The new UK GAAP framework, which becomes mandatory from 1 January 2015, retains a modified version of the FRSSE as the single standard applicable by small entities.
Reporting entities that apply FRSSE 2015, together with FRS 100, are exempt from complying with other Financial Reporting Standards.
For transactions and events not covered by the FRSSE 2015, a small entity shall first consider its existing accounting policies and, where it has no policy that deals with the specific issue, which will be typically the case for a new type of transaction undertaken for the first time, should develop a new accounting policy that takes into account FRS 102, not as a mandatory document but as a way of establishing current practice.
This is a change from the current FRSSE that points users directly to other accounting standards and UITF abstracts and is also a consequence of the withdrawal of all the standards and UITF abstracts on which the FRSSE is largely based. In practice an entity adopting the FRSSE will need to be aware of and will actually be required to apply part of the requirements of FRS 102 for some transactions not contemplated by the smaller entities’ standard.
The same principle will apply to an entity preparing consolidated financial statements under FRSSE 2015, so that it shall first apply its existing accounting policies and practices for the preparation of its group accounts, as the automatic re-direction to the specific accounting standards dealing with consolidation in the current FRSSE is no longer applicable. Therefore an entity producing consolidated accounts for the first time under FRSSE 2015 will need to refer to the relevant provisions in FRS 102.
Goodwill and other intangible assets
The treatment of capitalised goodwill and intangible assets in terms of depreciation and estimated useful economic life has also been altered. Depreciation should still be charged over the useful economic life of the asset, which is no longer limited to a maximum period of 20 years. However, goodwill and other intangibles should be considered to have a finite useful life and if the entity is unable to make a reliable estimate, the useful life shall be presumed not to exceed five years.
The new FRSSE includes additional requirements in respect of impairment of fixed assets (tangible, intangible and investments) and capitalised goodwill. In particular, at the end of each reporting period, the entity will have to assess whether there is any indication that an asset should be written down (ie whether its carrying amount is more than its recoverable amount).
If there is any such indication, the entity will need to estimate the recoverable amount of the asset. That will not be necessary if no indication of impairment is found. The entity should consider the factors listed in the standard at the end of each reporting period to assess whether there is an indication of impairment for an asset. The factors indicated include significant decline in market value, increases in market interest rates, evidence of obsolescence or physical damage, deterioration of operating results or cash flows from the assets and other significant adverse changes for the asset or the entity (technological, market, economic changes etc.).
Related party transactions
In terms of related party transactions FRSSE 2015 includes a new exemption from disclosing transactions between two or more members of a group, provided that any subsidiary which is party to the transaction is wholly owned by such a member.
The definition of a related party is also replaced by a new one in FRSSE 2015, which removes some interpretative doubts arising from the previous version and marginally extends its scope. In particular a person having control, joint control or significant influence over the reporting entity would be a related party and so will a close member of that person’s family.
The standard does no longer refer to close family, which featured a more vague definition, but includes a person’s children, spouse and domestic partner, the children of his/her spouse or domestic partner and the dependants of a person or his/her spouse or domestic partner as close members of a person’s family.
A member of the key management personnel of an entity or of a parent of an entity, which would include any director, is also a related party of the entity in contrast with the definition in the 2008 standard that only referred to directors.
The new definition also clarifies the position of associates and joint ventures. Apart from associates and joint ventures of the entity, the new standard identifies as related parties associates or joint ventures of a member of a group of which the entity is part, entities that are both joint ventures of the same third party and one entity that is a joint venture and one that is an associate of the same third entity.