properties
Do you have any clients who have investment property on the balance sheet?
If so, remember that the accounting treatment for fair value gains and losses is markedly different than in current SSAP 19 Accounting for Investment Properties.
LIFO has been forbidden – it was always a problem with the tax authorities anyway. From now on only FIFO and average cost methodologies are acceptable.
Many leases may require reclassification. Remember that the old 90% test has been abolished FRS 102 replaces it with various criteria which assess risk and reward, so the classification of some leases are likely to change.
5. Employee benefits
Do you have clients who have unpaid short-term employee benefits that have been accrued at the year-end? These may now need accruing. Unclaimed annual leave is a good example. To date UK GAAP did not require this.
6. Deferred tax
Do you have clients with material amounts of deferred tax balances?
If so, remember that section 29 Income Taxes introduces additional situations that trigger deferred tax - the most common one being the revaluation of non-monetary assets (e.g. investment property revaluations). Other considerations include business combinations and unremitted earnings in respect of investment entities.
7. Additional disclosures
A lot of disclosures will be required, particularly in the first year of adoption of the new standards. Particularly important is a disclosure of the nature of each change in accounting policy as well as a reconciliation of equity calculated under the previous standards to that calculated under the new. You need to ensure that clients as aware of the requirements and have made adequate preparation to be able to meet them.
8. Statement of cash flows
Are you aware of the new presentation of the cash flow statement? The cash flow statement will need to be prepared using only three classifications:
- Operating activities
- Investing activities
- Financing activities
Ensure that your client is up to speed with the changes.
9. Do you have clients with a defined benefit pension plan?
While relatively uncommon (defined contribution plans being more common), there are some medium-sized entities which do still have defined benefit pension plans. The new standard does not require a surplus or deficit to be shown on the balance sheet as a separate item but does reflect new IFRS provisions on interest cost and returns which may affect earnings. You need to discuss this with clients now if this is an issue.
10. Professional body resources
Are you using your professional body’s resources for the new UK GAAP? These include e-learning materials, publications and seminars/training courses.
It’s vital for your accounting practice to establish the extent to which UK GAAP will affect each client and ensure there has been a strong period of communication and preparation with the involvement of staff, investors and lenders. Addressing changes early and keeping communication channels open will ensure the smoothest transition possible and ensure that clients expectations are met.