In November 2012 the Financial Reporting Council issued FRS 101 Reduced Disclosure Framework. The standard allows qualifying subsidiary companies to continue to apply the recognition and measurement criteria of IFRS but to take advantage of reduced disclosures, lowering the financial reporting burden.
To qualify to use FRS 101 companies must be members of a group where publically available consolidated accounts are produced. Whilst parent companies can also take advantage of the exemptions in their entity accounts FRS 101 does not apply to the consolidated accounts.
The standard can be adopted for December 2012 year ends and FRS 101 can therefore be applied by most subsidiary companies of small and mid-cap companies on the UK capital markets.
Benefits of applying FRS 101
The key benefit of applying FRS 101 will be a reduction in the time spent on subsidiary company accounts as the level of disclosures is reduced. The key IFRS disclosures that a subsidiary company would be exempt from providing are:
IFRS 2 Share-based Payment – exempt from most of the disclosures required by this standard
IFRS 3 Business Combinations – only very basic information on business combinations needs to be disclosed
IFRS 7 Financial Instruments – except for financial institutions entities applying FRS 101 would be exempt from this standard
IAS 7 Statement of Cash Flows – exempt from this standard and hence a cash flow statement need not be produced
IAS 24 Related Party Disclosures – key management personnel compensation and transactions between wholly owned group companies need not be disclosed, though note that directors’ remuneration would still need to be disclosed as this is a Companies Act requirement
IAS 36 Impairment of Assets – exempt from most of the disclosures required by this standard
For subsidiary companies preparing accounts under UKGAAP similar exemptions are likely to be available upon transition to FRS 102, the accounting standard that will replace current UKGAAP. This standard, and hence the exemptions, is likely to be publish in late February or early March 2013.
Conditions of applying FRS 101
There are three main conditions for applying FRS 101:
Shareholders have been notified in writing and have not objected to the use of FRS 101. If objections are received from shareholders holding more than 5% of the allotted share capital then FRS 101 may not be applied.
For subsidiaries currently applying IFRS some adjustments to the recognition and measurement criteria of IFRS are required when adopting FRS 101. These principally apply to the accounting treatment of government grants and, in certain circumstances, business combinations.
The notes must briefly indicate which disclosure exemptions have been adopted, the name of the parent in whose consolidated accounts the company is included and where they may be obtained from.
For many subsidiaries currently preparing financial statements under IFRS FRS 101 will provide a welcome reduction in disclosure however there are some potential drawbacks.
Firstly changes will be required to the format of financial statements to meet the requirements of FRS 101 and this will reduce the amount of time saved in the first year of adoption.
Secondly, and as mentioned above, in certain circumstances the recognition and measurement criteria of IFRS have been amended. For example if a subsidiary has undertaken an acquisition involving the payment of contingent consideration or the recognition of negative goodwill the accounting treatment will differ when using FRS 101 compared to IFRS and the treatment in the consolidated accounts.
The disclosure exemptions offered by FRS 101 will save time for preparers of subsidiary companies accounts that currently use IFRS. FRS 101 is available for adopted for December 2012 year ends and entities should review their financial reporting plans to see whether adopting FRS 101 could be of benefit to them.
Matthew Stallabrass, the author of this article, is a partner at Crowe Clark Whitehill LLP.