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FRC issues revised Application Guidance to FRS 100
Publication date: 05 Dec 2022
uk In brief 2022-71
Key points
- The FRC issued revised Application Guidance The Interpretation of Equivalence to FRS 100 on 18 November 2022. The Application Guidance was amended to reflect changes in UK company law that came into effect on 31 December 2020 due to the UK’s exit from the European Union.
- The amended Application Guidance is intended to assist reporters in assessing ‘equivalence’ if they consider taking the following exemptions:
- exemption from preparing consolidated financial statements available to some intermediate parents under section 401 of the Companies Act 2006;
- exemption from certain disclosure requirements available to qualifying entities under FRS 101 para 8 and FRS 102 para 1.12;
- alternative measurement option permitted by FRS 102 para 26.16 which allows group entities to measure their share-based payment expense on the basis of a reasonable allocation of the group expense.
What is the issue?
After the UK’s exit from the European Union in January 2020, a number of changes were made to UK company law which came into effect on 31 December 2020.
As a result of these legal changes, consequential amendments to UK accounting standards were required. In December 2020, the FRC issued Amendments to UK and Republic of Ireland accounting standards UK exit from the European Union effective for accounting periods beginning on or after 1 January 2021. At the time of these 2020 amendments, FRS 100 Application Guidance The Interpretation of Equivalence was not revised and para 9 of the 2020 amendments indicated that it would be done in due course.
On 18 November 2022, the FRC issued revised Application Guidance The Interpretation of Equivalence to FRS 100.
What is the impact?
The revised Application Guidance is intended to assist companies and their auditors in adopting a consistent approach to assessing ‘equivalence’ in the three situations listed below.
Intermediate parent consolidation exemption: under section 401 of the Companies Act 2006, an intermediate UK parent might be exempt from the requirement to prepare consolidated financial statements provided that certain criteria are met. One of the criteria is that such an intermediate UK parent along with all its subsidiaries should be included in consolidated accounts of a non-UK parent, which must be drawn up:
- in a manner equivalent to the requirements of part 15 of the Act,
- in accordance with UK-adopted IFRS, or
- in accordance with accounting standards which are equivalent to UK-adopted IFRS.
Note that while the Application Guidance is primarily aimed at UK GAAP reporters, it is relevant for IFRS reporters as well given that whether a UK company needs to prepare consolidated financial statements is determined by the rules in the Companies Act 2006.Disclosure exemptions: FRS 101 para 8 and FRS 102 para 1.12 provide certain exemptions for qualifying entities from the disclosure requirements of UK-adopted IFRS and FRS 102 respectively, in some cases provided that equivalent disclosures are included in the consolidated financial statements of the group in which such qualifying entity is consolidated.Alternative measurement option for share-based payment transactions: FRS 102 para 26.16 allows group entities to measure their share-based payment expense in their individual financial statements on the basis of a reasonable allocation of the group expense, providing the group expense has been measured using FRS 102, IFRS 2 or an equivalent basis.
It is generally accepted that the reference to equivalence does not mean compliance with every accounting requirement. Rather, it is necessary to consider whether the basic requirements are met (such as the requirement to give a true and fair view), without implying strict conformity with every provision. The Application Guidance provides further details on how the equivalence assessment should be approached. It also, lists the GAAPs the UK Government currently recognised as equivalent to UK-adopted IFRS.
We do not envisage significant changes in practice, which has developed since 2020 in a manner that is largely consistent with what is now included in the Application Guidance.
When does it apply?
The Application Guidance is effective immediately, given that it was revised to reflect the UK legal and accounting requirements that are already effective.
Where do I get more details?
The IFRS and UK GAAP Manuals of Accounting are in the process of being updated to reflect the revised Application Guidance. This relates in particular to the chapters on accounting principles, consolidation; and share-based payments.
For more information, contact Peter Hogarth and Elena Kopylova.
1 Given that FRS 100 is applicable in the UK and Republic of Ireland the Application Guidance The Interpretation of Equivalence contains separate paragraphs relevant for UK entities and Irish entities. This In brief only considers impact on the UK entities.
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