FRS 102 and FRS 105 Compared

FRS 102 and FRS 105 Compared

by | Jul 15, 2024 | Blog, News

Below we compare the differences between FRS 102 (focusing on ‘small’ entities) and FRS 105 (‘micro’ entities) along with some other factors to consider when deciding whether to prepare accounts using the ‘small’ or ‘micro’-entities regime. The ‘small’ and ‘micro’ entities regime thresholds have changed recently. See our separate blog here about these changes.

An entity entitled to and choosing to apply the ‘micro-entities’ regime must apply FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime. The micro-entities regime is optional and therefore, when preparing their financial statements, entities may wish to consider the differences between applying FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and FRS 105 when deciding on the most suitable regime. The links given here are to the January 2022 versions of FRS 102/105.

New editions of both standards are expected to be published in the summer of 2024, effective for accounting periods commencing on/after 1 January 2026.

Users of the accounts

The most important aspect to consider is the needs of users. Different stakeholders will have different expectations. For example:

  • Suppliers/trade creditors
  • Banks and
  • Credit rating agencies may require more information than is provided by micro-entity accounts.

The level of information required by FRS 105 is very limited when compared to other standards, so be careful to advise your client about the implications for making a good impression on such stakeholders where that might be important.

Future growth plans

An entity that is entitled to either the ‘small’ or ‘micro-entities’ regime but is close to the size limits should consider carefully any decision on which regime to adopt. This is particularly relevant for a micro-entity if the business is expected to grow to the extent that it will be necessary to switch to the small entities’ regime in the near future. Transition from FRS 105 to FRS 102 Section 1A will involve significant changes to the presentation of the accounts and the accounting policies applied (see below).

Accounting Differences Between FRS 102 and FRS 105

Outlined below are eleven of the key accounting differences between FRS 102 and FRS 102:

TOPIC

FRS 102

FRS 105
Revenue Recognition Section 23 completely revised (in the changes published in March 2024) to include a simplified version of the IFRS 15 Five Step Model effective for accounting periods starting 1 January 2026 with early adoption allowed from 1 January 2024.

 

See our July 2024 webinar on these changes called ‘The Main Changes in Irish GAAP’.

 Section 20 revised in a similar fashion to FRS 102 (in the changes published in March 2024) with the simplified version of the IFRS 15 Five Step Model introduced effective for accounting periods starting 1 January 2026 with early adoption allowed from 1 January 2024.
Leasing Section 20 is completely revised with the introduction of rules similar to those in IFRS 16, where almost all leases will go on balance sheet, and only certain types of operating lease will remain off balance sheet.

 

These changes are effective for accounting periods starting 1 January 2026 with early adoption allowed from 1 January 2024.

 No change to the previous regime of only capitalizing finance leases. All operating leases remain as they were before.

 

 

 

See our July 2024 webinar on these changes called ‘The Main Changes in Irish GAAP’.
Investment properties With the exception of investment property rented to another group entity, a revaluation each year is required, with changes recognised in profit or loss. Measured at cost less depreciation and impairment.
Property plant and equipment Measured at cost less depreciation and impairment but can choose to adopt a revaluation accounting policy for fixed assets of the same class Measured at cost less depreciation and impairment.
Intangible assets Measured at cost less amortisation and impairment but can choose in limited circumstances to adopt a revaluation accounting policy for intangible assets of the same class Measured at cost less amortisation and impairment.
Development costs and borrowing costs These costs can, subject to certain conditions, be capitalised. No option to capitalise. Must be expensed to the profit and loss account in the period in which they are incurred.
Trade and asset acquisition An intangible asset purchased with a business is normally recognised as an asset when separable and arises from a contractual or other legal basis An intangible asset purchased with a business must not be recognised separately from goodwill.
Financial instruments Financial instruments are divided into ‘basic’ and ‘other’ instruments.

 

The former are mostly measured at amortised cost, the latter mostly at fair value with movements generally recognised in profit or loss.

 

Entities can instead choose to apply the recognition and measurement requirements of IAS 39 Financial Instruments: Recognition and Measurement and/or IFRS 9.

 

The exception is directors’ loans which may be measured initially at transaction price.

 No distinction between ‘basic’ and ‘other’ with all financial instruments initially recognised at cost, which will be the transaction price. Subsequent revaluation or measurement of financial instruments at fair value not permitted.

For lending arrangements, simplifications are made in relation to the allocation of interest and transaction costs, and no requirement to calculate an effective interest rate.

Also, there is no requirement to impute a market rate of interest in arrangements conducted at non-market rates.
Equity-settled share-based payments Recognised at the fair value of the goods or services when received. For arrangements with employees, fair value is measured at the grant date and the expense recognised over the vesting period. Not recognised in the accounts until the shares are issued.

 
Foreign exchange forward contract Recognised on the balance sheet as a financial instrument at fair value and the associated debtor or creditor retranslated at the year-end rate. Hedge accounting can be applied in certain circumstances. When a trading transaction is covered by a related or matching forward contract, the requirement is to use the rate specified in the contract.

If not matched to a trading transaction the cost of the foreign exchange forward contract will be recognised as a financial asset, unless it is not material in which case it will be recognised immediately as an expense in profit or loss.
Defined benefit pension plans Net interest on the net defined benefit asset or liability is recognised in the profit and loss account, and is calculated with reference to high quality corporate bonds i.e., the same rate is applied to both the plan assets and liabilities. Recognition of the surplus or deficit of the plan on the balance sheet not permitted. Agreed funding of deficit must, however, be recognised as a liability. Contributions payable to the plan accounted for as an expense.
Government grants Government grants can be accounted for using either the performance model or the accruals model. Requirement to use the accruals model.

 
Deferred tax Based on timing differences No deferred tax

 

Please see our latest CPD Webinar on The Main Changes in Irish GAAP (recorded July 2024).

See our webinar entitled ‘The Main Changes in Irish GAAP’ on the latest changes to FRS 102 here.

For more on the whole ISQM process for audit firms, please see our ISQM 1 Toolkit on our website here.

Please go to our website to see our:

  • Anti-Money Laundering Policies Controls and Procedures Manual (March 2022) — View the table of contents
  • AML Webinar (December 2023) available here, which accompanies the AML Manual. It explains the latest legal AML reporting position for accountancy firms and includes a quiz. Upon completion you receive a CPD certificate for attendance in your inbox.
  • Letters of engagement and similar templates—Please visit our website here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items bought together.
  • ISQM TOOLKIT, or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by email at john@jmcc.ie.
  • We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.
FRS 102 – potential transition pitfalls of new Irish GAAP – Part 2

FRS 102 – potential transition pitfalls of new Irish GAAP – Part 2

by | Nov 1, 2016 | News

In this second article on transition, we consider some practical tips for applying the requirements of Section 35 (the transition section) 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’.

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.’

Here are some of the issues that may need close attention during the transition phase:

Dormant companies – make any changes before transition date

If any changes are planned that will affect the balances in dormant companies’ financial statements, it may be beneficial to make the changes before the date of transition. This should ensure that the company can take advantage of the exemption from restating its accounting policies.

Establish fair values at the appropriate time

Although it will often be possible to obtain fair values later, it will involve more effort and research than if the valuations are done as close as possible to the date to be reflected in the valuation.

Early identification of financial instruments

Make sure that contracts and agreements are reviewed to identify all financial instruments within your business at the earliest possible stage, including contracts such as derivatives that may not have previously been recognised on the balance sheet.

Some accounting options will be available only when the necessary steps have been taken by the transition date. Fair values are used extensively in the measurement of certain financial instruments (e.g. investment properties) and this information is gathered more easily at the time of transition than afterwards.

Keep contract terms basic wherever possible

Make sure all staff with responsibilities for negotiating contracts on behalf of the organisation, from sales and trade purchases to financing arrangements, are aware of the potential pitfalls associated with any unusual contract terms. It may be helpful to draw up a list of issues that need consideration or ensure prior approval before contracts are completed.

Modification of loan arrangements

When bank loans have been renegotiated under substantially different terms prior to the transition date, but there has not been a process of derecognizing the old liability and recognising a new one, the entity may apply the exemption in Section 35 to retain this treatment on transition.

However, this exemption does not apply if these renegotiations take place after the transition date, that is after 1 January 2015 for a calendar-year company. In such instances the comparative balance sheet will need restated.

Amortisation of intangible assets

When intangibles have previously been tested for impairment and not amortised, a remaining useful life will need to be established at the transition date. When the total estimated useful life of the intangible is estimated to be more than five years, reliable back-up evidence will be required to support the estimated total useful life and the remaining useful life at transition. This would often be available in the form of cash flow projections.

Translation of goodwill and fair value adjustments at closing rate

FRS 102 requires goodwill and fair value adjustments to be translated at the closing rate. This may differ from the current treatment as current Irish GAAP does not specify the rate to be used and therefore many entities have translated goodwill and fair value adjustments at the rate ruling at acquisition.

 

More on Parts of FRS 102 That Are Not Yet Applicable in the RoI

More on Parts of FRS 102 That Are Not Yet Applicable in the RoI

by | Feb 1, 2016 | News

More on Parts of FRS 102 That Are Not Yet Applicable in the RoI

Following on last week’s blog piece about Section 1A Small Entities FRS 102, which as you know, does not yet apply in the Republic of Ireland (RoI).  There was an error in the blog which stated that charities that were formed as companies limited by guarantee were precluded from using the FRSSE (Financial Reporting Standard for Smaller Entities). However, with the enactment of the Companies Act 2014, companies limited by guarantee may qualify as ‘small’ and may therefore use the FRSSE. Apologies for any confusion.

Meanwhile we would like to draw your attention to another matter in FRS 102. There are now twenty exemptions (where there were previously 18) in Section 35, which many companies will be trawling through, as they transition to FRS 102 for the first time.

Two additional exemptions in Section 35, namely 35.10 (u) ‘Small entities – fair value measurement of financial instruments’ and                 35.10 (v) ‘Small entities – financing transactions involving related parties’ . These exemptions were included in the September 2015 version of FRS 102, specifically for ‘small’ entities.

The exemptions give some relief from the amortised cost rule on, for example, directors’ loans, but companies in the Republic of Ireland cannot avail of them just yet, because the relevant company legislation underpinning these rules has not been enacted. Hopefully this will follow soon after the forthcoming election.

The mechanics of these exemptions is that they relate to comparative information only. Companies will have to account for the transactions in accordance with FRS 102 for the first reporting period that they are allowed adopt FRS 102 and make an adjustment to opening reserves at the beginning of the first reporting period (as opposed to the date of transition).
 

For more on FRS 102 see the following:

1. Updated Transition Checklist (February 2016 version), for more information please click here.

To assist you with the transition work – retails for €100+VAT and accompanied by free:

  • Template letter to clients

  • List of Main Differences between old GAAP and FRS 102

2. FRS 102 Training Course

To learn the latest developments in accounting and the related company law, come along to our FRS 102 Accounting Update on Tuesday 1 March 2016 at the Camden Court Hotel, Dublin 2. Places are limited and are filling steadily.

For booking details please click here.

3. FRS 102 Transition Service

Please ask us about our bespoke FRS 102 Transition Service where we will examine client accounts before/after transition and give you a tailored report explaining the issues arising and whether the transition has been successful or not. To enquire just send an e-mail to john@jmcc.ie

 

Our next blog on Investment Properties and FRS 102 will follow next week.