U.K. Banks, Other Businesses Gain Simpler Accounting Choices

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By David R. Jones

Banks and other financial institutions in the U.K. that use the nation’s generally accepted accounting practice will have simpler—and probably less expensive—accounting options for classifying financial instruments.

The council, which sets accounting and auditing standards for the U.K. and the Republic of Ireland, expects its changes to a financial reporting standard to simplify and reduce reporting requirements for at least some of the 4 million businesses applying U.K. GAAP.

Reduced Disclosures

Under amendments to Financial Reporting Standard (FRS) 102 that the U.K. Financial Reporting Council issued Dec. 14, fewer entities will be classified as financial institutions under the revised standard, which will reduce disclosure requirements for newly categorized businesses.

“However, all entities, including those no longer classified as financial institutions, are encouraged to consider whether additional disclosure is required when the risks arising from financial instruments are particularly significant to the business,” the FRC said.

U.K. companies can use GAAP if they decide not to apply international financial reporting standards as adopted by the European Union or other U.K. FRS, such as those designed for small companies.

“All sectors and sizes of entities are potentially affected by these amendments, including companies and other legal structures, unless the entity is required or chooses to apply EU-adopted IFRS,” the council impact assessment of FRS 102 said. The effects will differ depending on such factors as an entity’s size, the nature of its business, and whether it’s part of a group.

Lower Preparation Costs

The amendments are expected to make it easier for some GAAP users to implement FRC accounting policies, which should cut their costs in producing financial statements.

“The FRC expects there to be an overall cost saving to preparers as a result of these changes when measured over the lifetime of their implementation,” the council said, “without impacting significantly on the usefulness of the resulting information for users of the financial statements.”

FRC adopted the changes following a consultation on its triennial review process for FRS 102, which ended June 30 and drew 35 responses.

The council didn’t set out to conduct a major overhaul of the standard but instead sought to fine-tune and clarify the standard’s provisions.

Designate by Cost, Not Value

Along with making it easier to classify financial instruments by introducing a description of a basic financial instrument, the revised FRS 102 allows investment property rented to another group to be measured by referring to cost, rather than fair value, and clarifies accounting requirements on topics that FRC previously hadn’t covered.

“Some clarifications will reduce the amount of time preparers and auditors will need to spend determining an appropriate accounting policy when FRS 102 is silent,” according to the impact assessment.

FRC also confirmed an interim measure that simplifies measurements of directors’ loans to small entities.

Most of the amendments come into force for reporting periods starting on or after Jan. 1, 2019, and can be adopted earlier if all changes are adopted simultaneously.

Further, the council issued an update on Dec. 18 to its package of taxonomies—the digital tags that an estimated 1.9 million U.K. companies use to submit electronic financial reports—to incorporate the FRS 102 amendments.

All entities can implement the new taxonomies immediately, and those that choose not to adopt the new standard early can continue to file digital reports using FRC’s previous taxonomies.

To contact the reporter on this story: David R. Jones in London at correspondents@bloomberglaw.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bloombergtax.com

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