FRC proposes changes to UK GAAPMTM Legal
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On 23 July 2020, the FRC proposed two exposure drafts to the UK GAAP, recommending the following amendments to accounting standards:
- FRED 75 Draft amendments to FRS 104 – Going concern; and
- FRED 76 Draft amendments to FRS 102 and FRS 105 – Covid-19-related rent concessions.
FRED 75: Amendments to FRS 104
FRS 104 Interim Financial Statements is intended for use in the preparation of interim reports by entities applying FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. FRS 104 places no mandatory obligation on entities to produce interim financial reports; nor is its application mandatory.
Where reporting entities produce interim reports using FRS 102, FRS 104 sets out the content, recognition and measurement principles for those interim reports. FRS 104 is based on IAS 34 Interim Financial Reporting issued by the IASB.
While IAS 34 does not contain any requirements which explicitly cover the assessment and reporting of going concern, the requirement itself does apply to condensed interim financial statements which are prepared in accordance with IAS 34 through IAS 1 Presentation of Financial Statements para 4 (which cross-refers to paragraph 25 and requires management to assess going concern and make any disclosures relating to material uncertainties).
FRS 104 does not contain any such requirements which explicitly cover the assessment and reporting of going concern. However, FRS 104, para 16A(a) does require a statement that the same accounting policies are applied in the interim financial statements as compared with the most recent financial statements. This would include any statement relating to the going concern basis of accounting.
Proposed changes to FRS 104
The FRC proposes to amend FRS 104 by including specific requirements in new paragraphs 4A and 4B which:
- Require management to make an assessment of the entity’s ability to continue as a going concern; and
- When management are aware (through their assessment) of material uncertainties related to events or conditions which cast significant doubt upon the entity’s ability to continue as a going concern, to disclose those uncertainties; or
- If the entity does not prepare interim financial statements on a going concern basis, it must disclose that fact, together with the basis on which the interim financial statements have been prepared and the reason why the entity is not regarded as a going concern.
The FRC also proposes to insert the definition of ‘going concern’ into the glossary to FRS 104.
The changes proposed in FRED 75 are planned to be effective for interim periods beginning on or after 1 January 2021 with early adoption permissible. Where an entity early adopts the amendments, it must disclose that fact.
FRED 76: Amendments to FRS 102
Covid-19 has caused significant amounts of disruption to businesses up and down the country and accountants have certainly felt the effects of this disruption. There have been several grants, reliefs and financing options made available through central and local government aimed at assisting businesses throughout this turbulent period.
One of those reliefs are rent concessions. Many businesses, such as retailers, that were forced to close in March 2020 when lockdown restrictions were imposed by the government were able to take advantage of rent concessions where the landlord foregoes the rent that would otherwise become due had Covid-19 not hit.
There have been several debates as to how these types of rent concessions should be accounted for because there is no explicit guidance in FRS 102 or FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime as to how to deal with such a concession. Some have suggested spreading the rent concession over the remaining life of the lease in the same way that a lease incentive is treated under FRS 102. This treatment is inconsistent with the accounting treatment applied to other Covid-19-related grants and reliefs.
FRED 76 proposes amendments to FRS 102 and FRS 105 to spell out the accounting treatment for temporary rent concessions which arise as a direct consequence of Covid-19 and which will reduce diversity in practice.
Emphasis has been added to concessions which are Covid-19-related because the changes proposed in FRED 76 will only apply to such concessions to minimise the risk of the treatment being applied too broadly hence risk creating unintended consequences. The changes only apply to changes in lease payments which result in a revision to the consideration for the lease which is less than the consideration for the lease immediately prior to the change. Therefore, a concession which:
- incorporates significant changes to a lease agreement;
- is unrelated to the Covid-19 pandemic; and
- is negotiated at the same time as those related changes,
would not meet the conditions.
Lease payments which are deferred would also not meet the conditions because such an arrangement is only a change in the timing of the payments.
Proposed accounting treatment in FRED 76
FRED 76 proposes to include paragraphs 20.15C and 20.15D which would require a lessee to recognise Covid-19 rent concessions in the periods that the change in lease payments is intended to compensate. Paragraph 20.15D (which also cross-refers to a new paragraph 20.25B (see ‘Lessors’ below)) sets out conditions which have to be met in order to qualify for this accounting treatment, which are:
- the change in lease payments results in revised consideration for the lease that is less than the consideration for the lease immediately preceding the change;
- any reduction in lease payments affects only payments originally due on or before 30 June 2021; and
- there is no significant change to other terms and conditions of the lease.
The FRC proposes to amend FRS 102, para 20.16(c) which would require such changes in lease payments to be disclosed.
Similar changes to FRS 105, Section 15 Leases (excluding the related disclosure requirements) are proposed as the operating lease accounting model in both FRS 102 and FRS 105 is the same.
For lessors, the FRC is proposing to insert paragraph 20.25B into FRS 102 which would require a lessor to recognise changes in lease income arising from Covid-19 rent concessions in the period the change in lease payments is intended to compensate.
In addition, FRS 102, para 20.30(c) requires a lessor to provide a general description of their significant leasing arrangements. Information relating to Covid-19 rent concessions would be expected in this disclosure hence the FRC has decided not to make any changes to this existing requirement.
Similar changes are proposed for lessors in FRS 105 by the inclusion of FRS 105, para 15.25A.
The above changes aim to reduce diversity in practice and provide a simpler means of accounting for Covid-19 rent concessions rather than spreading the rent concession over the remaining life of the lease agreement which would be akin to a lease incentive (which a Covid-19 rent concession is not). The accounting treatment proposed by the FRC would also be consistent with other types of Covid-19 concessions, such as rates reliefs and grants, all of which are recognised in the period in which the entity benefits.
The planned effective date is for accounting periods commencing on or after 1 January 2020 with early application permissible. This would allow an entity an option to apply the amendments for accounting periods ending on or after 31 March 2020 which are not yet authorised for issue at the date the amendments are issued (which are planned to be finalised during 2020).
The comment period for both FREDs 75 and 76 are short and end on 1 September 2020. If you would like to comment on the proposals please do so by email to [email protected].