In March 2018, the Financial Reporting Council issued new editions of FRS 102 which incorporate the amendments arising from the Triennial Review.
Amendments from the Triennial Review are compulsory for accounting periods commencing on or after 1 January 2019.
The key areas of change that we believe will affect our clients are:
Small entities, as defined within the Companies Act 2006, are no longer required to discount loans from a director-shareholder to present value using market rate of interest
Key points where this exception is concerned are:
- The company or LLP receiving the loan must be small.
- The loan must be from a director (or their group of close family members when that group contains a shareholder).
Section 18 Intangible Assets other than Goodwill has been amended to provide entities with an accounting policy choice of either separately recognising intangible assets acquired in a business combination or including them within goodwill.
Paragraph 18.8 has been changed and the amended paragraph states:
‘Intangible assets acquired in a business combination shall be recognised separately from goodwill when all the following three conditions are satisfied:
- the recognition criteria set out in paragraph 18.4 are met;
- the intangible asset arises from contractual or other legal rights; and
- the intangible asset is separable (ie capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged either individually or together with a related contract, asset or liability).
This new criteria is more restrictive (previously under FRS 102, only criteria (a) and (b) or (c) was required to be met). The result is that fewer intangible assets may need recognising separately on the Balance Sheet from goodwill. This amendment could therefore reduce the cost of valuing separate intangibles.
Where an entity chooses to separately recognise intangible assets, that policy must be consistently applied to all business combinations and all intangible assets in the same asset class.
Removal of Undue Cost or Effort Exemption
Previously, when fair value could not be measured reliably (without undue cost or effort on an ongoing basis), the requirement for entities was to measure investment property under the cost model (i.e. at cost less depreciation and impairment) in accordance with Section 17 Property, Plant and Equipment.
However, due to its widespread incorrect application, the ‘undue cost or effort’ exemption which was previously available under FRS 102 has been removed. The result is that all investment property must be measured at fair value at the Balance Sheet date, with fair value gains or losses going through the Profit and Loss Account. This will then have deferred tax implications.
The change will apply retrospectively and introduce fair value at the date of the transition to the amendments (at the commencement of the comparative period). For example, if an entity applies the amendments for an accounting period commencing on 1 January 2019, fair values will need to be introduced as at 1 January 2018.
Investment Property in a Group
There is one exception, however, and that is when an investment property is rented to another group entity.
Under these circumstances, there is now an accounting policy choice between either fair value through the Profit and Loss Account or the cost model as PPE.
It should be noted that where only part of a property is rented to another group entity, the accounting policy choice only applies to this component of the property.
Where an entity chooses to adopt the cost model, the group member owning the investment property can use the fair value of the investment property as its deemed cost at the date of transition. This will be the deemed cost going forward and depreciation with be charged on the property.
Should you wish for further clarification on the Triennial Amendments and how these could affect your financial statements then we will be happy to assist.
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.