FRC seeks to clarify two UK accounting standards

The Financial Reporting Council (FRC) has issued two exposure drafts proposing amendments to UK and Ireland accounting standards, in order to clarify issues when reporting either going concern issues or rent concessions

The FRC said it has become aware of an unintentional difference between the requirements for assessing and reporting on the going concern basis of accounting when preparing interim financial reports in accordance with EU-adopted IFRS and FRS 104 Interim Financial Reporting.

EU-adopted IFRS requires management to assess an entity’s ability to continue as a going concern and disclose any related material uncertainties when preparing interim financial statements. Although these requirements are not contained within IAS 34 Interim Financial Reporting, they apply to condensed interim financial statements prepared in accordance with IAS 34.

FRS 104 is based on the requirements of IAS 34, but does not contain any requirements that explicitly cover the assessment and reporting on the going concern basis of accounting.

However, FRS 104 currently requires an entity to include a statement that the same accounting policies are applied in the interim financial statements as compared with the most recent annual financial statements, which would include any statement about the going concern basis of accounting.

FRED 75 Draft amendments to FRS 104 – Going concern proposes to introduce requirements covering going concern in a similar way to EU-adopted IFRS. This will help to ensure consistency between the information available to the users of interim financial reports prepared in accordance with IAS 34 and FRS 104.

It is intended to clarify the requirement to assess the going concern basis of accounting; and require the disclosure of any related material uncertainties, when preparing interim financial statements in accordance with FRS 104.

As FRS 104 already requires an assessment of the going concern basis of accounting, in order to include a statement that the same accounting policies are applied as compared to the most recent annual financial statements, this element of the proposals will not be a change for companies, and should be applied prior to these proposals being finalised. The disclosure of any related material uncertainties will enhance the information available to users of the interim financial statements.

The other amendment relates to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, and is in response to the impact of Covid-19.

Currently, the standard does not explicitly specify how to account for changes in lease payments that result from rent concessions. There are different views about how the requirements of FRS 102 shall be applied to such changes, specifically those arising from forgiven payments in operating lease agreements. The FRC says this has the potential for entities to account differently for changes in lease payments that have arisen under similar circumstances, which could be unhelpful to users of financial statements.

FRED 76 Draft amendments to FRS 102 and FRS 105 – Covid-19-related rent concessions proposes explicit requirements for accounting for temporary rent concessions for operating leases occurring as a direct consequence of the Covid-19 pandemic, and within a limited timeframe. They shall be recognised over the period the concession is intended to compensate, reflecting the economic substance of the concessions and their temporary nature.

Similar amendments are also proposed to FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime.

Both comment periods end on 1 September. The proposals in FRED 75 are expected to apply to interim periods beginning on or after 1 January 2021, and the proposals in FRED 76 are expected to apply to accounting periods beginning on or after 1 January 2020. In both cases early application will be permitted.

FRED 75 Draft amendments to FRS 104 Interim Financial Reporting Going concern

FRED 76 Draft amendments to FRS 102 and FRS 105 COVID-19-related rent concessions

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