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Accounting Changes

2015 will see possibly the biggest upheaval in UK domestic accounting standards ever.

Because of EU requirements, UK quoted companies for several years have been required to prepare group consolidated accounts using International Accounting Standards. However, most of the individual accounts of UK companies within such groups have continued to be prepared using UK domestic standards. As most non quoted UK companies have also continued to use UK domestic standards, this has meant that UK domestic accounting standards have continued to be used by the great majority of UK companies.

For accounting periods beginning on or after 1st January 2015, all of the existing UK accounting standards (including UITFs) with the exception of Financial Report Standard for Small Enterprises (FRSSE) are being abolished and being replaced by two alternative comprehensive standards, FRS101 or FRS102.

FRS101 is essentially a condensed and to some extent simplified version of the full international standards. It is expected that subsidiaries of quoted groups are likely to adopt this standard.

FRS102 is intended to be a condensed version of all the existing UK standards. However most of it is based on a document produced by the International Accounting Standards Board (IASB) a few years ago and so its terminology and wording is sometimes radically different from the UK standards it is supposed to reflect. It can read as a rather strangely worded hybrid of UK and International standards. It was not supposed to give rise to any changes from previous UK standards, but with its condensed and changed wording, the new standard may give rise to some unexpected consequences. For example, we are already hearing of long standing EBT arrangements which were kept off balance sheet (because the EBTs were not considered to be under the defacto control of the company under the previous accounting rules) being required to brought on to the balance sheet as a result of FRS102.

Furthermore, FRSSE has only been given a brief stay of execution while the Financial Reporting Council (FRC) considers its future. A proposal for its abolition or replacement is expected within the next 12 months, and so there are no details yet of what may replace FRSSE. However, informed sources suggest that smaller companies may be required to follow FRS102 or something similar. If so, it is possible that the valuable but controversial exemption from the requirement to calculate fair values using Black Scholes option pricing theory for employee share options may be lost.

We must hope that all interested parties if necessary make representations to the FRC in due course to ensure that this does not happen.