UK GAAP Requiements

Question 1

What accounting standards do UK Companies have to follow?

Hint:

Size of group or company

• IFRS
• Frs100
• Frs101
• Frs102
• Frs105

Answer 1

FRS 100 Application of Financial Reporting Requirements. gives guidance on UK accounting standards The rules are as follows:

• Listed GROUPs must prepare their accounts under IFRS Standards.
  
  • – However, SUB’s can take advantage FRS 101 reduced disclosures & FRS102.
• All Other UK companies must apply:
  
  • FRS 102 The Financial Reporting Standard Applicable in the UK and the Republic of Ireland
    
    • or Voluntarily choose to apply IFRS,
• A small entity that applies FRS 102:
  
  • – Does not have to show OCI
  • – Does not have to produce a statement of cash flows
  • – Exempt from many disclosure requirements of FRS 102.
• If micro-entity may choose to apply FRS 105 The Financial Reporting Standard Applicable to the Micro-Entities Regime.

Question 2

Discuss the key principles of FRS 101 Reduced Disclosure Framework?

Answer 2

FRS 101 Reduced Disclosure Framework

• FRS 101 permits exemptions from many of the disclosure requirements found in IFRS
• FRS 101 can only be applied in the individual financial statements of subsidiaries and parent companies that fully apply IFRS
• Some public interest entities, such as banks, cannot take advantage of all of the exemptions they must still make disclosures with regards to financial instruments and fair value.

Background discussion:

• The application of FRS 101 results in cost-savings and time-savings for entities without severely impacting the quality of financial reporting.
• Moreover, full disclosures on a group level can be found in the consolidated statements, which are likely to be of greater use for investors and lenders.

Question 3

Discuss FRS 105 key principles?

What entity qualifies as a micro-entity?

Example of accounting transactions specifically prohibited?

Answer 3

• *FRS 105 The Financial Reporting Standard Applicable to the Micro-entities Regime**
• *A micro-entity if it satisfies two of the following three requirements:**
• Turnover of not more than £632,000 a year
• Gross assets of not more than £316,000
• An average number of employees of 10 or less.

FRS 105 is based on FRS 102 but with some amendments to satisfy legal requirements and to reflect the simpler nature of micro-entities. For example, FRS 105:

• Prohibits accounting for:
  
  • Deferred Tax
  • Equity-Settled Share-based payments BEFORE the issue of the shares
• Prohibits Capitalisation of:
  
  • Borrowing costs.
  • Development expenditure as an intangible asset.
• Prohibits revaluation model for:
  
  • Property, Plant and Equipment,
  • Intangible Assets
  • Investment Properties
• Simplifies the rules around classifying a financial instrument as debt or equity.
• Removes the distinction between functional and presentation currencies.

There are very few disclosure requirements in FRS 105.

Question 4

Discuss the contents of FRS 102:

Objectives

Qualitative characteristics

Elements

Recognition

Measurement

Accruals basis

Offsetting

Answer 4

FRS 102 is a single standard organised by topic, based on IFRS for Small and Medium Entities (the SMEs Standard), although there are some differences.

The objective of financial statements

• • “provide information about an entity’s financial position, performance and cash flow
• - As well as the results of the stewardship of management.
• - This information should be useful to a range of users.”

Qualitative characteristics of information

• - Understandability – to users with a reasonable knowledge of business and accounting.
• - Relevance – capable of influencing the economic decisions of users.
• - Materiality – information is material, therefore relevant if its omission or misstatement could influence the decisions of users.
• - Reliability – free from material error, bias, and offers a faithful representation
• - Substance over form – economic substance rather than their legal form.
• - Prudence – caution should be exercised when making judgements.
• - Completeness – information should be complete, within the bounds of cost and materiality.
• - Comparability – users should be able to compare financials through time, and different entities.
• - Timeliness – information is more relevant if it is provided without undue delay.
• - Balance - between benefit and cost

Elements - The definitions of the elements are as follows:

• - Assets – a resource controlled by an entity from a past event from which future economic benefits are expected to flow to the entity.
• - Liabilities – a present obligation of an entity from a past event, the settlement of which is expected to result in an outflow of economic benefits.
• - Equity – the residual interest in the assets of the entity after deducting all its liabilities.
• - Income – increases in economic benefits in the reporting period that result in an increase in equity (other than contributions from equity investors).
• - Expenses – decreases in economic benefits in the reporting period that result in a decrease in equity (other than distributions to equity investors).

Recognition: An element should be recognised in the financial statements if:

• *- It is probable that economic benefits will flow to or from the entity
• Its cost or fair value can be measured reliably.**

Definitions and recognition criteria are based on the 2010 Conceptual Framework. As such, the definitions of assets and liabilities and the recognition criteria outlined in FRS 102 differ from those in the 2018 Conceptual Framework

Measurement - FRS 102 says that there are two common measurement bases:

• • Historical cost – the amount of cash and cash equivalents paid to acquire an asset, or the amount of cash and cash equivalents received in exchange for an obligation.
• - Fair Value – the amount for which an asset could be exchanged, or a liability settled, between knowledgeable parties in an arm’s length transaction.
• Accruals basis*
• *FRS 102 emphasises that financial statements, other than statements of cash flow, are prepared using the accruals basis.**
• Offsetting*
• *An entity should not offset assets and liabilities unless required to or permitted by FRS 102**.

Question 5

What Factors to Consider when choosing between FRS 105 to FRS 102?

Answer 5

FRS 105 requires fewer disclosures than FRS 102. This means:

• Reduced the time and cost burden of producing financial statements.
• However, consideration should be given to whether the users of the financial statements will find this lack of disclosure a hindrance to making economic decisions. This is unlikely in the case of such a small company.

FRS 105 does not permit PPE, Intangible Assets or Investment Properties to be held at fair value.

• This will have an impact on the perception of the company’s financial position, particularly if carrying amounts of assets are materially lower than other companies as a result.

Accounting policy choices allowed in FRS 102 have been removed in FRS 105. e.g Borrowing Costs and R&D costs must be expensed.

• Profits reported under FRS 105 may be lower than if FRS 102 was applied.
• If competitors prepare financial statements in accordance with FRS 105 then it will be easier to compare and benchmark performance against them.

If the company is expected to grow quickly:

• might be easier to simply apply FRS 102 from the outset. That way, it will avoid the burden of transitioning from FRS 105 to FRS 102 at a later date.

Question 6

Key differences between FRS 102 and International Financial Reporting Standards?

Concepts and principles

Financial statement presentation

• True and Fair Override
• SFP Layout
• Income statement
• Statement of Cashflows

Answer 6

Concepts and Principles

Two commonly used measurement bases. These are:

• Historical cost, and
• Frs102 Fair value VS IFRS = Current Value.

Financial statement presentation

• True and Fair Override
  
  • To comply with the Companies Act, FRS 102 allows a ‘true and fair override’. If compliance with FRS 102 is inconsistent with the requirement to give a true and
    fair view,thedirectors must depart from FRS 102.Details of any departure, and the reasons for it and its effect are disclosed.​
• SFP Layout
  
  • The format is set out as: Assets – Liabilities = Equity
• Income statement
  
  • ​Refers to the statement of financial performance as the ‘income statement’ (as opposed to ‘the statement of profit or loss).
  • Its format is dictated by the Companies Act.
• Statement of Cashflows
  
  • ​Under FRS 102, small entities, mutual life assurance companies, pension funds and certain investment funds are not required to produce a statement of cash flows.
  • This exemption does not exist in the IAS 7 Statement of Cash Flows.

Question 7

What are the differences between FRS102 and conceptual framework for the definitions of elements?

Answer 7

Main Changes

Assets:-

• Original =“Economic benefits are Expected to flow to the entity”
• Now = An economic resource is a right that has the Potential to produce economic benefits

Meaning of change -

• - Clarifies an asset is an economic resource
• - Might affect the recognition of some assets

Liabilities:-

• Original =“A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits”
• Now =
  
  • “A present obligation of the entity to transfer an economic resource as a result of past events,
  • An obligation is a duty or responsibility that the entity has no practical ability to avoid”

Meaning of change -

• Clarifies that liability is the obligation to transfer the economic resource, not the ultimate outflow of economic benefit
• Deletion of ‘expected flow ’— might affect the recognition of some liabilities
• ​Introduction of the ‘no practical ability to avoid’ criterion to the definition of obligation

Question 8

Explain the FRS 102 Differences with IAS2 Inventories?

Answer 8

FRS 102 provides more guidance than IAS 2 Inventories about what costs should be included in production overheads.

For example:

• FRS 102 permits the reversal of inventory impairments, whereas IAS 2 does not.
• Production overheads to include a share of restoration cost of PPE
• • it says that production overheads should include the costs of any obligation to restore a site on which an item of property, plant and equipment is located that are incurred during the reporting period as a consequence of having used that item of property, plant and equipment to produce inventory.

Question 9

Explain the FRS 102 Differences with the measurement of Financial Instruments?

Answer 9

FRS 102 adopts a simplified approach to financial instruments:

• - Investments in shares are measured at fair value through profit or loss, if their fair value can be reliably measured. Otherwise, they are measured at cost less impairment.
• - Simple debt instruments (whether receivable or payable) are measured at amortised cost.
• - Commitments to make or receive a loan are measured at cost (if any) less impairment.
• - More complicated debt instruments (whether receivable or payable) are measured at fair value through profit or loss.

Question 10

Explain the FRS 102 Differences with Impairments of a financial instrument?

Answer 10

FRS 102 adopts an incurred loss model.

• Impairment loss is only recognised in respect of financial assets (Loan’s given out) if objective evidence of impairment has occurred
  – such as the bankruptcy of a credit customer.
• For an Asset measured at amortised cost,
• *Impairment loss is calculated as the difference between its carrying amount and the present value of the expected future cash flows**
• (discounted at the original effective rate of interest).

In contrast,

• IFRS 9 Financial Instruments adopts an ‘expected loss’ model for financial asset impairments.
• This involves recognising a loss allowance for all financial assets measured at amortised cost or fair value through other comprehensive income (except equity instruments) based on the level of credit risk.

Question 11

Explain the FRS 102 Differences with the derecognition of a financial instrument?

Answer 11

Derecognition:

FRS 102 contains simpler rules than IFRS 9 for deciding whether or not to derecognise a financial instrument.

Question 12

Explain the FRS 102 Differences with Joint Ventures?

Answer 12

Joint ventures

FRS 102 uses the term ‘joint venture’ with regards to any arrangement whereby an economic activity is subject to joint control.

FRS 102 says that there are three types of joint ventures:

• Jointly controlled operations – this is where each venturer contributes its own assets for use by the joint venture.
• Jointly controlled assets – this is where the venturers jointly control or jointly own the assets used by the joint venture.
• Jointly controlled entities – this involves the establishment of a separate entity that is under joint control. In the consolidated financial statements, such investments are accounted for using the equity method.

IFRS 11 Joint Arrangements classifies activities subject to joint control in one of two ways:

• Joint operations – where the venturers have rights to the assets, and obligations for the liabilities, of the operation.
• Joint ventures – where the venturers have rights to the net assets of the arrangement, usually as a result of a separate entity is established.

Question 13

Explain the FRS 102 Differences with Investment Property?

Answer 13

FRS 102 requires Investment Property to be accounting policy:

• - The use of the fair value model
  
  • Unless the fair value cannot be determined reliably.

In contrast, IAS 40 Investment Property allows entities to measure investment property using either the cost model or the fair value model.

• FRS 102 allows an entity that Rents investment property to another company in the same group to account for it as PPE in its separate financial statements. If so, it is measured at cost less depreciation.

IAS 40 does not permit this treatment.

• FRS 102 does not cover Property that is held to earn a rental income with ancillary services.

IAS 40 States that a property that is held to earn a rental income should be treated as PPE if ancillary services are provided that are significant to the arrangement e.g. the services provided to hotel guests.

Question 14

Explaining FRS 102 differences with intangible assets.

R&D Costs

Intangible assets gained Via grants

Useful Life of asset.

Answer 14

• **Intangible assets*
• R & Development Costs***
• FRS 102 says that the capitalisation of development expenditure is optional.

In contrast, IAS 38 Intangible Assets requires that development expenditure is capitalised if certain criteria are met.

• Grants*
• *FRS 102 specifies that an intangible asset acquired by way of:**
• - Grants shall be recognised at their fair value on the date that the grant is received or receivable.

Useful life

• FRS 102 specifies that intangible assets should be considered to have a definite useful economic life.
• FRS 102 says that if the useful life of an intangible asset cannot be measured reliably then it must be estimated. The estimate used should not exceed ten years.

IAS 38 allows entities to regard an intangible asset as having an indefinite useful economic life if they cannot foresee an end to the period over which the asset will generate economic benefits.

Question 15

Explain frs102 differences regarding Non-current assets.

Assets Held for sale

Borrowing costs

Estimate Review

Answer 15

• *Non-current assets
• Held for sale***

FRS 102 does not contain the concept of ‘held for sale’.

• - As such, assets are depreciated or amortised up to the date of disposal.
• - However, FRS 102 identifies the decision to sell an asset as a potential indicator of impairment, meaning that an impairment review should be performed.

Borrowing costs

• Under FRS 102, an entity may adopt a policy of capitalising borrowing costs.
• FRS 102 is more specific than IAS 23 about the capitalisation rate to be used.

IAS 23 Borrowing Costs requires that borrowing costs attributable to a qualifying asset are capitalised.

Estimate reviews

• FRS 102 only requires entities to review the useful economic life of assets if evidence exists that they have changed.

IAS 16 PPE and IAS 38 Intangible Assets require that an entity reviews residual values and useful lives annually.

Question 16

Explain frs102 differences with Leases

Answer 16

Leases

FRS 102 requires lessees to classify leases as operating leases or finance leases and account for them as follows:

• Finance leases – an asset and liability is recognised at the lower of the asset’s
  
  • fair value and
  • Present value of the minimum lease payments.
• Depreciation on the asset and interest on the liability is charged to profit or loss.
• Operating leases – lease payments are recognised as an expense in profit or loss on a straight-line basis
• This means that no liability is recognised in respect of operating leases in the
  financial statements of a lessee, even though it meets the definition of a liability
  as outlined in FRS 102.

IFRS 16 Leases requires lessees to recognise a lease liability and right-of-use asset in respect of all leases unless short-term or of low value.

Question 17

Explain frs102 differences with provisions?

Answer 17

Provisions

• FRS 102 simply states that a provision for restructuring costs should be recognised when a legal or constructive obligation exists.

IAS 37 Provisions, provides detailed guidance on restructuring provisions such as when a constructive obligation arises, and the amounts that can be included in the provision.

• FRS 102, financial guarantee contracts may be classified as provisions or contingent liability (depending on the probability of payment).

IFRS9, financial guarantee contracts are accounted for using IFRS 9 Financial Instruments

Question 18

Explain frs102 differences with revnue?

Answer 18

• *Revenue**
• *FRS 102 splits revenue accounting into three main areas:**
• Revenue from goods – recognised when the risks and rewards of ownership transfer from the buyer to the seller.
• Revenue from services – recognised according to the stage of completion.
• Revenue from construction contracts – recognised according to the stage of completion.

IFRS 15 Revenue from Contracts with Customers adopts a five-step model for revenue recognition.

Question 19

Explain frs102 differences with Government grants, recognition and repayments?

Answer 19

• Government grants*
• Recognition*
• *Under FRS 102, two methods of recognising government grants are allowed:**
• The performance model –
  
  • If no conditions are attached it is recognised as income immediately.
  • If conditions are attached to the grant, it is only recognised as income when all conditions have been met.
• The accruals model – Grants are recognised as income on a systematic basis, either as costs are incurred (revenue grants) or over the asset’s useful life (capital grants).

IAS 20 Accounting for Government Grants and the Disclosure of Government Assistance adopts an accruals model for government grant recognition.

Repayment - Government Grant may need to be repaid if their conditions are not complied with.

• FRS 102 simply says that liability should be recognised when the repayment meets the definition of a liability.

IAS 20 provides detailed guidance on how to deal with the repayment of a government grant.

Question 20

Explain frs102 differences with Share-Based Payment?

Answer 20

• *Share-based payment**
• Valuation* - When measuring the fair value of equity instruments granted,

FRS 102 requires the use of a three-tier hierarchy:

• 1 Observable market prices
• 2 The use of entity-specific market data, such as recent transactions in the instrument
• 3 A valuation method that uses, wherever possible, market data.

Recognition
FRS 102 provides simpler recognition rules than IFRS 2 Share-based Payment.
For example,

• Under FRS 102, schemes that offer a choice of the settlement are not split into an equity component and a liability component.
• FRS 102 provides rules to determine whether to account for them
  
  • Wholly cash-settled transaction or
  • Wholly equity-settled transaction.

Question 21

Explain frs102 differences with Impairment of assets?

Answer 21

Impairment of assets

• FRS 102 specifies that a recoverable amount need not be determined unless there are indicators of impairment.
• FRS 102 is much less detailed with regards to impairments than IAS 36.

In contrast, IAS 36 Impairment of Assets requires that some assets are subject to annual impairment review (such as goodwill acquired in a business combination).

Question 22

Explain frs102 differences with Employee Benefits?

Answer 22

Employee benefits

• Under FRS 102 an entity only accounts for termination benefits when it has a detailed formal plan for the restructuring and has no realistic possibility of withdrawal.

IAS 19 Employee Benefits says that termination benefits are recognised at the earlier of:

• the date when the entity can no longer withdraw the offer, and
• the date when costs associated with restructuring are recognised under IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Question 23

Explain frs102 differences with Income tax

Answer 23

Income tax

• The income tax section of FRS 102 differs significantly from IAS 12 Income Taxes.

Profit or loss/statement of financial position

• FRS 102 adopts a profit or loss approach to the recognition of deferred tax.

Timing differences are defined as differences between taxable profits and total
comprehensive income, which arises from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in financial statements.

• FRS 102 makes an exception to this rule.
• It states that deferred tax should alsobe recognised based on the differences between the tax value and fair value ofassets and liabilities acquired in a business combination.

In contrast, IAS 12 conceptualises deferred tax through the statement of financial position.

The standard states that deferred tax should be accounted for based on differences between the amounts recognised for the entity’s assets and liabilities in the statement of financial position and the recognition of those assets and liabilities by the tax authorities.

Permanent differences FRS 102 uses the concept of permanent differences.

• Permanent differences arise because certain types of income and expenses are non-taxable or disallowable, or
• ​Because certain tax charges or allowances are greater or smaller than the corresponding income or expense in the financial statements.
• Deferred tax is not recognised on permanent differences.

IAS 12 does not use the terminology ‘permanent difference’. Instead, it says that
deferred tax assets and liabilities are recognised for ‘temporary differences’.

Question 24

Explain frs102 differences with foreign currency translations?

Answer 24

Foreign currency translation
Unlike IAS 21 The Effects of Changes in Foreign Exchange Rates,

• FRS 102 does not require the presentation of a separate translation reserve for foreign exchange differences arising on the translation of a subsidiary.
• Under FRS 102, foreign exchange differences are not reclassified from other comprehensive income to profit or loss on the disposal of the overseas subsidiary

(whereas they are reclassified under IAS 21).

Question 25

Explain frs102 differences with Events after the reporting period?

Answer 25

Events after the reporting period

Under both FRS 102 and IAS 10 Events after the Reporting Period, no liability is recognised for dividends declared after the reporting date.

• However, FRS 102 says that the dividend can be presented as a separate component of retained earnings

Question 26

Explain frs102 differences with Related Parties?

Answer 26

Related parties
FRS 102 has additional disclosure exemptions.

It states that disclosures need not be given of transactions entered into between two or more members of a group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member.

FRS 102 only requires disclosure of key management personnel compensation in total.

In contrast, IAS 24 Related Party Disclosures requires that disclosure of key management personnel compensation is broken down into:

• short-term benefits
• post-employment benefits
• other long-term benefits
• termination benefits
• share-based payments.

Question 27

Explain frs102 differences with Agriculture?

Answer 27

Agriculture

• FRS 102 says that, for each class of biological assets, an entity can choose to use the cost model or the fair value model.
  
  • Under the cost model, the asset is measured at cost less accumulated depreciation and accumulated impairment losses.
  • The fair value model is consistent with IAS 41 Agriculture (below).

IAS 41 Agriculture requires biological assets to be measured using a fair value model.

This means that they are initially recorded at fair value less costs to sell. They are then remeasured to fair value less costs to sell at each reporting date with gains and losses recorded in profit or loss.

Question 28

Explain frs102 differences on consolidated and separate financial statements?

Hints

Definition of control

Exclusions

Answer 28

_Consolidated and separate financial statements
Control_
The definition of control in FRS 102 is different from the definition in IFRS 10

• FRS 102 says that control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
• FRS 102 says that control is presumed to exist if an entity owns more than half of the voting rights of another entity,
  
  • although this assumption can be rebutted in exceptional circumstances.

IFRS 10 Consolidated Financial Statements says that an investor controls an investee if it:

• Has power over the investee
• Has rights or exposure to variable returns.
• Can affect these returns through its power over the investee

Exclusions

• FRS 102 says that a subsidiary is excluded from consolidation if severe long-term restrictions hamper the ability of the parent to exercise control.

This exemption does not exist in full IFRS Standards.

Question 29

Explain frs102 differences with Business Combinations and goodwill?

Contingent considerations

Controls in stages

Answer 29

• Business Combinations and goodwill*
• Consideration- With regards to contingent consideration,*
• FRS 102 states that the estimated amount payable is only included in the calculation of goodwill if it is probable that it will be incurred.
• Costs directly attributable to the acquisition are also included in the calculation of goodwill (such as legal and professional fees).

Under IFRS 3 Business Combinations, contingent consideration is measured at its fair value and included in the calculation of goodwill.

The fair value of the contingent consideration will incorporate the probability that the payment will be made. Any transaction costs are expensed to profit or loss.

Control in stages
If control in a subsidiary is achieved in stages (e.g. from a 10% holding to a 60%) then IFRS 3 Business Combinations requires earlier investments to be remeasured to fair value at the date control is achieved.

• In contrast, FRS 102 says that the earlier share purchases are not remeasured.

Question 30

Explain frs102 differences with Net assets of the acquired?

Answer 30

Net assets of the acquiree

IFRS 3 Business Combinations says that intangible assets (other than goodwill) arising from a business combination are recognised at fair value if they are separable or if they arise from legal or contractual rights.

• FRS 102 only requires recognition of intangible assets (other than goodwill) arising on a business combination, if they are separable and arise from legal or contractual rights.
  
  • However, FRS 102 permits entities to recognise additional intangibles if they are separable or if they arise from legal or contractual rights.

Question 31

Explain frs102 differences on how to deal with negative goodwill?

Answer 31

Negative goodwill

• is recognised on the statement of the financial according to FRS 102, negative goodwill position immediately below goodwill.
• It should be followed by a subtotal of the net amount of goodwill and the negative goodwill, i.e. it is presented as a negative asset.
• The subsequent treatment of negative goodwill is that any amount up to the fair value of non-monetary assets acquired is recognised in profit or loss in the periods in which the non-monetary assets are recovered.
• Any amount exceeding the fair value of non-monetary assets acquired must be recognised in profit or loss in the periods expected to be benefited.

IFRS 3 Business Combinations refers to negative goodwill as a ‘gain on bargain purchase’. This is recognised immediately in profit or loss.

Question 32

Explain frs102 differences with amortisation of goodwill?

Answer 32

Amortisation

• FRS 102 requires that goodwill is amortised over its useful economic life.
• If this cannot be reliably measured then the useful life should not exceed ten years.

Under International Financial Reporting Standards, goodwill is not amortised but is instead subject to an annual impairment review.

Question 33

Explain frs102 differences on how to calculate NCI?

Answer 33

Non-controlling interest (NCI)

• FRS 102 requires that the NCI at acquisition is only measured using the proportionate method.

IFRS 3 Business Combinations allows the NCI at acquisition to be measured at
either:

•  Fair value, or
•  Its proportionate share of the subsidiary’s identifiable net assets.

Question 34

Explain frs102 differences with Fair values?

Answer 34

Fair value
IFRS 3 Fair Value Measurement includes more detailed information on fair values than FRS 102.

Question 35

Explain frs102 differences on how to deal with subsidiaries held with a view to resale?

Answer 35

• Subsidiaries held exclusively with a view to resale*
• *In the consolidated financial statements, FRS 102 requires that an election is made to measure such investments at either:**
• Cost less impairment, or
• Fair value with gains and losses in other comprehensive income, or
• Fair value with gains and losses in profit or loss.
• If the subsidiary is held as part of an investment portfolio, then it must be measured at fair value with gains and losses in profit or loss.

In contrast, IFRS 5 Assets Held for Sale and Discontinued Operations requires that a subsidiary acquired for resale is classified as ‘held for sale’.

This means that all of its assets will be amalgamated into one line in the statement of
financial position, and all of its liabilities will be amalgamated into another line.

Question 36

Explain frs102 differences with how to account for associates?

Answer 36

Associates

• FRS 102 specifies that any transactions costs are added to the initial carrying amount of an associate.

Under International Financial Reporting Standards, these costs are expensed to profit or loss.

• FRS 102 specifies that any difference between the consideration paid to acquire an associate and the investor’s share of the fair value of the associate’s net assets is implicit goodwill.
• This goodwill should be amortised over its useful economic life.

Question 37

Explain companies act requirements related to single and group entity financial statements?

Answer 37

Companies Act
Companies Act requirements relating to single and group entity financial statements.
Single entity financial statements
A company is exempt from the requirement to prepare individual accounts for a financial year if:

• it is itself a subsidiary undertaking
• it has been dormant throughout the whole of that year, and
• its parent undertaking is established under the law of an EEA State

Group financial statements.
A company subject to the small companies regime may prepare group accounts
for the year.

If not subject to the small companies regime, a parent company must prepare group accounts for the year unless one of the following applies:

• A company is exempt from the requirement to prepare group accounts if it is itself a wholly-owned subsidiary of a parent undertaking.
• *​**
• A parent company is exempt from the requirement to prepare group accounts if, under section 405 of the Companies Act, all of its subsidiary undertakings could be excluded from consolidation.

Exclusion of a subsidiary from consolidation
Where a parent company prepares Companies Act group accounts, all the subsidiary undertakings of the company must be included in the consolidation, subject to the following exceptions:

•  A subsidiary undertaking may be excluded from consolidation if its inclusion is not material for the purpose of giving a true and fair view (but two or more undertakings may be excluded only if they are not material taken together).

A subsidiary undertaking may be excluded from consolidation where:

• – severe long-term restrictions substantially hinder the exercise of the rights of the parent company over the assets or management of that undertaking
• – the information necessary for the preparation of group accounts cannot be obtained without disproportionate expense or undue delay
• – the interest of the parent company is held exclusively with a view to subsequent resale.