Superseded Accounting Standards
Published: 18 September 2023
1 minute read
The superseded standards and statements on this page have been withdrawn and replaced by FRS 100 to FRS 105, which are available from our UK Accounting Standards page.
Superseded financial reporting standards
UK GAAP for accounting periods beginning prior to 1 January 2015.
- Improvements to Financial Reporting Standards 2010 (PDF)
- Improvements to Financial Reporting Standards 2009 (PDF)
FRS 1 Cash Flow Statements
FRS 1 (Revised 1996) was effective for accounting periods ending on or after 23 March 1997. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
FRS 1 (Revised 1996) requires reporting entities within its scope to prepare a cash flow statement in the manner set out in the FRS. Cash flows are increases or decreases in amounts of cash, and cash is cash in hand and deposits repayable on demand at any qualifying institution less overdrafts from any qualifying institution repayable on demand.
An entity's cash flow statement should list its cash flows for the period classified under the following standard headings:
- Operating activities
- Returns on investments and servicing of finance
- Capital expenditure and financial investment
- Acquisitions and disposals
- Equity dividends paid
- Management of liquid resources
An appendix to the standard sets out examples of cash flow statements for an individual company, a group, a bank and an insurance group.
FRS 1 (Revised 1996) replaced the original FRS 1 which was issued in September 1991 to replace SSAP 10 'Statements of source and application of funds'. At the time the requirement for a cash flow statement instead of a statement of source and application of funds represented a radical change in financial reporting. However, cash flow statements had increasingly come to be recognised as a useful addition to the balance sheet and profit and loss account in their portrayal of financial position, performance and financial adaptability (in particular in indicating the relationship between profitability and cash-generating ability) and thus of the quality of the profit earned.
FRS 2 Accounting for Subsidiary Undertakings
FRS 2 was effective for accounting periods ending on or after 23 December 1992. The amended FRS took effect for accounting periods beginning on and/or after 6 April 2008, when the provisions of the Act/or the Regulations were applied to other entities (eg. limited liability partnerships), if later. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
FRS 2 sets out the conditions under which an entity qualifies as a parent undertaking which should prepare consolidated financial statements for its group-the parent and its subsidiaries. In general an investor that controls an investee entity is its parent and should account for that entity as a subsidiary. The FRS also sets out the manner in which consolidated financial statements are to be prepared.
FRS 2 was amended in June 2009 to update the references in the FRS such that they correspond with the requirements set out in the Companies Act 2006 and the Large and Medium-sized Companies and Group (Accounts and Reports) Regulations 2008.
The need to revise the earlier standard on group accounts arose because of the amendment of the Companies Act in 1989. However, the opportunity was to taken to conduct a thorough review of consolidated financial statements at the same time.
FRS 3 Reporting Financial Performance
FRS 3 was effective for accounting periods ending on or after 22 June 1993. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
FRS 3 has changed the way in which performance is reported. Its objective is to require entities to highlight a range of important components of financial performance to aid users in understanding the performance achieved by the entity in a period and to assist them in forming a basis for their assessment of future results and cash flows.
The standard requires a layered format for the profit and loss account to highlight a number of important components of financial performance:
- results of continuing operations (including acquisitions);
- results of discontinued operations;
- profits and losses on the sale or termination of an operation, costs of a fundamental reorganisation or restructuring and profits or losses on the disposal of fixed assets; and
- extraordinary items.
The effect of the standard has been effectively to outlaw extraordinary items. If any were to arise, the standard requires them to be included in the earnings figure used to calculate earnings per share;
The standard also requires a statement of total recognised gains and losses to be shown. This is a primary financial statement that includes the profit or loss for the period together with all movements in reserves reflecting recognised gains and losses attributable to shareholders.
A note of historical profits, which is a memorandum item, is also required. The purpose of this note is to present the profits or losses of entities that have revalued assets on a more comparable basis with those of entities that have not.
FRS 4 Capital Instruments
FRS 4 was effective for accounting periods ending on or after 22 June 1994. Most of FRS 4, other than material relating to measurement of debt and gains and losses on the repurchase of debt, was withdrawn on implementation of FRS 25 (IAS 32) 'Financial Instruments: Disclsoure and Presentation'. The remainder of FRS 4 was withdrawn on implementation of FRS 26 (IAS 39) 'Financial Instruments: Measurement'.
The objective of FRS 4 is to ensure that financial statements provide a clear, coherent and consistent treatment of capital instruments, in particular as regards the classification of instruments as debt, non-equity shares or equity shares; that costs associated with capital instruments are dealt with in a manner consistent with their classification, and, for redeemable instruments, allocated to accounting periods on a fair basis over the period the instrument is in issue; and that financial statements provide relevant information concerning the nature and amount of the entity's sources of finance and the associated costs, commitments and potential commitments.
FRS 4 requires capital instruments to be presented in financial statements in a way that reflects the obligations of the issuer. The standard prescribes the methods to be used to determine the amounts to be ascribed to capital instruments and their associated costs and specifies relevant disclosures.
The amount of shareholders' funds attributable to equity interests, non-equity interests and (for consolidated financial statements) minority interests is to be disclosed. The key distinctions may be summarised as:
Minority interests in subsidiaries
Equity interests in subsidiaries
Non-equity interests in subsidiaries
To aid its application, FRS 4 contains a number of application notes that show how its requirements apply to transactions with certain features. However, FRS 4 is not limited to the transactions covered in the application notes.
FRS 5 Reporting the Substance of Transactions
- FRS 5 (April 1994) (PDF)
- Amendment to FRS 5 (September 1998) (PDF)
- Amendment to FRS 5 (November 2003) (PDF)
FRS 5 was effective for accounting periods ending on or after 22 September 1994. (Application Note F was effective from 10 September 1998. Application Note G was effective from 23 December 2003.)
From 1 January 2007 amendments to FRS 26 'Financial Instruments: Recognition and Measurement' amended FRS 5 to exclude from its scope transactions in financial assets that would then fall within the scope of FRS 26. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
FRS 5 addresses the problem of what is commonly referred to as 'off balance sheet financing'. One of the main aims of such arrangements is to finance a company's assets and operations in such a way that the finance is not shown as a liability in the company's balance sheet. A further effect is that the assets being financed are excluded from the accounts, with the result that both the resources of the entity and its financing are understated.
FRS 5 requires that the substance of an entity's transactions is reported in its financial statements. This requires that the commercial effect of a transaction and any resulting assets, liabilities, gains and losses are shown and that the accounts do not merely report the legal form of a transaction.
For example, a company may sell (ie transfer legal title to) an asset and enter into a concurrent agreement to repurchase the asset at the sales price plus interest. The asset may remain on the premises of the 'seller' and continue to be used in its business. In such a case, the company continues to enjoy the economic benefit of the asset and to be exposed to the principal risks inherent in those benefits. FRS 5 requires that the asset continues to be reported as an asset of the seller, notwithstanding the transfer of legal title, and that a liability is recognised for the 'seller's' obligation to repay the sales price plus interest.
To aid its application, FRS 5 contains seven application notes that show how its requirements apply to transactions with certain features. These are:
- Consignment stock
- Sale and repurchase agreements
- Factoring of debts
- Securitised assets
- Loan transfers
- Private Finance Initiative and similar contracts (September 1998)
- Revenue recognition (November 2003)
- However, FRS 5 has general application and is not limited to the transactions covered in the application notes.
FRS 6 Acquisitions and Mergers
FRS 6 was effective in respect of business combinations first accounted for in financial statements relating to accounting periods ending on or after 23 December 1994. The amended FRS took effect for accounting periods beginning on and/or after 6 April 2008, when the provisions of the Act/or the Regulations were applied to other entities (eg. limited liability partnerships), if later. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
FRS 6 sets out the circumstances in which the two methods of accounting for a business combination (acquisition accounting and merger accounting) are to be used. A business combination is the bringing together of separate entities into one economic entity as a result of one entity uniting with another or obtaining control over another entity's net assets and operations.
The ASB issued an amendment to FRS 6 in June 2009. The amendment updates the references in the FRS such that they correspond with the requirements set out in the Companies Act 2006 and the Large and Medium-sized Companies and Group (Accounts and Reports) Regulations 2008.
The objective of the FRS is too ensure that merger accounting is used only for those business combinations that are not, in substance, the acquisition of one entity by another but the formation of a new reporting entity as a substantially equal partnership where no party is dominant. To this end the FRS sets out five criteria that must be met for merger accounting to be used. When those five criteria are met merger accounting should be used. If those five criteria are not met then acquisition accounting should be used.
FRS 6 sets out the disclosures to be made under acquisition and merger accounting.
FRS 7 Fair Values in Acquisition Accounting
FRS 7 was effective in respect of business combinations first accounted for in financial statements relating to accounting periods ending on or after 23 December 1994. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
FRS 7 sets out the principles of accounting for a business combination under the acquisition method of accounting. Companies legislation in the UK requires the identifiable assets and liabilities of the acquired entity to be included in the consolidated financial statements of the acquirer at their fair value at the date of acquisition. FRS 7 sets out how the fair values of identifiable assets and liabilities should be determined and what 'identifiable assets and liabilities' means. The difference between the sum of these fair values and the cost of acquisition is recognised as goodwill or negative goodwill.
The standard also gives guidance on the period available to investigate and identify the fair values of assets and liabilities of an acquired entity and how to account for any subsequent adjustments.
The objective of the FRS is to ensure that, when a business entity is acquired by another, all the assets and liabilities that existed in the acquired entity at the date of acquisition are recorded at fair values reflecting their condition at that date. All changes to the acquired assets and liabilities, and the resulting gains and losses, that arise after control of the acquired entity has passed to the acquirer are reported as part of the post acquisition financial performance of the group.
FRS 8 Related Party Disclosures
- FRS 8 (October 1995) (PDF)
- Amendment to FRS 8 'Related Party Disclosures': Legal Changes 2008 (December 2008) (PDF)
FRS 8 was effective for accounting periods ending on or after 23 December 1995. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
The objective of FRS 8 is to ensure that financial statements contain the disclosures necessary to draw attention to the possibility that the reported financial position and results may have been affected by the existence of related parties and by material transactions with them.
Two or more parties are related when at any time during the financial period:
- one party has direct or indirect control over the other party; or
- the parties are subject to common control from the same source; or
- one party has influence over the financial and operating policies of the other party to the extent that that other party might be inhibited from pursuing at all times its own separate interests; or
- the parties, in entering a transaction, are subject to influence from the same source to such an extent that one of the parties to the transaction has subordinated its own separate interest.
The standard requires the disclosure of:
- information on related party transactions; and
- the name of the party controlling the reporting entity and, if different, that of the ultimate controlling party whether or not any transactions between the reporting entity and those parties have taken place.
The standard gives various exemptions for consolidated financial statements.
Amendment to FRS 8
The ASB issued an Amendment to FRS 8 'Related Party Disclosures' in December 2008. This Amendment simply reflects the minimum necessary to comply with legal requirements on the definition of a related party and an exemption for wholly-owned subsidiaries in the Large and Medium-sized Companies and Groups (Accounts and Reports) 2008 Regulations. Medium-sized companies are still required to comply with FRS 8 as amended in December 2008.
Small companies applying the Financial Reporting Standard for Smaller Entities (FRSSE) remain exempt from FRS 8, but are still required to apply the provisions on related party disclosures set out in Section 15 of the FRSSE.
FRS 9 Associates and Joint Ventures
FRS 9 was effective for accounting periods ending on or after 23 June 1998. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
FRS 9 sets out the definitions and accounting treatments for associates and joint ventures, two types of interests that a reporting entity may have in other entities. The standard requires that an associate (where the investor holds a participating interest and exercises significant influence) is accounted for in its investor's consolidated financial statements using the equity method. For a joint venture (where the investor's interest is long-term and it shares control with other investors) the FRS requires the use of the gross equity method in the investor's consolidated financial statements (ie, the investor's share of the gross assets and liabilities underlying the net amount of the investment is shown, in aggregate, on the face of the balance sheet, and, in the profit and loss account, the investor's share of the investee's turnover is noted). The FRS also deals with joint arrangements that are not entities. In these cases, participants should account for their own assets, liabilities and cash flows measured according to the agreement governing the arrangement.
The definitions and treatments prescribed have been developed to be consistent with the ASB's approach to accounting for subsidiaries (dealt with in FRS 2 'Accounting for Subsidiary Undertakings'). The requirements are also consistent with companies legislation.
It was necessary to revise the previous standard on associates because of changes in companies legislation. However, the ASB decided to carry out a full review because the previous standard:
- did not cover joint ventures, which were becoming increasingly popular; and
- did not require sufficient disclosure where there were significant associates or joint ventures.
FRS 10 Goodwill and Intangible Assets
FRS 10 was effective for accounting periods ending on or after 23 December 1998. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
The objective of FRS 10 is to ensure that purchased goodwill and intangible assets are charged to the profit and loss account (income statement) in the periods in which they are depleted.
The standard takes the view that goodwill arising on an acquisition (ie, the cost of acquisition less the aggregate of the fair value of the purchased entity's identifiable assets and liabilities) is neither an asset like other assets nor an immediate loss in value. Rather, it forms a bridge between the cost of an investment shown as an asset in the acquirer's own financial statements and the values attributed to the acquired assets and liabilities in the consolidated financial statements. Although purchased goodwill is not in itself an asset, its inclusion amongst the assets of the reporting entity, rather than as a deduction from shareholders' equity, recognises that goodwill is part of a larger asset, the investment, for which management remains accountable.
An intangible item may meet the definition of an asset when access to the future economic benefits that it represents is controlled by the reporting entity, whether through custody or legal protection. However, intangible assets fall into a spectrum ranging from those that can readily be identified and measured separately from goodwill to those that are essentially very similar to goodwill. The basic principles set out in the standard for accounting for intangible assets that are similar in nature to goodwill are therefore closely aligned with those set out for goodwill.
The standard requires purchased goodwill and certain intangible assets to be capitalised and, in most circumstances, to be amortised systematically through the profit and loss account (usually over 20 years or less). Impairment reviews must be undertaken, particularly if the goodwill or intangible asset is regarded as having an infinite life and is therefore not being amortised. Internally generated goodwill should not be capitalised and internally developed intangible assets should be capitalised only where they have a readily ascertainable market value.
FRS 11 Impairment of Fixed Assets and Goodwill
FRS 11 was effective for accounting periods ending on or after 23 December 1998. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
The objective of FRS 11 is to ensure that:
- fixed assets and goodwill are recorded in the financial statements at no more than their recoverable amount;
- any resulting impairment loss is measured an recognised on a consistent basis; and
- sufficient information is disclosed in the financial statements to enable users to understand the impact of the impairment on the financial position and performance of the reporting entity.
FRS 11 sets out the principles and methodology for accounting for impairments of fixed assets and goodwill. It replaces the previous approach whereby diminutions in value were recognised only if they were regarded as permanent. Instead, the carrying amount of an asset is compared with its recoverable amount and, if the carrying amount is higher, the asset is written down.
Recoverable amount is defined as the higher of the amount that could be obtained by selling the asset (net realisable value) and the amount that could be obtained through using the asset (value in use). Value in use is calculated by forecasting the cash flows that the asset is expected to generate and discounting them to their present value. Where individual assets do not generate independent cash flows, a group of assets (an income-generating unit) is tested for impairment.
Impairment tests are only required when there has been some indication that an impairment has occurred.
The development of FRS 11 shadowed the development of the international standard on the same subject (IAS 36).
FRS 12 Provisions, Contingent Liabilities and Contingent Assets
FRS 12 was effective for accounting periods ending on or after 23 March 1999. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
FRS 12's objective is to ensure that a provision (a liability that is of uncertain timing or amount) is recognised only when it actually exists at the balance sheet date. A provision should be recognised therefore only when:
- an entity has a present obligation (legal or constructive) as a result of a past event;
- it is probable that a transfer of economic benefits will be required to settle the obligation; and
- a reliable estimate can be made of the amount of the obligation.
The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date.
Contingent liabilities and contingent assets are not recognised as liabilities or assets. However, a contingent liability should be disclosed if the possibility of an outflow of economic benefit to settle the obligation is more than remote. A contingent asset should be disclosed if an inflow of economic benefit is probable.
The standard was developed as a joint project with IASC.
Provisions often have a substantial effect on an entity's financial position and performance. Earlier published guidance, however, had tended to concentrate on particular forms of provision rather than the general principles underlying all provisions. Furthermore the practice had grown up of aggregating present liabilities with expected liabilities of future years, including sometimes items related to ongoing operations, in one large provision, often reported as an exceptional item. The effect of such 'big bath' provisions was not only to report excessive liabilities at the outset but also to boost profitability during the subsequent years, when the liabilities were in fact being incurred.
FRS 13 Derivatives and other Financial Instruments: Disclosures
FRS 13 was effective for accounting periods ending on or after 23 March 1999. FRS 13 was withdrawn on implementation of the disclosure requirements of FRS 29 'Financial Instruments: Disclosure'.
Some financial instruments, such as cash, debtors and creditors, generally arise as part of an entity's operating and financing activities and tend to be highly visible in the financial statements. Others (such as swaps, forwards, caps and collars, and other derivatives) are entered into in order to manage the risks arising from the operating and financing activities of the entity and are generally less visible. FRS 13 seeks to improve the disclosures provided in respect of all financial instruments and it does this by focusing on the way in which they are used by the reporting entity. The objective of its disclosures is to provide information about:
- the impact of the instruments on the entity's risk profile;
- how the risks arising from financial instruments might affect the entity's performance and financial condition; and
- how these risks are being managed.
FRS 13 applies to all entities, other than insurance companies and groups, that have one or more of their capital instruments listed or publicly traded on a stock exchange or market and all banks and similar institutions.
The FRS requires both narrative and numerical disclosures.
The narrative disclosures should include an explanation of the role that financial instruments play in creating or changing the risks that the entity faces in its activities. The directors' approach to managing each of those risks should also be explained, and this should include a description of the objectives, policies and strategies for holding and issuing financial instruments.
The numerical disclosures are intended primarily to show how these objectives and policies were implemented in the period. They focus on:
- interest rate risk;
- currency risk;
- liquidity risk (except for banks and similar institutions, which are covered by existing requirements);
- fair values; and
- hedging activities.
Although all entities falling within the scope of FRS 13 are required to provide the same type of narrative disclosures, the standard requires different numerical disclosures for each of:
- entities that are not financial institutions;
- banks and similar institutions; and
- other types of financial institution.
FRS 14 Earnings per Share
FRS 14 was effective for accounting periods ending on or after 23 December 1998. From January 2005, it was superseded by FRS 22.
Earnings per share is one of a number of indicators used in financial analysis to assess a company's performance. Broadly, it expresses a company's reported profits in terms of the amount earned in a period attributable to one ordinary share.
Companies that are listed in the UK are required to disclose earnings per share in their financial statements. FRS 14 sets out the way in which earnings per share calculations should be computed and disclosed.
FRS 14 is largely based on the International Accounting Standard, IAS 33, which was developed concurrently with the US standard-setting body, the FASB, as it progressed its own standard on the topic (FAS 128). The UK financial reporting community agreed with the ASB that it was opportune for the ASB also to revise its guidance on this topic to lend support to the harmonisation of international accounting standards, particularly as comparability of earnings per share is an important objective.
There were few changes in substance to SSAP 3 'Earnings per share', which FRS 14 superseded.
Like all standards on earnings per share, FRS 14 focuses on the number of shares to be used in the calculation. It explains, with the help of illustrative examples, how to compute basic and diluted earnings per share and sets out the additional disclosures to be given where companies choose to publish other amounts per share that might assist in explaining their performance.
FRS 15 Tangible Fixed Assets
FRS 15 was effective for accounting periods ending on or after 23 March 2000. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
FRS 15 sets out the principles of accounting for tangible fixed assets, with the exception of investment properties, which are dealt with in SSAP 19 'Accounting for investment properties'. The objective of the FRS is to ensure that tangible fixed assets are accounted for on a consistent basis.
Consistently with previous practice (as reflected, for example, in the Companies Act) the FRS permits a choice as to whether tangible fixed assets are stated at cost or at revalued amount. However, where an enterprise chooses to adopt a policy of revaluing some assets, all assets of the same class (that is, those with a similar nature, function or use) must be revalued. The FRS also contains requirements that ensure that the valuations are kept up to date.
FRS 15 incorporates many of the requirements of SSAP 12 'Accounting for depreciation' which it will supersede in due course. The FRS acknowledges that in a limited number of cases, no depreciation charge may be made on the grounds that it is immaterial. Where this is the case, or where depreciation is calculated on a basis that assumes that the useful economic life of an asset is longer than fifty years, the standard requires annual impairment reviews to be performed, to ensure that the carrying amount of the asset is not overstated.
FRS 16 Current Tax
FRS 16 was effective for accounting periods ending on or after 23 March 2000. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
FRS 16 addresses all aspects of accounting for current tax. It supersedes SSAP 8 'The treatment of taxation under the imputation system in the accounts of companies', which became out of date when advance corporation tax was abolished early in 1999.
As well as updating SSAP 8, the FRS has changed one of the main requirements, ie the way in which tax associated with dividend income is presented in financial statements. Dividends received from UK companies are no longer reported 'gross', ie by adding the attributable tax credit to both the dividend income and the tax charge. Instead, they are reported at the net amount received. Dividends received from other countries are reported gross only to the extent that they have suffered a withholding tax.
The FRS also incorporates the consensus reached in UITF Abstract 16 'Income and expenses subject to non-standard rates of tax'. The Abstract has therefore been withdrawn.
The FRS comes into force for accounting periods ending on or after 23 March 2000. Earlier adoption is encouraged and it is expected that many companies with December year-ends will wish to apply the FRS in their 1999 financial statements.
Requirements of FRS 16
In summary, FRS 16 requires:
- current tax for the period to be recognised in the profit and loss account except to the extent that it relates to gains or losses that have been recognised directly in the statement of total recognised gains and losses. Such tax should also be recognised in the statement of total recognised gains and losses.
- dividends, interest and other amounts payable or receivable to be recognised at an amount that:
- includes withholding taxes payable to the tax authorities wholly on behalf of the recipient.
- excludes any other taxes, such as attributable tax credits, not payable wholly on behalf of the recipient.
- income and expenses subject to non-standard rates of tax (or exempt from tax) to be included in the pre-tax results on the basis of the income or expenses actually receivable or payable, without any adjustment to reflect a notional amount of tax that would have been paid or relieved in respect of the transaction if it had been taxable, or allowable for tax purposes, on a different basis.
- current tax to be measured using tax rates and laws that have been enacted or substantively enacted by the balance sheet date.
FRS 17 Retirement Benefits
The requirements of FRS 17, following a long transition period, were effective for accounting periods beginning on or after 1 January 2005. The requirements of the Amendment issued in December 2006, were effective for accounting periods beginning on or after 6 April 2007. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
FRS 17 sets out the accounting treatment for retirement benefits such as pensions and medical care during retirement. It replaced SSAP 24 ‘Accounting for pension costs’ and UITF Abstract 6 ‘Accounting for post-retirement benefits other than pensions’.
The main requirements of FRS 17 are:
- pension scheme assets are measured using market values
- pension scheme liabilities are measured using a projected unit method and discounted at an AA corporate bond rate
- the pension scheme surplus (to the extent it can be recovered) or deficit is recognised in full on the balance sheet
- the movement in the scheme surplus/deficit is analysed into:
- the current service cost and any past service costs; these are recognised in operating profit
- the interest cost and expected return on assets; these are recognised as other finance costs
- actuarial gains and losses; these are recognised in the statement of total recognised gains and losses.
In December 2006 the ASB issued an amendment to FRS 17 which amends the disclosure requirement set out in the FRS.
*This web-version of FRS 17 has been updated as it was noted that paragraph 44 of the previous web-version did not agree with printed copies of FRS 17. The words "equal to the service cost divided by the discount rate" have been deleted from the web-version.
FRS 18 Accounting Policies
The FRS came into force for accounting periods ending on or after 22 June 2001, except for certain requirements relating to Statements of Recommended Practice (SORPs), which came into force for accounting periods beginning on or after 24 December 2001. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
FRS 18 deals primarily with the selection, application and disclosure of accounting policies. Its objective is to ensure that for all material items:
- an entity adopts the accounting policies most appropriate to its particular circumstances for the purpose of giving a true and fair view;
- An entity should prepare its financial statement on a going concern basis, unless:
- the entity is being liquidated or has ceased trading, or
- the directors either intend to liquidate the entity or to cease trading, or have no realistic alternative but to do so.
- the accounting policies adopted are reviewed regularly to ensure that they remain appropriate, and are changed when a new policy becomes more appropriate to the entity’s particular circumstances; and
- sufficient information is disclosed in the financial statements to enable users to understand the accounting policies adopted and how they have been implemented.
The FRS supersedes SSAP 2 ‘Disclosure of accounting policies’, which was published in 1971. Although in many respects SSAP 2 was still broadly satisfactory, the framework within which it discussed accounting policies was out of step with modern accounting. The FRS updates that framework to make it consistent with the ASB’s Statement of Principles for Financial Reporting.
In October 2009 the Financial Reporting Council published guidance for UK entities to assist them in making their assessment at going concern. The guidance may be downloaded above.
Summary of requirements of FRS 18
The FRS requires accounting policies to be consistent with accounting standards, Urgent Issues Task Force (UITF) Abstracts and companies legislation. Where this constraint allows a choice, the FRS requires an entity to select whichever of those accounting policies is judged to be most appropriate to its particular circumstances for the purpose of giving a true and fair view.
An entity should judge the appropriateness of accounting policies to its particular circumstances against the objectives of.
The constraints that an entity should take into account are the need to balance the different objectives, and the need to balance the cost of providing information with the likely benefit of such information to users of the entity’s financial statements.
An entity’s accounting policies should be reviewed regularly to ensure that they remain the most appropriate to its particular circumstances. An entity should implement a new accounting policy if it is judged more appropriate to the entity’s particular circumstances than the present accounting policy.
The FRS requires specific disclosures about the accounting policies followed and changes to those policies. It also requires, in some circumstances, disclosures about the estimation techniques used in applying those policies.
FRS 19 Deferred Tax
FRS 19 ‘Deferred Tax’ was issued on 7 December 2000. It superseded SSAP 15 ‘Accounting for deferred tax’, becoming effective for years ending on or after 23 January 2002. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
The FRS requires deferred tax to be provided for on a ‘full provision’ basis—rather than the ‘partial provision’ basis previously required by SSAP 15—on most types of timing difference. It permits but does not require entities to discount long-term deferred tax balances. It also requires reporting entities to explain (by reconciliation) the differences between their effective tax rates and the standard rate of tax.
The new requirements bring accounting practice in the UK and the Republic of Ireland more closely into line with international requirements. However, there are differences between the requirements of the FRS and the equivalent International Accounting Standard, IAS 12 (revised 1996) ‘Income Taxes’, reflecting differences in the conceptual approaches underlying them.
Summary of requirements
FRS 19 ‘Deferred Tax’ requires full provision to be made for deferred tax assets and liabilities arising from timing differences between the recognition of gains and losses in the financial statements and their recognition in a tax computation.
The general principle underlying the requirements is that deferred tax should be recognised as a liability or asset if the transactions or events that give the entity an obligation to pay more tax in future or a right to pay less tax in future have occurred by the balance sheet date. The FRS:
- requires deferred tax to be recognised on most types of timing difference, including those attributable to:
- accelerated capital allowances
- accruals for pension costs and other post-retirement benefits that will be deductible for tax purposes only when paid
- elimination of unrealised intragroup profits on consolidation
- unrelieved tax losses
- other sources of short-term timing difference
- prohibits the recognition of deferred tax on timing differences arising when:
- a non-monetary asset is revalued without there being any commitment to sell the asset (subject to the exception outlined below)
- the gain on sale of an asset is rolled over onto replacement assets
- a non-monetary asset is adjusted to its fair value on the acquisition of a business
- the remittance of a subsidiary, associate or joint venture’s earnings would cause tax to be payable, but no commitment has been made to the remittance of the earnings
- requires deferred tax assets to be recognised to the extent that it is regarded as more likely than not that they will be recovered.
As an exception to the general requirement not to recognise deferred tax on revaluation gains and losses, the FRS requires deferred tax to be recognised when assets are continuously revalued to fair value, with changes in fair value being recognised in the profit and loss account.
The FRS permits but does not require entities to adopt a policy of discounting deferred tax assets and liabilities.
The FRS includes other requirements regarding the measurement and presentation of deferred tax assets and liabilities. These include requirements for the deferred tax to be:
- measured using tax rates that have been enacted or substantively enacted
- presented separately on the face of the balance sheet if the amounts are so material that, in the absence of such disclosure, readers may misinterpret the accounts
The FRS requires information to be disclosed about factors affecting current and future tax charges. A key element of this is a requirement to disclose a reconciliation of the current tax charge for the period to the charge that would arise if the profits reported in the accounts were charged at a standard rate of tax.
The FRS amends FRS 7 ‘Fair Values in Acquisition Accounting’. The amendment requires deferred tax recognised in a fair value exercise to be measured in the same way as it would have been if the adjustments to fair values had been gains and losses reflected in the acquired entity’s own financial statements.
Comparison with IAS 12
The requirements of the FRS are similar to those of the equivalent International Accounting Standard (IAS) 12 (revised 1996)—both require deferred tax to be provided for in full on most types of timing difference.
However, there are significant differences between the two standards. The ASB does not agree with the conceptual arguments underpinning the requirements of IAS 12 (revised 1996), which it believes lead to companies making excessive provisions. It has therefore taken a different conceptual approach. The most important practical consequence is that, unlike IAS 12 (revised 1996), the FRS does not in general require deferred tax to be provided for when non-monetary assets are revalued or when they are adjusted to their fair values on the acquisition of a business.
A second significant difference is that the FRS allows (but does not require) deferred tax liabilities that will not be settled for some time to be discounted to reflect the time value of money. In contrast, IAS 12 (revised 1996) prohibits discounting.
There are a number of other differences between the requirements of the FRS and those of the IAS. These are set out in Appendix IV to the FRS.
Background to FRS requirements
The changes introduced by the FRS reflect an acceptance of the need to harmonise the way in which deferred tax is accounted for in the UK and the Republic of Ireland with the way in which it is accounted for in other countries.
In recent years, the partial provision method of accounting for deferred tax required by SSAP 15 has lost favour internationally, primarily because it is subjective (relying heavily on management expectations about future events) and inconsistent with other areas of accounting. Other major standard-setters and IAS 12 (revised 1996), now require deferred tax to be provided for in full. Whilst the ASB could see the merits of the partial provision method, it accepted some of the arguments against it and concluded that deferred tax was not an area where a good case could be made for taking a stand against the direction of international opinion.
Appendix V to the FRS provides a detailed analysis of the features of and rationale for the various approaches to deferred tax considered by the ASB, including that adopted in IAS 12 (revised 1996).
In particular, the analysis develops two different approaches to full provision accounting. The first argues that deferred tax should be provided for only when it reflects an existing obligation at the balance sheet date (the ‘incremental liability’ approach). The second argues that provisions should be made for all the future tax inherent in the carrying value of an asset (the ‘valuation adjustment’ approach). The valuation adjustment approach developed by the Board has similar objectives to the ‘temporary difference’ approach on which IAS 12 (revised 1996) is based. However, it is framed differently and does not require exceptions to its basic principles to avoid some of the more controversial consequences of the temporary difference approach.
The Appendix also explains in detail why the Board:
- decided to issue an FRS requiring full rather than partial provision for deferred tax
- did not pursue the option of moving to flow-through accounting (whereby no provision is made for deferred tax)
- chose not to adopt the requirements of IAS 12 (revised 1996)
- chose to adopt an incremental liability rather than a valuation adjustment approach as the basis for the requirements in the FRS
- decided to permit but not require entities to discount deferred tax.
Finally, the appendix explains how the ASB applied the approach it developed to arrive at the detailed requirements of the FRS and it took into consideration the views of those commenting on earlier consultation papers.
FRS 20 (IFRS2) Share-based Payment
FRS 20 was mandatory for accounting periods beginning on or after 1 January 2006 for unlisted entities (other than those applying the Financial Reporting Standard for Smaller Entities (FRSSE)). It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
FRS 20 specifies the accounting treatment to be adopted (including the disclosures to be provided) by entities making share-based payments. In particular, it requires entities to recognise an expense, measured at fair value, in respect of the share-based payments they make.
- The term ‘share-based payments’ includes all types of executive share option and share purchase plans and employee share option and share purchase schemes, including Save-As-You-Earn (SAYE) plans and similar arrangements. It also includes arrangements such as share appreciation rights, where a cash payment is made, the amount of which depends on the share price However, the FRS does not apply just to transactions with employees; it also applies to transactions with suppliers of goods or non-employee services that involve share-based payments being made in exchange for those goods or services.
- A ‘listed entity’ is an entity that has shares or other capital instruments it has issued traded on the London Stock Exchange or any other regulated market of an EU Member State.
Apart from the delayed implementation for unlisted entities and the exemption for entities applying the FRSSE, FRS 20 is identical to the IASB’s IFRS 2 ‘Share-based Payment’ and therefore has the effect of implementing that IFRS in the UK.
FRS 20 identifies three types of share-based payment transaction:
- equity-settled share-based payment transactions. These are transactions in which the entity receives goods or services as consideration for equity instruments of the entity.
- cash-settled share-based payment transactions. These are transactions in which the entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price (or value) of the entity’s equity instruments.
- transactions in which the entity receives or acquires goods or services and the terms of the arrangement provide one or other of the parties to the transaction with a choice as to whether the transaction is settled in cash or by issuing equity instruments.
The FRS then sets out the measurement principles and specific requirements that apply to each type of transaction. For equity-settled transactions, entities are required to measure the goods or services received at their fair value, unless that fair value cannot be estimated reliably in which case that fair value should be estimated by reference to the fair value of the equity instruments granted.
If a non-employee (or similar) transaction is involved, there should be a rebuttable presumption that the fair value of the goods or services received can be estimated reliably. The relevant measurement date is the date the entity obtains the goods or the counterparty renders service.
However, it is typically not possible to estimate reliably the fair value of employee services received so, for transactions with employees and others providing similar services, the entity should use the grant date fair value of the equity instruments granted.
- That fair value should be based on market prices and should take into account the terms and conditions upon which the instruments were granted. In the absence of market prices, a valuation technique (such as an option pricing model) will need to be used.
- Vesting conditions other than market conditions should not be taken into account when estimating the fair value of the instruments granted. Instead, those conditions should be taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that the aggregate amount recognised is based on the number of equity instruments that vest.
The FRS requires, in the case of cash-settled share-based payment transactions, the entity to measure the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the entity will remeasure the fair value of the liability at each reporting date and at the date of settlement, and should recognise any changes in value in profit or loss for the period.
For share-based payment transactions in which one of the parties to the transaction has a choice of settlement method, the transaction, or the components of that transaction, should be accounted for as a cash-settled share-based payment transaction if, and to the extent that, the entity has incurred a liability to settle in cash (or other assets), or as an equity-settled share-based payment transaction if, and to the extent that, no such liability has been incurred.
The FRS also contains various disclosure requirements designed to enable users of financial statements to understand the nature and extent of share-based payment arrangements, their effect on the period’s financial statements, and the methodologies used in arriving at the numbers included in the financial statements.
FRS 20 supersedes the existing UK accounting requirements in this area, which were set out mainly in UITF Abstract 17 ‘Employee share schemes’.
FRS 21 (IAS 10) Events after the Balance Sheet Date
The FRS is mandatory for accounting periods beginning on or after 1 January 2005 for all entities other than those applying the Financial Reporting Standard for Smaller Entities (FRSSE). It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
FRS 21 specifies the accounting treatment to be adopted (including the disclosures to be provided) by entities for events occurring between the balance sheet date and the date when the financial statements are authorised for issue.
Apart from the exemption for entities applying the FRSSE, FRS 21 is identical to the IASB’s IAS 10 ‘Events after the Balance Sheet Date’ and therefore has the effect of implementing that IAS in the UK and Republic of Ireland.
FRS 21 sets out the recognition and measurement requirements for two types of event after the balance sheet date:
- Those that provide evidence of conditions that existed at the balance sheet date for which the entity shall adjust the amounts recognised in its financial statements or recognise items that were not previously recognised (adjusting events). For example, the settlement of a court case that confirms the entity had a present obligation at the balance sheet date.
- Those that are indicative of conditions that arose after the balance sheet date for which the entity does not adjust the amounts recognised in its financial statements (non-adjusting events). For example, a decline in market value of investments between the balance sheet date and the date when the financial statements are authorised for issue.
The FRS removes the requirement to report dividends proposed after the balance sheet date in the profit and loss account and instead requires disclosures in the notes to the financial statements. This accords with the now generally accepted view that dividends declared after the balance sheet date should not be reported liabilities. The Department of Trade and Industry has announced a parallel change in the law to take effect also in 2005.
The FRS sets out other disclosure requirements. These include disclosure of the date when the financial statements were authorised for issue and the disclosure of information received about conditions that existed at the balance sheet date. And if non-adjusting events after the balance sheet date are material and non-disclosure could influence the economic decisions of users the entity should disclose the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made. The FRS provides a number of examples of non-adjusting events that would generally result in disclosure.
The FRS also requires that an entity shall not prepare its financial statements on a going concern basis if management determines after the balance sheet date that it intends to liquidate the entity or to cease trading or that it has no realistic alternative but to do so.
FRS 21 superseded the previous UK accounting requirements in this area which were set out in SSAP 17 ‘Accounting for post balance sheet events'.
FRS 22 (IAS 33) Earnings per Share
FRS 22 was effective for accounting periods beginning on or after 1 January 2005 and superseded FRS 14. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
Earnings per share is one of a number of indicators used in financial analysis to assess a company’s performance. Broadly, it expresses a company’s reported profits in terms of the amount earned in a period attributable to one ordinary share.
FRS 22 prescribes the basis for calculating and presenting earnings per share in the financial statements of entities whose shares are, or will be, publicly traded and other entities that choose to disclose earnings per share. It has the effect of implementing IAS 33 (revised 2003) for such entities not preparing their financial statements in accordance with international accounting standards. The standard focuses, with the help of illustrative examples, on the number of shares (the denominator) to be used in the calculation of basic and diluted earnings per share.
FRS 23 (IAS 21) The Effects of Changes in Foreign Exchange Rates
FRS 23 was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
FRS 23 has the effect, for those entities that are applying it, of implementing IAS 21 ‘The Effects of Changes in Foreign Exchange Rates’ and withdrawing an existing UK standard, SSAP 20 ‘Foreign currency translation’.
The FRS applied, for accounting periods beginning on or after 1 January 2005, to all listed entities preparing their financial statements in accordance with UK requirements—including listed parent undertakings preparing individual financial statements in accordance with those requirements. Other entities were permitted to apply the FRS, as long as they applied certain other FRSs at the same time. For accounting periods beginning on or after 1 January 2006, unlisted entities using fair value measures were also be required to comply with the FRS.
An entity may carry on foreign activities in two ways. It may have transactions in foreign currencies or it may have foreign operations. In addition, an entity may present its financial statements in a foreign currency. FRS 23 prescribes how entities should include foreign currency transactions and foreign operations in their financial statements and how they should translate financial statements into a presentation currency.
In December 2005 the ASB issued an amendment to FRS 23, making changes to the UK standard to correspond to those made by the IASB to IAS 21. These changes amended and clarified the requirements for the inclusion of intra-group loans in the net investment in a foreign operation.
FRS 25 (IAS 32) Financial Instruments: Presentation
The amendment was effective for accounting periods beginning on or after 1 January 2010. Early adoption was only permitted for accounting periods beginning on or after 1 January 2009. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
FRS 25 implements the international standard IAS 32 and (for accounting periods ending 31 December 2006) covers both presentation and disclosure requirements. For accounting periods beginning on or after 1 January 2007 the revised disclosure requirements FRS 29 replaced the requirements in FRS 25.
The presentation requirements of FRS 25 deal with the classification of capital instruments issued between debt and equity and the implications of that classification for dividends and interest expense.
- Many preference shares are required to be shown as liabilities, rather than as part of shareholders' funds. A consequence of this is that dividends on preference shares shown as liabilities are treated as part of the interest expense.
- Compound instruments (in other words, instruments that comprise debt and equity, such as convertible debt) are required to be split into their debt and equity elements, with each element being accounted for separately.
- The FRS also includes detailed material on the classification of contracts on the equity instruments of the reporting entity.
FRS 25 also deals with the bringing together of receivables and payables on the balance sheet as a single (net) receivable or payable (ie 'offset').
The presentation requirements of FRS 25 applied to all entities for accounting periods beginning on of after 1 January 2005, which corresponded with the amendments to the Companies Act 1985 resulting from the EU Accounts Modernisation Directive that also required the classification of items on the balance sheet to have regard to their substance.
FRS 25 also has the effect of withdrawing FRS 4 ‘Capital Instruments’, except for material on the measurement of debt and gains and losses on the repurchase of debt. This material is withdrawn for entities applying the measurement requirements in FRS 26, but remains applicable for other entities. FRS 25 will also supersede two UITF Abstracts: 33 ‘Obligations in capital instruments’; and 37 ‘Purchases and sales of own shares’. FRS 25 also replaces the offset rules in FRS 5 ‘Reporting the Substance of Transactions’.
The ASB issued revised disclosure requirements for financial instruments in FRS 29 replacing those set out in FRS 25 as issued. FRS 29 has the effect of implementing the amended disclosure requirements of IFRS 7 'Financial Instruments: Disclosures', issued by the IASB in August 2005, in the UK. FRS 29 is applicable for accounting periods beginning on or after 1 January 2007.
During August 2008 the ASB issued an amendment to FRS 25 to change the classification from liabilities to equity of certain puttable financial instruments and for certain financial instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation. These changes, upon implementation, would ensure that FRS 25 remains converged with IAS 32, which was amended by the IASB in February 2008.
FRS 26 (IAS 39) Financial Instruments: Recognition and Measurement
FRS 26 applied to accounting periods commencing on or after 1 January 2005 for all listed entities following UK standards, and to those commencing on or after 1 January 2006 for unlisted entities whose financial statements were prepared in accordance with the fair value accounting rules set out in the Companies Act.
FRS 26 was amended on 25 April 2006. The amendment had the impact of implementing the IAS 39 material dealing with recognition and derecognition into FRS 26. The amendment was effective for accounting periods commencing on or after 1 January 2007, with earlier adoption permitted. Transitional provisions were also set out for initial adoption of the amendments.
It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective
FRS 26 implemented the recognition, measurement and hedge accounting requirements of the international standard IAS 39.
FRS 26 requires:
- all derivatives and all financial assets and financial liabilities that are held for trading to be recognised and measured at fair value. All changes in those fair values to be recognised immediately in the profit and loss account (P&L);
- all loans and receivables held as assets and all financial assets that are being held to maturity to be initially recognised at fair value but subsequently measured at cost-based amounts;
- all other financial assets ('available-for-sale financial assets') to be recognised and measured at fair value with gains and losses recognised immediately in the statement of total recognised gains and losses (STRGL); and
- all other financial liabilities to be recognised at fair value but subsequently measured at cost-based amount
There are two exceptions to this.
- The entity can choose to measure at fair value any financial asset or financial liability that would otherwise be measured at a cost-based amount, as long as this choice is made on initial recognition and provides more relevant information either by eliminating a measurement inconsistency or where a group of financial items are managed and evaluated on a fair value basis. If this 'fair value option' is chosen, all changes in fair value should be recognised immediately in the P&L.
- The requirements may be modified by the use of hedge accounting techniques.
Hedge accounting is a special type of accounting that generally involves deferring the recognition in the P&L of gains and losses that would otherwise be recognised there immediately. FRS 26 permits the use of hedge accounting in accounting for financial instruments, but only if:
- the hedging relationship involved was designated at the outset as a hedge and the hedge meets certain minimum effectiveness criteria and certain other detailed requirements; and
- the hedge accounting techniques prescribed by the standard are adopted
FRS 26 implements the measurement and hedging requirements of IAS 39 in their full. However, entities applying FRS 26 will still be subject to the provisions of the Companies Act, which restricts the use of fair value measurement for liabilities. These entities will not, as a result, be able to take full advantage of the fair value option in FRS 26. FRS 26 includes guidance on the extent to which liabilities may be accounted for at fair value.
FRS 26 has the effect of withdrawing the material in FRS 4 'Capital Instruments' on the measurement of debt and gains and losses on the repurchase of debt. The remainder of FRS 4 is withdrawn by FRS 25 'Financial Instruments: Disclosure and Presentation'. FRS 26 also supersedes UITF Abstract 11 'Capital instruments: issuer call options'.
In October 2005 the ASB issued an amendment to FRS 26 which has the effect of implementing in full into FRS 26 the following amendments to IAS 39, by the IASB:
- transition and initial recognition of financial assets and financial liabilities;
- cashflow hedge accounting of forecast intragroup transactions;
- the fair value option; and
- financial guarantee contracts and credit insurance. Further details are set out in: Financial Instruments - long term project.
Further details are set out in: Financial Instruments - long term project.
FRS 27 Life Assurance
- FRS 27 (December 2004) (PDF)
- Memorandum of Understanding (MoU) (withdrawn May 2016) (PDF)
- Report to HM Treasury 'Financial Reporting for Life Assurance' (June 2005) (PDF)
FRS 27 applied to all entities with a life assurance business (including a life reinsurance business), and was effective for accounting periods ending on or after 23 December 2005, except that some smaller friendly societies were exempt until 2006 or 2007.
Under the terms of a Memorandum of Understanding (MoU) between the ASB, the Association of British Insurers and the major UK life assurers and bancassurers, the companies agreed to apply the standard from 2005 even though, as entities reporting under IFRS, it was not mandatory for them. In addition these companies agreed to make disclosures for 2004 in their operating and financial review (or elsewhere in their annual report) covering much of the information that would be required under the standard. The ABI agreed to encourage a similar approach by insurance entities not signatories to the MoU. This MoU was withdrawn in May 2016.
The FRS builds on the new prudential capital requirements regime recently introduced by the Financial Services Authority (FSA) for with-profits life assurance business, based on the ‘realistic balance sheet’ approach, and set out in FSA Policy Statement 04/24. This approach takes into account constructive obligations to pay future bonuses and uses modelling techniques to value options and guarantees.
FRS 27 requires:
- For large UK with-profits life assurance businesses falling within the scope of the FSA's realistic capital regime, liabilities to policyholders are required by the FRS to be measured on the basis determined in accordance with that regime, subject to adjustments specified in the FRS. Further adjustments are made to related assets and deferred tax for consistency with the measurement of the realistic liabilities, and the resulting effect on profit and loss account is offset by a corresponding transfer to the fund for future appropriations or, in the case of a mutual, to retained surplus.
- For all entities within the scope of the FRS, the fund for future appropriations must be separately presented on the balance sheet and an explanation given of a negative FFA balance.
- The FRS restricts the recognition of the value of in-force business, but permits entities that currently recognise such value to continue to do so, subject to limitations on the way this value may be determined.
- A capital statement is required setting out the total available capital for sections of the life assurance business of the entity.
- The capital statement is required to be supported by information on regulatory capital requirements or management’s capital targets, the basis of determining regulatory capital, the sensitivity of liabilities and capital to changes in market variables and key assumptions, and the entity's capital management policies. An appendix to the FRS sets out an example of a capital statement and its supporting narrative.
- Information is also required to be disclosed on the assumptions used in the measurement of liabilities, and the terms and conditions of options and guarantees relating to life assurance contracts. For those liabilities to policyholders resulting from options and guarantees that are not measured at fair value or on a statistical basis that takes into account all possible outcomes of the option or guarantee, entities must provide additional information on the nature and extent of the options and guarantees and the possible liabilities that may arise.
- A movements table is also required to show the changes in capital from one reporting date to the next.
FRS 27 was one part of the Board’s response to a request from the Financial Secretary to the Treasury, in March 2004, for a study into accounting for with-profits business by life assurers. The other part of this response was a report by the Board on life assurance financial reporting, issued in June 2005. This report summarised the needs of different users of financial statements of life assurance entities, and the improvements introduced by FRS 27 to meet those needs. It also analysed key areas where further improvements could be made, including the measurement of liabilities, profit recognition, the distinction between equity and liabilities, and the role of embedded value methods. The report concludes that these complex issues, that could not be addressed in the timescale available for the development of FRS 27, are best considered in the wider context of international insurance accounting that is being addressed by the IASB’s project. The Board will continue to monitor and give input to this wider IASB project.
FRS 28 Corresponding Amounts
FRS 28 set out the requirements for the disclosure of corresponding amounts1 for items shown in an entity’s primary financial statements and the notes to the financial statements.
The ASB issued an amendment to FRS 6 in June 2009. The amendment updates the references in the FRS such that they correspond with the requirements set out in the Companies Act 2006 and the Large and Medium-sized Companies and Group (Accounts and Reports) Regulations 2008.
The FRS is effective for financial statements relating to accounting periods which begin on or after 1 January 2005 and which end on or after 1 October 2005. The amended FRS takes effect for accounting periods beginning on and/or after 6 April 2008, when the provisions of the Act/or the Regulations are applied to other entities (eg. limited liability partnerships), if later.
The requirements of the FRS apply to financial statements that are intended to give a true and fair view except where an accounting standard or Urgent Issues Task Force Abstract permits or requires an alternative treatment.
Reporting entities applying the Financial Reporting Standard for Smaller Entities (FRSSE) currently applicable are exempt from the FRS.
FRS 28 requires corresponding amounts to be shown for items in the primary financial statements and notes to the financial statements. Where corresponding amounts are not directly comparable with the amount to be shown in respect of the current financial year, they shall be adjusted and the basis for adjustment disclosed in a note to the financial statements.
The FRS permits a reporting entity not to show corresponding amounts for certain items in the notes to the financial statements that were previously exempted under company law. It also does not require corresponding amounts for the earliest period presented where financials statements for two or more consecutive periods are presented together.
The development of the FRS started in March 2005 when the ASB issued FRED 35 ‘Corresponding Amounts’. Reflecting respondents view the FRS adopts the proposals in FRED 35. Consistent with the objective of the FRS to maintain the existing legal requirements for corresponding amounts a consequential amendment has been made to the Financial Reporting Standard for Smaller Entities (effective January 2005).
1 Also described as ‘comparative figures’ or ‘comparative information’ in other accounting standards.
FRS 29 (IFRS 7) Financial Instruments: Disclosures
FRS 29 implemented the International Financial Reporting Standard IFRS7 ‘Financial Instruments: Disclosures’, together with the related amendment to IAS 1 ‘Presentation of Financial Statements – Capital Disclosures’.
FRS 29 applies only to entities applying FRS 26 – the scope of that standard covers listed entities and entities that use the fair value accounting rules of the Companies Act 1985 to produce their financial statements. The ASB has issued proposals for extending the scope of FRS 26 to all entities (other than those who apply the requirements of Financial Reporting Standard for Smaller Entities) but has not yet reached a conclusion on implementing this proposal.
For entities applying it, FRS 29 replaces the disclosure requirements of FRS 25 (IAS 32) ‘Financial Instruments: Disclosure and Presentation’ and is mandatory for these entities for accounting periods commencing on or after 1 January 2007; earlier adoption is allowed to enable entities to move directly to the new requirements on first applying FRS 26, avoiding the need to make two changes in quick succession. The new standard bases its risk disclosure requirements on the entity’s management’s internal risk monitoring information, so reducing the burden for additional data collection.
The disclosures required by the Standard include:
- information on the significance of financial instruments for an entity’s financial position and performance;
- information about exposure to risks arising from financial instruments. These include, where relevant, certain minimum qualitative disclosures about credit, liquidity and market risks together with descriptions of management’s objectives, policies and processes for managing those risks. Quantitative disclosures are also required to provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity’s key management;
- the entity’s objectives, policies and processes for managing capital. This would include quantitative data about what the entity regards as capital, and whether the entity has complied with any capital requirements and if it has not complied, the consequences of such non-compliance.
Certain companies are exempted from the requirements of the Standard:
- subsidiary undertakings where at least 90 percent of the voting rights are held within the group
- parent companies in their single-entity financial statements
provided the entity is included in publicly available consolidated financial statements which include disclosures that comply with this Standard.
In November 2008 the ASB issued Financial Reporting Exposure Draft (FRED) ‘Improvements to Financial Instrument Disclosures’ which proposes amendments to FRS 29 consistent with those the IASB is proposing for IFRS 7 ‘Financial Instruments: Disclosures’. The proposed amendments seek to improve the information, available to users of financial reports, about fair value measurements and the liquidity risk of financial instruments. Specifically, the ASB is proposing to:
- Introduce a fair value hierarchy for inputs into fair value measurements
- Require additional information about financial instruments carried at fair value in the balance sheet
- Require fair value disclosures for instruments carried in the balance sheet on a basis other than fair value
- Change the liquidity risk maturity analysis for derivative financial liabilities to expected values (based on how the entity manages liquidity risk)
- Require credit risk disclosures for loans and receivables
The FRED closes for comment on 30 January 2009.
FRS 30 Heritage Assets
SSAP 4 Accounting for Government Grants
SSAP 4 deals with the accounting treatment and disclosure of government grants and other forms of government assistance, including grants, equity finance, subsidised loans and advisory assistance. It is also indicative of best practice for accounting for grants and assistance from other sources.
Government grants are made in order to persuade or assist enterprises to pursue courses of action that are deemed to be socially or economically desirable. The range of grants available is very wide and changes regularly, reflecting changes in government policy. More significantly, different grants tend to be given on different terms as to the eligibility, manner of determination, manner of payment and conditions to be fulfilled.
The term 'government' is defined widely in SSAP 4. Thus, it includes not only the national government and all the various tiers of local and regional government of any country, but also government agencies. It also includes the European Commission and other EU bodies, together with other international bodies and agencies.
The general rule of SSAP 4 is that government grants should be recognised in the profit and loss account so as to match them with the expenditure towards which they are intended to contribute. To the extent, therefore, that grants are made as a contribution towards specific expenditure on fixed assets, they should be recognised over the useful economic lives of the related assets. In contrast, grants made to give immediate financial support or to reimburse costs already incurred should be recognised in the profit and loss account in the period in which they become receivable; those made to finance the general activities of an entity should be recognised in the profit and loss account in the period in which they are paid.
SSAP 4 is effective for accounting periods starting on or after 1 July 1990.
SSAP 5 Accounting for Value Added Tax
SSAP 5 seeks to achieve uniformity of accounting treatment of value added tax (VAT) in financial statements.
In the UK and the Republic of Ireland, VAT is a tax on the supply of goods and services that is eventually borne by the final consumer but collected at each stage of the production and distribution chain. As a general principle, therefore, the treatment of VAT in the accounts of a trader should reflect his role as a collector of the tax and VAT should not be included in income or in expenditure whether of a capital or revenue nature. There will, however, be circumstances in which a trader will bear the VAT, and in such cases where the VAT is irrecoverable, it should be included in the cost of the items reported in the financial statements.
SSAP 5 is effective for accounting periods starting on or after 1 January 1974.
SSAP 9 Stocks and Long-term Contracts
SSAP 9 gives guidance on the accounting treatment of both stocks (inventories) and long-term contracts.
The determination of profit for an accounting period involves the allocation of costs to reporting periods. As part of this process, the cost of unsold or unconsumed stocks is?to the extent that it is believed to be recoverable?carried forward until the period in which the stock is sold or consumed.
Separate consideration needs to be given to long-term contracts. Owing to the length of time taken to complete such contracts, to defer recording turnover and taking profit into account until completion may result in the profit and loss account (income statement) reflecting not so much a fair view of the results of the activity of the company during the period but rather the results relating to contracts that have been completed in the period. It is therefore appropriate to take credit for ascertainable turnover and profit while contracts are in progress in accordance with the guidance given in SSAP 9.
SSAP 9 is effective for accounting periods starting on or after 1 July 1988. If put into effect as expected in 2003, the proposed standard in FRED 28 'Inventories & Construction and Service Contracts' will supersede SSAP 19.
SSAP 13 Accounting for Research and Development
SSAP 13 gives guidance on the accounting policies to be followed in respect of research and development expenditure. These policies must have regard to the fundamental accounting concepts, including the 'accruals' concept and the 'prudence' concept.
The term 'research and development' is used to cover a wide range of activities, including those in the services sector. Classification of expenditure is often dependent on the type of business and its organisation. However, it is generally possible to recognise three broad categories of activity, namely pure research, applied research and development.
The standard defines these categories and specifies the accounting policies that may be followed for each.
Expenditure on pure and applied research (unless it is expenditure on fixed assets, which should be capitalised and amortised over their useful lives) should be written off in the year of expenditure through the profit and loss account.
Development expenditure should also be written off in the year of expenditure except in certain strictly defined circumstances. In situations where all the relevant criteria are met, it is permissible to defer development expenditure to the extent that its recovery can reasonably regarded as assured. Such deferred development costs must be amortised in future years.
SSAP 13 is effective for accounting periods starting on or after 1 January 1989.
SSAP 15 - Status of SSAP 15
SSAP 15 is the accounting standard that has now been superseded by FRS 19 'Deferred Tax'
However, FRS 19 need not be applied until financial years ending on or after 23 January 2002.
Background to SSAP 15
The amount of tax payable on the profits of a particular period often bears little relationship to the amount of income and expenditure appearing in the financial statements. This results from the different basis on which profits are arrived at for the purpose of tax computations as opposed to the basis on which profits are stated in financial statements.
The different basis of arriving at profits for tax purposes derives from two main sources. Firstly, certain types of income are tax-free and certain types of expenditure are disallowable, giving rise to 'permanent differences' between taxable and accounting profits. Permanent differences also arise where there are tax allowances or charges with no corresponding amount in the financial statements. Secondly, there are items that are included in the financial statements of a period different from that in which they are dealt with for tax purposes, giving rise to 'timing differences'; thus revenue, gains, expenditure and losses may be included in the financial statements either earlier or later than they enter into the computation of profit for tax purposes.
Requirements of SSAP 15
There are various different bases for computing deferred tax. SSAP 15 requires that deferred tax should be calculated under the 'liability method', ie calculated at the rate of tax that it is estimated will be applicable when the timing differences reverse. Deferred tax is accounted for on the 'partial provision' basis, which means that tax deferred or accelerated by the effect of timing differences should be accounted for only to the extent that it is probable that a liability or asset will crystallise (based on reasonable assumptions). The standard also lays out presentation and disclosure requirements.
SSAP 15 is effective for accounting periods starting on or after 1 April 1985.
SSAP 17 Accounting for Post Balance Sheet Events
SSAP 17 gives guidance on the identification and treatment of two types of post balance sheet events: adjusting and non-adjusting. For the purposes of the standard, post balance sheet events are defined as those that occur between the balance sheet date and the date on which the financial statements are approved by the board of directors.
The standard distinguishes between two different types of post balance sheet events. Adjusting events are those post balance sheet events which provide additional evidence of conditions existing at the balance sheet date. Non-adjusting events are those post balance sheet events which concern conditions that did not exist at the balance sheet date.
Events arising after the balance sheet date need to be reflected in financial statements if they provide additional evidence of conditions that existed at the balance sheet date and materially affect the amounts to be included.
To prevent financial statements from being misleading, disclosure needs to be made by way of notes of other material events arising after the balance sheet date which provide evidence of conditions not existing at the balance sheet date. Disclosure is required where this information is necessary for a proper understanding of the financial position.
SSAP 17 is effective for accounting periods starting on or after 1 September 1980. It is being superseded by FRS 21 (IAS 10), which is effective for accounting periods starting on or after 1 January 2005.
SSAP 19 Accounting for Investment Properties
Investment properties are interests in land and/or buildings that are held for their investment potential, rather than for consumption in the business operations. In such cases the current value of these investments, and changes in current value, are of prime importance rather than a calculation of systematic annual depreciation. SSAP 19 therefore requires investment properties to be included in the balance sheet at their open market value, but without charging depreciation. Investment properties are thus treated differently from the generality of fixed assets, which are subject to depreciation charges to reflect, on a systematic basis, the wearing out, consumption or other loss of value of the asset required by FRS 15.
IASC is at present reviewing its standard, IAS 25 'Accounting for Investments', which includes the treatment of investment properties. The ASB is following and contributing to the international debate on investment properties and may review SSAP 19 in due course, in light of the outcome of the IASC project.
SSAP 19 is effective for accounting periods starting on or after 1 July 1981.
SSAP 20 Foreign Currency Translation
For entities applying FRS 23 (IAS 21) 'The Effects of Changes in Foreign Exchange Rates', SSAP 20 is withdrawn on implementation of FRS 23.
The objective of SSAP 20's requirements are:
- the translation of foreign currency transactions and financial statements should produce results that are generally compatible with the effects of exchange rates on a company's cash flows and its equity;
- the financial statements should present a true and fair view of the results of management actions; and
- consolidated financial statements should reflect the financial results of and relationships as measured in the foreign currency financial statements prior to translation.
A company may engage in foreign currency operations in two main ways.
- It may enter directly into business transactions that are denominated in foreign currencies; the results of these transactions will need to be translated into the currency in which the company reports.
- Foreign operations may be conducted through a foreign enterprise that maintains its accounting records in a currency other than that of the investing company; in order to prepare consolidated financial statements it will be necessary to translate the complete financial statements of the foreign enterprise into the currency used for reporting purposes by the investing company.
In individual financial statements, the general rule of SSAP 20 is that the result of each transaction should be translated into the company's local currency using the exchange rate in operation at the date on which the transaction occurred. The standard also gives rules on the treatment of exchange gains and losses arising on settlement of a transaction or where a transaction is unsettled at the year-end.
At the consolidated financial statements stage, the standard requires that the method used to translate financial statements for consolidation purposes should reflect the financial and operational relationship that exists between an investing company and its foreign enterprise. The standard thus allows two alternative methods of translation of a foreign entity's financial statements, depending on whether the enterprise is a separate, quasi-independent entity, or rather where it represents a direct extension of the trade of the investing company.
SSAP 20 is effective for accounting periods starting on or after 1 April 1983. If put into effect as expected in 2003, the proposed standard in FRED 24 'The Effects of Changes in Foreign Exchange Rates & Financial Reporting in Hyperinflationary Economics' will supersede SSAP 20.
SSAP 21 Accounting for Leases and Hire Purchase contracts
Leases and hire purchase contracts are means by which companies obtain the right to use or purchase assets. In the UK there is normally no provision in a lease contract for legal title to the leased asset to pass to the lessee.
A hire purchase contract has similar features to a lease except that under a hire purchase contract the hirer may acquire legal title by exercising an option to purchase the asset upon fulfilment of certain conditions (normally the payment of an agreed number of instalments).
SSAP 21 defines two different types of lease: finance leases and operating leases. The distinction between a finance lease and an operating lease will usually be evident from the terms of the contract between the lessor and the lessee. SSAP 21 requires lessees to capitalise material finance leases because the transaction is considered to be the economic equivalent of borrowing to acquire an asset; accordingly, the lessee records the asset and the liability to pay lease rentals in its balance sheet.
An operating lease is more closely akin to the hire of an asset and so the lessee is not required to capitalise the lease.
SSAP 21 also prescribes the accounting treatment in respect of leases to be adopted by lessors.
SSAP 21 is effective for accounting periods starting on or after 1 July 1984 (subject to certain transitional arrangements).
Guidance notes on the application of SSAP 21 were issued in August 1984; they do not form part of the statement of standard accounting practice.
A current project on leasing is developing a standard that will supersede SSAP 21.
SSAP 24 Accounting for Pension Costs
The provision of a pension is part of the remuneration package of many employees. Pension costs form a significant proportion of total payroll costs and they give rise to special problems of estimation and of allocation between accounting periods. Accordingly, it is important that standard accounting practice exists concerning the recognition of such costs in the employers' financial statements.
SSAP 24 deals with the accounting for, and the disclosure of, pension costs and commitments in the financial statements of enterprises that have pension arrangements for the provision of retirement benefits for their employees. It requires employers to recognise the expected cost of providing pensions on a systematic and rational basis over the period during which they derive benefit from the employees' services. This is done by recognising a regular cost for the pension every year. Variations from the regular cost are allocated over the expected remaining service lives of the current employees.
SSAP 24 is effective for accounting periods starting on or after 1 July 1988 (subject to certain transitional arrangements).
SSAP 24 is being superseded by FRS 17, which is being implemented in stages between 22 June 2001 and 22 June 2003.
SSAP 25 Segmental Reporting
Many entities carry on several classes of business or operate in several geographical areas with different rates of profitability, different opportunities for growth and different degrees of risk. It is not usually possible for the user of the financial statements of such an entity to make judgements about either the nature of the entity's different activities or their contribution to the entity's overall financial results unless the financial statements provide some segmental analysis of the information they contain.
The purpose of SSAP 25 is to provide information to assist users of financial information to make judgements about the nature of the entity's different activities and their contributions to the entity's overall financial position. SSAP 25 therefore requires the disclosure of turnover, segment result and segment net assets by class of business and by geographical segment.
SSAP 25 is effective for accounting periods starting on or after 1 July 1990.
Superseded reporting statements
- Statement of Principles
- Interpretation for Public Benefit Entities
- Operating and Financial Review
- Preliminary Announcements
- Half-Yearly Financial Reports
- Retirement Benefits - Disclosures
The following reporting statements have been withdrawn.
Statement of Principles
- Statement of Principles for Financial Reporting (December 1999) (PDF)
- Introductory Note - Statement of Principles 1999 (PDF)
What is a Statement of Principles
An accounting standard-setter's conceptual framework or statement of principles describes the accounting model that it uses as the conceptual underpinning for its work. Such statements therefore typically describe the standard-setter's views on:
- the activities that should be reported on in financial statements
- the aspects of those activities that should be highlighted
- the attributes that information needs to have if it is to be included in the financial statements
- how information should be presented in those financial statements.
The Purpose of the Statement of Principles
The main role of the Statement is to provide conceptual input into the FRC's work on the development and review of accounting standards. The Statement is not, therefore, an accounting standard nor does it contain any requirements on how financial statements are to be prepared.
Interpretation for Public Benefit Entities
In June 2007 the Board published an Interpretation for Public Benefit Entities of the Statement of Principles for Financial Reporting (PDF). The Interpretation explains how the principles in the Statement apply for public benefit entities.
Operating and Financial Review
When the statement was issued in 1998 the publication of preliminary announcements was a requirement, but the issuance of them has since been made voluntary.
The statement Preliminary Announcements (PDF) provided guidance which is intended to supplement the requirements concerning preliminary announcements in the Listing Rules.
The statement was withdrawn in March 2015 without replacement. The FRC will evaluate whether it should develop new guidance on certain aspects of preliminary announcements.
Half-Yearly Financial Reports
The 2007 Statement Half-Yearly Financial Reports (PDF) was an update and replacement of the 1997 statement Interim Reports, in particular reflecting the implementation of the EU Transparency Directive in the UK through the Disclosure and Transparency Rules (DTR).
The 2007 Statement Half-Yearly Financial Reports was withdrawn in March 2015 and replaced with FRS 104 Interim Financial Reporting (PDF).
FRS 104 constitutes the pronouncement on interim reporting referred to in DTR 4.2.10(4)(b).
Retirement Benefits - Disclosures
Objective and recommendations
The objective of this Reporting Statement (PDF) is to recommend disclosures for defined benefit schemes such that:
- the financial statements contain adequate disclosure of the cost of providing retirement benefits and the related gains, losses, assets and liabilities;
- the users of financial statements can obtain a clear view of the risks and rewards arising from defined benefit schemes; and
- the funding obligations of the entity in relation to liabilities of a defined benefit schemes are clearly identified.
The Reporting Statement sets out six principles to be considered when providing disclosures for defined benefit schemes in the financial statements. The six areas addressed by the principles are:
- the relationship between the entity and trustees (managers) of the defined benefit scheme;
- the principal assumptions used to measure scheme liabilities;
- the sensitivity of the principal assumptions used to measure the scheme liabilities;
- how the liabilities arising from defined benefit schemes are measured;
- the future funding obligations in relation to the defined benefit scheme; and
- the nature and extent of the risks arising from financial instruments held by the defined benefit scheme.
- The principles set out in the Reporting Statement aim to assist the users of financial statements in understanding the risks and rewards, and funding obligations, arising from defined benefit schemes.
Role of the Reporting Statement
The Reporting Statement is designed as a formulation of best practice; it is intended to have persuasive rather than mandatory force. The Reporting Statement is written for any entity that operates or sponsors a defined benefit scheme.
The Reporting Statement recommends that the directors provide disclosures in the notes to the financial statements that complement the disclosure requirements set out in FRS 17 'Retirement Benefits'. The extent of disclosure required depends on the significance to the entity of its participation in defined benefit schemes and of its exposure to risk arising from those schemes.
As the amendment to FRS 17 replaced the disclosure requirements set out in the previous FRS 17 with those of International Accounting Standards (IAS) 19 'Employee Benefits' the ASB noted the Reporting Statement can be applied by entities applying either UK or International Financial Reporting Standards.
In developing the Reporting Statement the ASB was conscious that any additional disclosure requirements, beyond those set out in the amended FRS 17, should address the needs of users whilst not being cumbersome to preparers. The ASB is of the view a Reporting Statement which sets out principles for disclosure, rather than specific requirements, allows entities the flexibility to provide disclosures that are appropriate to their exposure to risks and rewards arising from defined benefit schemes.
The Accounting Standards Board (ASB) published FRS 17 'Retirement Benefits' in November 2000. Its full requirements only became mandatory for accounting periods beginning on or after 1 January 2005. Following its implementation, some commentators expressed a concern that the financial statements do not contain sufficient information in relation to defined benefit schemes to allow users of the financial statements to obtain a clear view of the risks and rewards arising from defined benefit schemes.
In 2006 the ASB undertook a review of the disclosure requirements for defined benefit schemes as set out in FRS 17. This review was distinct from the wider research project the ASB is undertaking into the financial reporting of pensions, which is a far reaching project reconsidering the fundamental principles of accounting for retirement benefits.
Following initial research on possible improvements to disclosures, in May 2006, the ASB issued for comment a Financial Reporting Exposure Draft (FRED) that proposed to replace the disclosure requirements of FRS 17 with those of IAS 19 'Employee Benefits'. In addition the FRED set out a draft Reporting Statement 'Retirement Benefits - Disclosures'.
In deciding to propose the draft Reporting Statement the ASB considered the amended FRS 17 addressed many, but not all, of the concerns of commentators. The draft Reporting Statement, therefore, proposed disclosures that would complement those disclosures required by the amended FRS 17.
Respondents to the FRED were generally in support of the proposal to amend FRS 17 and in December 2006 the ASB issued an amendment to FRS 17. Respondents, however, raised a number of concerns in relation to the proposals set out in the draft Reporting Statement. Those concerns were taken into consideration when developing the final Reporting Statement, which was issued in January 2007.