1.2.1 Amendments made in FRS 102 compared to the IFRS for SMEs

The Accounting Standards Board (replaced by the FRC in 2012), replying to concerns from respondents about the removal of certain accounting policy options and noting that some pragmatism was required in determining what amendments were to be made to the IFRS for SMEs, developed a set of guidelines for application in the UK and Republic of Ireland (ROI). [FRS 102.BC.A.5-6].

The guidelines were as follows:

• Changes should be made to permit accounting treatments that existed in FRSs at the transition date which align with EU-adopted IFRS.
• Changes should be consistent with EU-adopted IFRS unless a non-IFRS based solution clearly better meets the objective of providing high-quality understandable financial reporting proportionate to the size and complexity of the entity and the users' information needs. In these cases, elements of an IFRS-based solution may nevertheless be retained.
• Use should be made, where possible, of existing exemptions in company law to avoid gold-plating.
• Changes should be made to provide clarification, by reference to EU-adopted IFRS, which would avoid unnecessary diversity in practice. [FRS 102.BC.A.6].

As a result of applying the guidelines, FRS 102 now includes accounting options for the capitalisation of borrowing costs, the revaluation of property, plant and equipment and intangible assets and, in certain circumstances, the capitalisation of development costs. [FRS 102.BC.A.7].

Further clarifications were also made, some by reference to EU-adopted IFRS and some to previous UK and Ireland accounting standards. Examples of these include: [FRS 102.BC.A.8]

• Amending the disclosure requirements for discontinued operations for compliance with company law.
• Providing an option to use cost or fair value for the measurement of investments by an investor which is not a parent, but has an investment in one or more associates and/or jointly controlled entities.
• Clarifying that the life of goodwill cannot exceed 10 years, where the entity is otherwise unable to make a reliable estimate – this also applies to intangible assets. Previously the time period was 5 years, but this was changed subsequent to the implementation of the EU Accounting Directive in 2015.
• Clarifying the accounting treatment of group share-based payments when the award is granted by the parent or another group entity.

Subsequent amendments made to FRS 102 have continued to follow the guidelines set out above. The Triennial review 2017 represents the most significant revision of FRS 102 to date and has been carried out in response to stakeholder feedback on the implementation of FRS 102 and after considering recent improvements in financial reporting.

1.2.2 Review of FRS 102

1.2.3 Amendments made to FRS 102 from December 2016

All amendments up to and including the Triennial review 2017 have been incorporated in the 2018 version of the standard. All amendments since December 2016 are discussed at 1.2.3.A to 1.2.3.C below.

1.2.4 FRS 103 – Insurance Contracts

FRS 103 (and its accompanying Implementation Guidance) consolidated existing financial reporting requirements for entities in the UK and Republic of Ireland issuing insurance contracts. It replaced the previous requirements in FRS 27 – Life Assurance – and the ABI SORP – Statement of Recommended Practice on Accounting for Insurance Business, which were withdrawn for accounting periods beginning on or after 1 January 2015. [FRS 103.1.13]. Amendments to FRS 103 – Solvency II – was issued in May 2016 and the standard was included in the scope of the Triennial review 2017. FRS 103 is discussed in Chapter 33.

1.2.5 FRS 104 – Interim Financial Reporting

FRS 102 does not address the presentation of interim financial reports. Entities preparing such reports must describe the basis for preparing and presenting such information. The original version of FRS 104 was issued by the FRC in November 2014 and set out a basis for the preparation and presentation of interim financial reports that an entity may apply. [FRS 102.3.25]. This standard was also included in the scope of the Triennial review 2017 and consequential amendments were made; the latest version of the standard was issued in March 2018. FRS 104 is discussed in Chapter 34.

1.3.1 Accounting periods beginning on or after 1 January 2019

For accounting periods beginning on or after 1 January 2019, the following apply:

• the March 2018 version of FRS 102, containing the Triennial review 2017 amendments;
• the March 2018 version of FRS 103 (if an entity is in scope of FRS 103); and
• the March 2018 version of FRS 104 (if an entity is applying this standard to its interim reporting).

FRS 100 (March 2018) must be applied from the same date that the March 2018 version of FRS 102 is applied.

1.3.2 Accounting periods beginning before 1 January 2019

For accounting periods beginning before 1 January 2019, entities have a choice of (a) applying the March 2018 version of the standard early (see 1.3.1 above) or (b) applying the September 2015 version, in conjunction with the amendments issued in 2016 and 2017. If (b) is chosen, the following apply:

• the September 2015 version of FRS 102 (see 1.2 above);
• the February 2017 version of FRS 103 (if an entity is in scope of FRS 103) and the accompanying implementation guidance and clarification on Solvency II (see 1.2.4 above); [FRS 103.1.11A]
• the March 2015 version of FRS 104 (if an entity is applying this standard to its interim reporting);
• the March 2016 amendment to FRS 102; [FRS 102.1.16]
• the December 2016 amendment to FRS 102 (see 1.2.3.A above); and
• the May 2017 amendment to FRS 102 (see 1.2.3.B above).

Early application of the March 2018 version of FRS 102 is permitted, provided that all the amendments to the FRS are applied at the same time – in other words, cherry picking is not permitted. If an entity does early adopt the Triennial review 2017 amendments, it must disclose that fact. A small entity is not obliged to disclose that it has early adopted the amendments, but it is encouraged to make the disclosure. [FRS 102.1.18].

There are three exceptions to the above, where amendments may be applied early without early application of the rest of the Triennial review 2017 amendments. The first relates to directors' loans (see 1.2.3.B above). The second relates to gift aid payments made within charitable groups; this early application was permitted following feedback from respondents.

The third exception relates to small entities in the Republic of Ireland only. For these entities, the Triennial review 2017 amendments to Section 1A are effective for accounting periods beginning on or after 1 January 2017, in order to align the effective date with the implementation of the Companies (Accounting) Act 2017. These amendments can also be early adopted and a small entity so adopting is encouraged, though not required, to disclose that fact. [FRS 102.1.18]. Such an entity must disclose that its financial statements have been prepared in accordance with Section 1A of FRS 102 and the effect of and reasons for any material departure from that section must also be disclosed. [FRS 102.1AD.3].

1.3.3 Effective date – entities subject to SORP

Following the issuance of FRS 102, some SORPs have been updated for consistency with the original version of FRS 102 and others withdrawn. See Chapter 1 at 4.7.1 for a list of the extant SORPs. However, some SORPS have not been updated and there remains inconsistency in updating SORPS for subsequent amendments to FRS 102, leading to a lag between revisions to FRS 102 and the update of SORPs.

Amendments to the relevant SORPs are not necessary before any changes to FRS 102 take effect because a change in accounting standards after a SORP has been issued means any conflicting provisions of a SORP cease to have effect. [FRS 100.6]. However, where there is a lag between amendments made to FRS 102 and review of a SORP, there may be uncertainty as to which parts of a SORP are considered in conflict with the amended version of FRS 102 and over what, if any, changes to a SORP may subsequently be made. Consequently, an entity may be wary of early applying amendments to FRS 102 until the relevant SORP (which will generally include additional guidance and disclosures) has been reviewed. For example, it is generally understood that small charities may not adopt Section 1A of FRS 102. The Charities SORP (FRS 102) (as amended by Update Bulletin 2 in 2018) also includes additional disclosures for charities beyond those required by FRS 102, which would apply to small charities (unless specifically exempted by the SORP). See Chapter 5 at 4.2.

Certain entities may also be subject to legal requirements relating to the application of SORPs which may restrict the ability of an entity to early apply an amendment to FRS 102 (or related SORP). This issue may affect some charities but could also affect other entities not discussed below. It is therefore always important for entities to understand the legislative or other regulatory requirements governing the preparation of their financial statements.

2.4.1 Application of FRS 103

FRS 102 is not applicable to insurance contracts (including reinsurance contracts) issued or held by an entity, nor to financial instruments with a discretionary participation feature that an entity issues. Instead an entity must apply FRS 103 to such contracts and instruments. [FRS 102.1.6, FRS 103.1.2]. This is the same scope as for IFRS 4 – Insurance Contracts – and may be wider than entities that are legally insurers for legal or supervisory purposes. See 1.2.4 above and Chapter 33 for information on FRS 103.

2.5.1 Financial institutions – disclosure requirements

A financial institution that is a qualifying entity is not entitled to make use of the disclosure exemptions from Sections 11 and 12 when applying the reduced disclosure framework in its individual financial statements (see 3 below). [FRS 102.1.9].

Section 34 of FRS 102 includes additional disclosure requirements for financial institutions (see definition at 2.5.1.A below) in financial statements prepared in accordance with FRS 102.

These disclosure requirements set out in paragraphs 19 to 33 of Section 34 must be provided in: [FRS 102.34.17]

• the individual financial statements of a financial institution; and
• the consolidated financial statements of a group containing a financial institution where the financial institution's financial instruments are material to the group.

Disclosures are required in the consolidated financial statements of a group containing a financial institution even if the principal activities of the group itself are not being a financial institution. This has an implication for group accounts where a group company is identified as a financial institution (see 2.5.1.A below). Disclosures will be required in the group accounts in relation to financial instruments of the group company (to the extent the transactions have not eliminated on consolidation), where these are material to the group.

The additional disclosures required by financial institutions are set out in Chapter 10 at 11.2.4.

2.5.2 Public benefit entities

Paragraphs in FRS 102 that are prefixed by PBE are specific to public benefit entities (see definition in the Glossary to FRS 102, and discussed further in Chapter 31 at 6). These paragraphs must not be applied directly, or by analogy, to entities that are not public benefit entities (other than, where specifically directed, entities within a public benefit entity group, i.e. a public benefit entity parent and all its wholly-owned subsidiaries). [FRS 102.1.2, FRS 102 Appendix I].

Section 34 addresses incoming resources from non-exchange transactions, public benefit entity combinations, and public benefit entity concessionary loans. These parts of Section 34 include paragraphs prefixed by PBE and, therefore, apply only to public benefit entities. Other sections of FRS 102 also contain paragraphs prefixed by PBE. Section 34 also addresses other accounting topics such as heritage assets and funding commitments, which may be of particular relevance to some public benefit entities, but (as the paragraphs are not prefixed by PBE) apply to all entities. See Chapter 31 at 6 and Chapter 19 at 3.9.

Many public benefit entities may also be subject to the requirements of a SORP (see 1.3.4 and 2.3 above).

3.1.1 Reporting date of the consolidated financial statements of the parent

The requirement for the qualifying entity to be included in the consolidation implies that the consolidated financial statements of the parent should be approved before, or at the same time as, the FRS 102 individual financial statements of the qualifying entity are approved, where FRS 102's reduced disclosure framework is used in the individual financial statements of the qualifying entity. FRS 102 is silent on whether the reporting date and period of those consolidated financial statements has to be identical to that of the qualifying entity. In contrast, both sections 400 and 401 of the CA 2006 require that the exemption from preparing group accounts for a parent company that is a subsidiary undertaking is conditional on the inclusion of the company in consolidated financial statements of a parent undertaking drawn up to the same date or to an earlier date in the same financial year. It would seem logical that the reporting date criteria in sections 400 and 401 should also be used for FRS 102's reduced disclosure framework.

However, when the consolidated financial statements are prepared as at an earlier date than the date of the qualifying entity's financial statements, some of the disclosure exemptions may not be available to the qualifying entity because the consolidated financial statements may not contain the ‘equivalent’ disclosures (see 3.6 below).

3.1.2 Definition of ‘group’ and ‘subsidiary’

The definition of a qualifying entity contains a footnote that refers to section 474(1) of the CA 2006 which defines a ‘group’ as a ‘parent undertaking and its subsidiary undertakings’. [s474(1)].

The CA 2006 states that an undertaking is a parent undertaking in relation to another undertaking, a subsidiary undertaking, if:

1. it holds a majority of the voting rights in the undertaking;
2. it is a member of the undertaking and has the right to appoint or remove a majority of its board of directors;
3. it has the right to exercise a dominant influence over the undertaking by virtue of provisions contained in the undertaking's articles or by virtue of a control contract; or
4. it is a member of the undertaking and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights in the undertaking.

An undertaking should be treated as a member for the purposes above if any of its subsidiary undertakings is a member of that undertaking or if any shares in that other undertaking are held by a person acting on behalf of the undertaking or any of its subsidiary undertakings.

An undertaking is also a parent undertaking in relation to another (subsidiary) undertaking if it has the power to exercise, or actually exercises, dominant influence or control over it, or it and the subsidiary undertaking are managed on a unified basis.

A parent undertaking should be treated as the parent undertaking of undertakings in relation to which any of its subsidiary undertakings are, or are to be treated as, parent undertakings, and references to its subsidiary undertakings should be construed accordingly. [s1162(1)-(5)]. Schedule 7 to the CA 2006 provides interpretation and references to ‘shares’ in section 1162 and in Schedule 7 are to ‘allotted shares’. [s1162(6)-(7)].

FRS 102 defines a subsidiary as an entity that is controlled by the parent. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. FRS 102 goes on to explain in what circumstances control exists or can exist. [FRS 102.9.4-6A]. These circumstances are similar but not identical to those included in the definition of a subsidiary undertaking under section 1162.

Although there are slight differences in wording emphasis between the definition of a subsidiary undertaking in section 1162 and the requirements of Section 9 – Consolidated and Separate Financial Statements, we would expect to see few conflicts arising in practice between Section 9 and the CA 2006 (see Chapter 8 at 3.2). The key issue for the application of FRS 102's reduced disclosure framework is whether the subsidiary is included in the consolidation of the parent's consolidated financial statements. A company that meets the definition of a subsidiary undertaking under the CA 2006 but is not included in the consolidation of the consolidated financial statements of its parent cannot apply FRS 102's reduced disclosure framework.

3.1.3 Publicly available consolidated financial statements

By ‘publicly available’, we believe that FRS 102 requires that the consolidated financial statements can be accessed by the public as the use of FRS 102's reduced disclosure framework is conditional on a disclosure by the qualifying entity indicating from where those consolidated financial statements can be obtained (see 3.2 below). This does not mandate that the consolidated financial statements must be filed with a regulator. Therefore, for example, UK consolidated financial statements that have not been filed with the Registrar of Companies, at the date that the subsidiary's financial statements prepared in accordance with FRS 102 are approved, must be publicly available via some other medium.

3.1.4 Non-UK qualifying entities

There is no requirement that a qualifying entity is a UK entity. Non-UK entities can apply FRS 102's reduced disclosure framework in their individual or separate financial statements subject to meeting the criteria for its use, and provided FRS 102 is allowed for use in their own jurisdiction.

3.1.5 Non-controlling interests

There is no ownership threshold for a subsidiary to apply FRS 102's reduced disclosure framework. Therefore, a qualifying entity can apply the reduced disclosure framework even if its parent holds less than a majority of the voting rights, provided that the parent has control via other means (see Chapter 8 at 3.2).

3.1.6 Intended to give a true and fair view

In the definition of a qualifying entity (see 3.1 above), the consolidated financial statements in which the qualifying entity is included are not required to give an explicit true and fair view of the assets, liabilities, financial position and profit or loss. Rather, they are ‘intended to give a true and fair view’ [emphasis added]. This means that the consolidated financial statements in which the qualifying entity is consolidated need not contain an explicit opinion that they give a ‘true and fair view’ but, in substance, they should be intended to give such a view. The FRC guidance – True and Fair – issued in June 2014 states that ‘Fair presentation under IFRS is equivalent to a true and fair view’.

3.1.7 Equivalence

A UK parent company that wishes to claim an exemption from preparing group accounts under either section 400 or section 401 of the CA 2006 must be a subsidiary included in the consolidated accounts for a larger group. Those consolidated accounts (and where appropriate, the group's annual report) must be drawn up: [s400(2)(b), s401(2)(b)]

• in accordance with the provisions of Directive 2013/34/EU (‘the Accounting Directive’) (for sections 400 and 401);
• in a manner equivalent to consolidated accounts and consolidated reports so drawn up (for section 401);
• in accordance with international accounting standards adopted pursuant to the IAS Regulation, i.e. EU-adopted IFRS (for sections 400 and 401); or
• in accordance with accounting standards which are equivalent to international accounting standards, as determined pursuant to Commission Regulation (EC) No. 1569/2007 (for section 401).

There are similar requirements for a parent LLP but for section 401, there is no reference to the basis on which the consolidated reports are drawn up. [s400(2)(b) (LLP), s401(2)(b) (LLP)].

We believe that references to ‘in accordance with the Accounting Directive’ in relation to a banking or insurance group in section 400 or section 401, mean as modified by the provisions of the Bank Accounts Directive or the Insurance Accounts Directive respectively. [s400(2)(b), s401(2)(b), s400(2)(b) (LLP), s401(2)(b) (LLP)].

In our view, a set of consolidated financial statements that would meet the above criteria (i.e. the consolidated financial statements are drawn up in accordance with or in a manner equivalent to the Accounting Directive, or in accordance with EU-adopted IFRS or accounting standards which are equivalent to EU-adopted IFRS as determined by the mechanism established by the EU Commission) is intended to give a true and fair view.

The Application Guidance to FRS 100 states that consolidated financial statements of the higher parent will meet the exemption or the test of equivalence in the Accounting Directive if they are intended to give a true and fair view and:

• are prepared in accordance with FRS 102;
• are prepared in accordance with EU-adopted IFRS;
• are prepared in accordance with IFRS, subject to the consideration of the reason for any failure by the European Commission to adopt a standard or interpretation; or
• are prepared using other GAAPs which are closely related to IFRS, subject to consideration of the effect of any differences from EU-adopted IFRS.

Consolidated financial statements of the higher parent prepared using other GAAPs or the IFRS for SMEs should be assessed for equivalence with the Accounting Directive based on the particular facts, including the similarities to and differences from the Accounting Directive. [FRS 100.AG6].

In accordance with Commission Regulation (EC) No. 1569/2007(a) of 21 December 2007 (see above), the EU Commission has identified the following GAAPs as equivalent to international accounting standards. This means that these GAAPs are equivalent to international accounting standards as a matter of UK law: [FRS 100.AG7]

In addition, third country issuers were permitted to prepare their annual consolidated financial statements and half-yearly consolidated financial statements in accordance with the GAAP of the Republic of India for financial years starting before 1 April 2016. For reporting periods beginning on or after 1 April 2016, in relation to GAAP of the Republic of India, equivalence should be assessed on the basis of the particular facts. [FRS 100.AG7].

The concept of equivalence for the purposes of section 401 is discussed further in Chapter 8 at 3.1.1.C.

In theory, there is no reason why consolidated financial statements of a parent prepared under a GAAP that is not ‘equivalent’ to the Accounting Directive cannot be used provided those consolidated financial statements in which the entity is included are publicly available and are intended to give a true and fair view.

In addition, a number of the disclosure exemptions under FRS 102's reduced disclosure framework are conditional on ‘equivalent’ disclosures being made in those publicly available consolidated financial statements in which the qualifying entity is included. [FRS 102.1.13]. Where the equivalent disclosure is not made, the relevant disclosure exemptions cannot be applied in the qualifying entity's individual financial statements prepared under FRS 102 (see 3.6 below). A GAAP that is not ‘equivalent’ to the Accounting Directive is less likely to have those ‘equivalent’ disclosures.

One issue not addressed by FRS 102 is the impact of a qualified audit opinion on the parent's consolidated financial statements. A Queen's Counsel's opinion, obtained by the FRC in 2008, stated that ‘the scope for arguing that financial statements which do not comply with relevant accounting standards nevertheless give a true and fair view, or a fair presentation, is very limited’.¹

3.3.1 Statement of cash flows

The exemption removes the requirement for a cash flow statement for any qualifying entity in its individual financial statements.

3.3.2 Financial instruments

The exemption removes certain of the disclosure requirements of Sections 11 and 12 (see 3.3 above). [FRS 102.1.12(c)].

Financial institutions are not permitted to use this exemption (see 3.5 below).

The exemption depends on there being equivalent disclosures in the publicly available consolidated financial statements in which the qualifying entity is included. The guidance on ‘equivalence’ included in FRS 100 (see 3.6 below) is clear that the exemption can be taken in relation to intra-group balances that are eliminated on consolidation in these consolidated financial statements.

Notwithstanding this exemption, where a qualifying entity that is not a financial institution has financial instruments held at fair value subject to the requirements of paragraph 36(4) of Schedule 1 to the Regulations (or its equivalents in the Small Companies Regulations, LLP Regulations or Small LLP Regulations), it must give the disclosures required by ‘international accounting standards’ (see 3.4 below). [1 Sch 36(4), 1 Sch 36(4) (LLP)].

The reduction in disclosure exemptions in relation to Sections 11 and 12 applies even if the qualifying entity is not subject to UK company and LLP law. See Chapter 10 at 11.2.1.

3.3.3 Share-based payment

This exemption removes all the disclosure requirements of Section 26 except for the following:

• a description of each type of share-based payment arrangements that existed at any time during the period, including the general terms and conditions of each arrangement, such as vesting requirements, the maximum term of options granted, and the method of settlement (e.g. whether in cash or equity). An entity with substantially similar types of share-based payment arrangement may aggregate this information; [FRS 102.26.18(a)] and
• if the entity is part of a group share-based payment plan, and it recognises and measures its share-based payment expense on the basis of a reasonable allocation of the expense recognised for the group, it shall disclose that fact and the basis for the allocation (addressed further in paragraph 26.16). [FRS 102.26.22].

3.3.4 Related party transactions

This exemption removes the requirement to disclose key management personnel compensation in total. [FRS 102.1.12(e)].

3.4.1 Which financial instruments may be included at fair value in accordance with paragraph 36(4) of Schedule 1 to the Regulations?

Paragraph 36 of Schedule 1 to the Regulations (and its equivalents in Schedules 2 and 3 to the Regulations, the Small Companies Regulations, LLP Regulations and Small LLP Regulations) allow financial instruments to be included in the financial statements at fair value, where their fair value can be measured reliably, but paragraphs 36(2) and 36(3) exclude certain types of financial instruments, unless these are permitted to be held at fair value by paragraph 36(4). [1 Sch 36, 2 Sch 44, 3 Sch 30, 1 Sch 36 (SC), 1 Sch 36 (LLP), 1 Sch 36 (LLP SC)].

Paragraph 36(4) of Schedule 1 to the Regulations (and its equivalents) state that ‘financial instruments which under international accounting standards may be included in accounts at fair value, may be so included, provided that the disclosures required by such accounting standards are made.’ [1 Sch 36(4), 1 Sch 36(4) (LLP)].

The reference to ‘international accounting standards’ in this context would mean EU-adopted IFRS. [s474, s 474(LLP)]. Accordingly, reference is made to extant EU-adopted IFRS in determining whether certain financial instruments may be held at fair value and the required disclosures.

Financial instruments listed in paragraphs 36(2)(c) and 36(3) of Schedule 1 to the Regulations (and its equivalents) are as follows:

• financial liabilities, unless they are held as part of a trading portfolio or are derivatives;
• financial instruments (other than derivatives) held to maturity;
• loans and receivables originated by the company (or the LLP) and not held for trading purposes;
• interests in subsidiary undertakings, associated undertakings and joint ventures;
• equity instruments issued by the company (or the LLP);
• contracts for contingent consideration in a business combination; or
• other financial instruments with such special characteristics that the instruments according to generally accepted accounting principles or practice, should be accounted for differently from other financial instruments. [1 Sch 36(2)-36(3), 1 Sch 36(2) (LLP)-36(3) (LLP)].

FRS 102 allows a choice of applying either IAS 39, IFRS 9, or Sections 11 and 12 in the recognition and measurement of financial instruments. The situations in which financial instruments are carried at fair value under FRS 102 will differ depending on the choice taken. Following the adoption by the EU of IFRS 9, this standard is now the principal point of reference for which financial instruments may be included in the accounts at fair value when referring to paragraph 36(4) of Schedule I to the Regulations.

Furthermore, the Regulations (and its equivalents) were written with the application of the previously extant IAS 39 in mind. Terms such as ‘loans and receivables’, ‘held to maturity’ and ‘held for trading’ are not defined in FRS 102. The Regulations indicate that these terms are defined in the Accounting Directive (Directive 2013/34/EU) and Directive 91/674/EEC (for insurance undertakings) and in paragraph 96 of Schedule 2 to the Regulations (for banking companies). [10 Sch 3(1), 4 Sch 2(1) (LLP)]. Some of these terms are no longer used in IFRS 9 and therefore it would be necessary to refer back to definitions under the version of IAS 39 extant immediately before the introduction of IFRS 9.

Sections 11 and 12, where applied to the recognition and measurement of financial instruments, distinguish between basic and other financial instruments. These requirements differ significantly to those of IAS 39 and IFRS 9. Most basic financial instruments (with certain exceptions) are carried at cost or amortised cost, whereas other financial instruments are carried at fair value through profit or loss. For other financial instruments, Section 12 does not permit measurement at fair value through profit or loss where this is not permitted by the Regulations (and its equivalents). [FRS 102.12.8(c)]. Hence the potential for conflict between Sections 11 and 12 and the Regulations (and its equivalents) over financial instruments permitted to be carried at fair value should be limited. See Chapter 10 at 6 for a discussion of the classification and measurement of financial instruments and which financial instruments may be held at fair value under Sections 11 and 12.

Financial instruments that are held at fair value subject to paragraph 36(4) of Schedule 1 to the Regulations (and its equivalents) in FRS 102 financial statements (under any of the accounting choices) therefore include:

1. financial liabilities (which are not held as part of a trading portfolio nor derivatives) that are designated at fair value through profit or loss – because this eliminates or significantly reduces an ‘accounting mismatch’ or a group of financial assets and/or financial liabilities is managed and its performance evaluated on a fair value basis (IAS 39, IFRS 9 and Section 11 have similar but not identically worded provisions); [IAS 39.9, IFRS 9.4.2.2, FRS 102.11.14(b)]
2. where Section 11 is applied, financial liabilities (which are not held as part of a trading portfolio nor derivatives) that do not qualify as basic financial instruments, but would meet the conditions to be measured or designated at fair value through profit or loss under EU-adopted IFRS (i.e. under paragraphs 4.3.5 and 4.3.6 of IFRS 9); [IFRS 9.4.2.2, 4.3.5-6]
3. where IAS 39 or IFRS 9 are applied, financial liabilities (which are not held as part of a trading portfolio nor derivatives) that are not covered by (a), but are measured or designated at fair value through profit or loss; [IAS 39.11A, 12, IFRS 9.4.3.5-6]
4. financial assets, which could have been designated as held to maturity (which are not derivatives) or loans and receivables originated by the reporting entity (and which are not held for trading purposes) that:
   1. where IAS 39 is applied, are designated at either available-for-sale or are measured or designated at fair value through profit or loss (i.e. under paragraphs 9, 11A or 12 of IAS 39) – but would meet the conditions to be measured or designated at fair value under EU-adopted IFRS; [IAS 39.9, 11A, 12, IFRS 9.4.1.2A, 4.1.4-5, IFRS 9.4.3.5-6]
   2. where Section 11 is applied, are designated at fair value through profit or loss; [FRS 102.11.14(b)]
   3. where Section 11 is applied, do not qualify as basic financial instruments but would meet the conditions to be measured or designated at fair value through profit or loss under EU-adopted IFRS); [FRS 102.11.14(b), 12.8(c), IFRS 9.4.1.4-5, IFRS 9.4.3.5-6]
   4. are measured at fair value in accordance with IFRS 9 (which is extant EU-adopted IFRS); [IFRS 9.4.1.2A, 4.1.4-5] and
5. investments in subsidiaries, associated undertakings and joint ventures measured at fair value through profit or loss in consolidated or individual financial statements. [FRS 102.9.9-9B, 9.26(c), 14.4(d), 14.4B, 15.9(d), 15.9B]. See Chapter 8 at 3.4, 4.1 and 4.2, Chapter 12 at 3.3.1 and Chapter 13 at 3.6.2 and 3.6.3.

FRS 102 permits or requires investments in subsidiaries, associates and joint ventures to be measured at fair value in consolidated and/or individual financial statements in certain circumstances. However, where such investments are held at fair value through profit and loss, these fall within the scope of paragraph 36(4) of Schedule 1 to the Regulations (and its equivalents). The interaction with company and LLP law is explained further in Chapter 6 at 10.3.1.C.

Contingent consideration arising in a business combination is not permitted to be held at fair value (whatever accounting policy choice is applied to the recognition and measurement of financial instruments). [FRS 102.19.12-13, FRS 102.BC.A.28]. Equity instruments are not held at fair value under Section 22 – Liabilities and Equity.

3.4.2 What disclosures are required by paragraph 36(4) to Schedule 1 to the Regulations?

Appendix III to FRS 102 comments that an entity applying FRS 102 and holding financial instruments measured at fair value may be required to provide the disclosures required by paragraph 36(4) of Schedule 1 to the Regulations. [FRS 102 Appendix III.13].

As noted at 3.4.1 above, the disclosures required by paragraph 36(4) of Schedule 1 to the Regulations (and its equivalents) are those in extant EU-adopted IFRS, as confirmed by Appendix II – Note on legal requirements – to FRS 101 which addresses the same paragraph. [FRS 101 Appendix II.7]. The most logical interpretation of this is that an entity should make all material disclosures required by IFRS 7 – Financial Instruments: Disclosures – and IFRS 13 – Fair Value Measurement – in respect of such financial instruments.

However, Appendix III to FRS 102 states that the disclosures required by paragraph 36(4) of Schedule 1 to the Regulations have been incorporated into Section 11. Some of the disclosure requirements of Section 11 apply to all financial instruments measured at fair value, whilst others (such as paragraph 11.48A) apply only to certain financial instruments (this does not include financial instruments held as part of a trading portfolio nor derivatives). The disclosure requirements of paragraph 11.48A will predominantly apply to certain financial liabilities, however, there may be instances where paragraph 36(3) of Schedule 1 to the Regulations requires that the disclosures must also be provided in relation to financial assets, e.g. investments in subsidiaries, associates or jointly controlled entities measured at fair value through profit or loss. [FRS 102 Appendix III.13, FRS 102.9.27B].

While the guidance in Appendix III above (and the amendments made to the disclosures covered by the reduced disclosure framework), implies that FRS 102 reporters complying with the disclosures included in Sections 11 and 12 will meet the disclosure requirements of paragraph 36(4) of Schedule 1 to the Regulations (and its equivalents), we consider that care needs to be taken with both the scope of the disclosures and which disclosures are required. In any event, FRS 102 reminds entities that they must ensure that they comply with any relevant legal requirements applicable to them and that the standard does not necessarily contain all legal disclosure requirements. [FRS 102.1.2A].

The disclosure requirements of Sections 11 and 12 apply to financial instruments within the scope of whichever accounting standard is applied for the recognition and measurement of financial instruments. [FRS 102.11.1, 11.7, 12.1, 12.3, 12.26].

Paragraph 11.48A, which is excluded from the disclosure exemptions in the reduced disclosure framework, has a more restricted scope. It states that: ‘An entity, including an entity that is not a company, shall provide the following disclosures only for financial instruments measured at fair value through profit or loss in accordance with paragraph 36(4) of Schedule 1 to the Regulations. This does not include financial liabilities held as part of a trading portfolio nor derivatives.’ [emphasis added]. [FRS 102.11.48A]. However, the reference to an ‘entity, including an entity that is not a company’ implies that the disclosures in paragraph 11.48A should be given by entities that are not subject to the statutory requirements in paragraph 36(4) of Schedule 1 to the Regulations (or its equivalents) if they hold financial instruments that would fall within that paragraph as if the entity had been a UK company.

FRS 102 also requires a parent adopting a policy of accounting for its investments in subsidiaries, associates or jointly controlled entities at fair value through profit or loss in its separate financial statements to comply with the requirements of paragraph 36(4) of Schedule 1 to the Regulations by applying the disclosure requirements of Section 11 to those investments. [FRS 102.9.27B]. This means that all applicable disclosures in Section 11 must be given in respect of those investments. In our view, the same requirement would also apply where investments in subsidiaries, associates or jointly controlled entities are held at fair value through profit or loss in the consolidated financial statements or in the individual financial statements of an investor or venturer (that is not a parent).

Care should also be taken where IAS 39 or IFRS 9 is applied to the recognition and measurement of financial instruments, as financial instruments held at fair value (but not through profit or loss) may in principle be held at fair value subject to paragraph 36(4) of Schedule 1 to the Regulations (or its equivalents). Examples might include an available-for-sale financial asset or debt instrument at fair value through other comprehensive income that falls within the financial instruments listed in paragraph 36(3). Section 11 and Section 12's disclosure requirements for financial instruments at fair value, including paragraph 11.48A, are generally framed in respect of financial instruments at fair value through profit or loss (and therefore may not capture all financial instruments for which disclosures are required – see Chapter 10 at 11.2).

4.1.1 Small companies regime, small LLPs regime and small companies exemption

A UK company subject to the small companies regime (or an LLP subject to the small LLPs regime) can apply the Small Companies Regulations (or the Small LLP Regulations) and is exempt from the requirement to prepare group accounts and from giving certain disclosures required in the notes to the financial statements by Part 15 of the CA 2006. LLPs subject to the small LLPs regime are exempt from the requirement to prepare group accounts.

A UK company that takes advantage of the small companies exemption is not required to prepare a strategic report, [s414A], and is entitled to certain disclosure exemptions in the directors' report. [s415A]. LLPs are not required to prepare a directors' report or strategic report and there is, therefore, no equivalent of the small companies exemption for LLPs. Some LLPs choose to prepare a separate members' report but this is not a statutory requirement; while the LLP SORP includes certain disclosures (such as principal activities, a list of designated members etc.) that could be included in such a report, the disclosures may be presented anywhere in the annual report. [LLP SORP.30-31].

A UK company subject to the small companies regime or taking advantage of the small companies exemption is entitled to certain filing exemptions. An LLP subject to the small LLPs regime is also entitled to filing exemptions. The criteria for use of the small companies regime, small LLPs regime and the small companies exemption (which has a wider scope than the small companies regime), together with the exemptions available, are discussed in Chapter 5 at 4 and 12.

FRS 102 (where Section 1A is not applied) requires use of the profit and loss account and balance sheet formats included in Part 1 ‘General Rules and Formats’ of Schedule 1 (or where applicable, Schedule 2 or Schedule 3) to the Regulations or Part 1 ‘General Rules and Formats’ of Schedule 1 to the LLP Regulations. As explained in Chapter 6 at 4, there is a choice of adapted formats or statutory formats where Schedule 1 to the Regulations or the LLP Regulations are applied. Unless Section 1A is applied, a small company or small LLP is not permitted to use the formats included in Part 1 ‘General Rules and Formats’ of Schedule 1 to the Small Companies Regulations or Part 1 ‘General Rules and Formats’ of Schedule 1 to the Small LLP Regulations.

However, our view is that companies and LLPs applying FRS 102 (but not Section 1A) are not prevented from taking advantage of other exemptions applicable to companies subject to the small companies regime or LLPs subject to the small LLPs regime. This is because regulation 3(3) of the Small Companies Regulations specifically states that ‘Accounts are treated as having complied with any provision of Schedule 1 to these Regulations if they comply instead with the corresponding provision of Schedule 1 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.’ Regulation 8(2) of the Small Companies Regulations makes a similar statement in respect of the group accounts formats included in Schedule 6 to the Small Companies Regulations and Schedule 6 to the Regulations. [Regulations SC 3(3), 8(2)]. For LLPs, the corresponding statements are made in paragraphs 3(1) and 6(1) of the Small LLP Regulations. [LLP SC Regulations 3(1), 6(1)].

4.1.2 Medium-sized companies and LLPs

A medium-sized company (or LLP) may take advantage of certain disclosure exemptions for a financial year in which the company (or the LLP) qualifies as medium-sized and is not an excluded company (or LLP) (see Chapter 1 at 6.6). [s465-s467, s465 (LLP)-s467 (LLP)]. The exemptions for medium-sized companies impacting the strategic report (not to disclose non-financial KPIs) are not relevant for LLPs.

Companies (or LLPs) applying FRS 102 can make use of these exemptions to the extent they do not conflict with accounting standards, e.g. medium-sized companies would need to give related party disclosures in individual financial statements because this is required by FRS 102 notwithstanding the exemption in the Regulations. [Regulations 4(2B), LLP Regulations 4(2B)].