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Current accounting standards require you to recognise sales as you earn the right to be paid for your contractual performance. In particular, when a service contract is performed over a period of time, revenue is recognised on a ‘percentage of completion’ basis - either as time is spent on the contract or as value is provided to the customer.
FRS 102 does not change the basic approach to accounting for sales. However it provides several brief examples that may relate to your business model, including:
Currently you can opt to hold property at cost less depreciation (NB land is usually not depreciated) or at revaluation on your balance sheet. FRS 102 is broadly similar in this respect. If you have opted for revaluation, the new standard is less explicit on how often revaluations should be performed and by who.
If your property (including land) is worth more than its current carrying value in the accounts, FRS 102 allows a one-off revaluation to fair value on adoption of the standard. This figure is then ‘deemed’ to be the property’s cost for accounting purposes. You should consider whether this option would be beneficial, as it strengthens the balance sheet value of the company although may lead to lower future profits due to higher depreciation charges.
If you have financed the acquisition of properties (or any other plant and equipment) with bank or other loans, the accounting for these may change under FRS 102 as follows:
If you receive incentives from landlords on rented properties, such as rent-free periods or cashback deals, the income for these is currently spread over the shorter of the lease term or the period to the first ‘break point’ in the lease. Under FRS 102 the incentives will be spread over the lease term.
This change in accounting treatment will decrease annual profits as less incentive is credited per annum, and will lead to tax cashflow advantages as a result.
As a lessee, you will need to disclose more in your accounts about your lease arrangements than under previous standards. This includes the total of all committed lease payments in today’s terms (split between amounts due in 1, 2-5 and over 5 years).
If you grow through acquiring other businesses, you currently recognise any difference between the purchase price and the fair value of the individual net assets you have acquired as ‘goodwill’. In future, you will need to consider whether there are other intangible assets (such as contracts with customers or brands) that should be separately recognised in your accounts before arriving at the goodwill figure. This can be complex to do, and we would be happy to advise further on this process. You will not need to revisit any previous acquisitions made before the date of transition to FRS 102 (which is broadly two years before the first year-end for which FRS 102 is adopted).
The goodwill and intangible assets will be written off, or ‘amortised’, over a useful life period of several years. You will need to decide on the appropriate useful life for each asset. In the rare event that this is not possible, the asset will be limited to a life of ten years.
If your holiday year and accounting year are not the same, then you should make an accounting adjustment each year for staff holiday earned but not yet taken. This was not explicitly required in the past but is now under FRS 102.
We want to ensure that you are prepared and informed about the impact of FRS 102, which includes (but is not limited to) the issues we have covered above. If you would like to arrange an initial meeting where we can begin to plan for the specific impact on your business, please contact Martin Wharin, Business Services Partner on 0114 251 8850 or firstname.lastname@example.org.
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