FRS 102 – potential transition pitfalls of new Irish GAAP (Part 1)
In this article, we consider practical tips for applying the requirements of Section 35 of FRS 102.
The Financial Reporting Council issued a report called the Annual Review of Corporate Reporting 2015/2016 on 21 October 2016 encouraging smaller entities to ‘start their planning as soon as possible in order to ensure they are prepared for a smooth transition’.
In this report, the FRC stated that ‘small entities will also be applying FRS102 for the first time from 1 January 2016, which may pose some challenges for preparers, but should improve reporting in certain areas, as well as offering opportunities to reconsider the necessary disclosures. Anecdotal evidence suggests that some of the larger private companies applying FRS 102 from 1 January 2015 could have started their planning for transition earlier; any entities yet to transition to new standards should start their planning as soon as possible to ensure they are prepared for a smooth transition.’
This article assumes that readers have used the FRSSE (2015) for the year ended 31 December 2015 and will now be adopting FRS 102 for the first time for year ended 31 December 2016.
Review of existing accounting policies
Companies will need to perform a detailed review of whether their current accounting policies meet the requirements of FRS 102 Financial Reporting Standard applicable in the Irish and Ireland, and whether change is necessary or desirable. and changes in accounting policy will be inevitable.
In some cases, the requirements under FRS 102 will be different from previous Irish GAAP However, transition to FRS 102 can also provide an opportunity to look again at current accounting policies and reconsider their appropriateness to the business. In some cases, there will also be accounting rules that were not previously in place e.g. the rule about recording transactions in the functional currency which can be in a currency other than the Euro, if the company’s sales are denominated mostly in sterling or dollars.
Time is of the essence
FRS 102 generally requires retrospective application (in our example the transition date will be 1 January 2015 and therefore the comparatives for the year ended 31 December 2015 will need revised under the new rules). It is very important to identify those areas most likely to have a significant impact on the financial statements and actions which might be taken to ease the burden, for example deciding which of the eighteen exemptions (currently available) to take.
You need to identify those actions which are time-critical, that is areas where action (or inaction) at transition will have a direct impact on the accounting treatment and the options available. Special care will need to be taken by entities that have hedging arrangements or defined benefit pension schemes.
Gathering information for restatement of comparatives
Don’t underestimate the challenge of restating comparative information, including numerical and narrative disclosures, on first-time adoption of FRS 102. There may be disclosures which were not required previously (e.g. the statement of cash flows) or which are now required in greater depth e.g. changes to the accounting policies on turnover and stock. It is hoped that the new companies Act (when enacted) will update the Companies Ct, 2014 and will allow smaller companies avail of the exemption form the statement of cash flows.
This information will generally be easier to gather at the time a transaction takes place or close the date a balance arises, rather than when the first FRS 102 financial statements are being prepared.