1.1 Summary of FRS 101

Application of FRS 101 can be summarised as follows:

• adoption of FRS 101 is voluntary, being one of a number of accounting standards available for financial reporting in the UK and Republic of Ireland (see Chapter 1);
• FRS 101 can only be applied in individual financial statements (see 2 below);
• FRS 101 can only be applied by a ‘qualifying entity’ (see 2.1 below);
• entities can transition to FRS 101 from IFRS or another GAAP (usually this will be from a form of UK GAAP) (see 3 below);
• entities using FRS 101 apply the recognition and measurement principles of EU-adopted IFRS, as amended by FRS 101 (see 4 below);
• entities using FRS 101 must prepare a balance sheet and profit and loss account (either as a separate income statement or as a section of the statement of comprehensive income) in accordance with the Regulations or, where applicable, the LLP Regulations. UK companies (other than banking or insurance companies) and LLPs may either apply statutory formats or adapted formats (which are based on IAS 1 – Presentation of Financial Statements) (see 5 below);
• entities using FRS 101 can take advantage of various disclosure exemptions from EU-adopted IFRS. Entities defined as ‘financial institutions’ have fewer exemptions than entities that are not financial institutions. Some of these disclosure exemptions are conditional on equivalent disclosures being included in the publicly available consolidated financial statements of the group in which the entity is consolidated and which are intended to give a true and fair view (see 6 below); and
• in addition to IFRS disclosures, entities using FRS 101 must comply with any legal requirements relating to financial statements, e.g. disclosures required by the CA 2006 and the Regulations, if subject to those requirements (see 7 below).

1.2 Effective date of FRS 101

FRS 101 was issued originally on 22 November 2012. Consolidated versions of the standard incorporating subsequent amendments were subsequently issued in August 2014, September 2015 and March 2018. The March 2018 version reflects the Amendments to FRS 102 – The Financial Reporting Standard applicable in the UK and Republic of Ireland – Triennial review 2017 – Incremental improvements and clarifications issued in December 2017 (Triennial review 2017) discussed at 1.2.1 below. Subsequent to the March 2018 version of the standard, minor changes to the Basis for Conclusions have been made by Amendments to Basis for Conclusions FRS 101 – Reduced Disclosure Framework 2017/18 cycle issued in May 2018 (discussed at 1.2.2 below).

FRS 101 has been available for use for accounting periods beginning on or after 1 January 2015. Early application was permitted but was required to be disclosed. [FRS 101.11].

The March 2018 version of FRS 101 is effective for accounting periods beginning on or after 1 January 2019. Early application of the March 2018 version of FRS 101 for accounting periods beginning prior to 1 January 2019 is permitted provided that all amendments made by the Triennial review 2017 are made at the same time. If an entity applies the Triennial review 2017 for an accounting period beginning before 1 January 2019 it shall disclose that fact. [FRS 101.14].

Since FRS 101 is based on EU-adopted IFRS, any disclosure exemptions referring to a specific requirement of IFRS are effective only once the IFRS has been EU-adopted and is first applied by the entity. [FRS 101.1, 8].

The FRC reviews FRS 101 annually to ensure that the reduced disclosure framework maintains consistency with EU-adopted IFRS. In addition, limited amendments have been made to FRS 101 (compared to EU-adopted IFRS) for compliance with the CA 2006 and the Regulations.

1.3 Statement of compliance with FRS 101

A set of financial statements prepared in accordance with FRS 101 must contain a statement in the notes to the financial statements that ‘These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework’. Since the standard does not comply with all of the requirements of EU-adopted IFRS, financial statements prepared in accordance with FRS 101 should not contain the unreserved statement of compliance referred to in paragraph 3 of IFRS 1 and otherwise required by paragraph 16 of IAS 1. [FRS 101.10].

The Regulations require a large and medium-sized UK company (except a medium-sized company preparing individual accounts) preparing Companies Act accounts to state in the notes to the accounts whether the accounts have been prepared in accordance with applicable accounting standards, giving particulars of any material departure from those standards and the reasons for it. [1 Sch 45]. Financial statements prepared in accordance with FRS 101 are prepared in accordance with applicable accounting standards (which are defined in section 464 of CA 2006), [s464], and therefore this statement would be required. See Chapter 1 at 4.6.1.

2.1 Definition of a qualifying entity

FRS 101 defines a qualifying entity as ‘a member of a group where the parent of that group prepares publicly available consolidated financial statements, which are intended to give a true and fair view (of the assets, liabilities, financial position and profit or loss) and that member is included in the consolidation’. [FRS 101 Appendix I].

A charity may not be a qualifying entity and therefore may not apply FRS 101. [FRS 101 Appendix I].

There is no requirement that a qualifying entity is a member of the group in which it is consolidated for its entire reporting period. There is also no requirement that the financial statements of the qualifying entity and the consolidated financial statements of the parent of that group (which may be the reporting entity itself) must be coterminous or have reporting dates within a particular timeframe. The use of the present tense implies that the intention is only that the qualifying entity (where it does not prepare its own consolidated financial statements) is a subsidiary of the parent at its reporting date. This is consistent with UK company law which requires that an entity which is a parent at the end of a financial year must prepare group accounts unless it is exempted from the requirement. [s399(2)].

The phrase ‘included in the consolidation’ is referenced to section 474(1) of the CA 2006 which states that this means that ‘the undertaking is included in the accounts by the method of full (and not proportional) consolidation, and references to an undertaking excluded from consolidation shall be construed accordingly’. Therefore, entities that are not fully consolidated in the consolidated financial statements, such as subsidiaries of investment entities which are accounted for at fair value through profit or loss where required by IFRS 10 – Consolidated Financial Statements, cannot use FRS 101. Associates and joint ventures are not qualifying entities since they are not members of a group (see 2.1.2 below).

There is no requirement for the consolidated financial statements in which the qualifying entity is included to be prepared under EU-adopted IFRS nor that the parent that prepares the consolidated financial statements is a UK entity. However, the consolidated financial statements must be intended to give a true and fair view (see 2.1.6 below).

2.2 Use of the disclosure exemptions

The use of the disclosure exemptions in FRS 101 (see 6 below) is conditional on all of the following criteria being met: [FRS 101.5]

• the reporting entity applies, as its financial reporting framework, the recognition, measurement and disclosure requirements of EU-adopted IFRS but makes those amendments to EU-adopted IFRS as required by the Application Guidance to FRS 101 that are necessary in order to comply with the CA 2006 and the Regulations. This is because financial statements prepared under FRS 101 are Companies Act individual accounts as defined in section 395(1) of the CA 2006 but the Application Guidance applies to any qualifying entity applying FRS 101, including those that are not companies (see 4 and 5 below);
• the reporting entity discloses in the notes to its financial statements a brief narrative summary of the disclosure exemptions adopted; and
• the reporting entity discloses the name of the parent of the group in whose consolidated financial statements its financial statements are consolidated (i.e. the parent identified in the definition of a ‘qualifying entity’) and from where those financial statements may be obtained.

A qualifying entity which is a financial institution is entitled to more limited disclosure exemptions (see 6.4 below).

2.3 The impact of section 400 and section 401 of the CA 2006 on FRS 101

FRS 101 does not override either section 400 or section 401 of the CA 2006. Section 400 exempts a UK parent company from preparing consolidated accounts if it is a subsidiary undertaking (whose immediate parent undertaking is established under the law of an EEA State) and is included in the consolidated accounts of a larger group drawn up to the same date, or to an earlier date in the same financial year, by a parent undertaking established under the law of an EEA State. Section 401 exempts a UK parent company from preparing consolidated accounts if it is a subsidiary undertaking of a parent undertaking not established under the law of an EEA State and the company and all of its subsidiary undertakings are included in the consolidated accounts of a larger group drawn up to the same date, or to an earlier date in the same financial year, by a parent undertaking. The exemptions from preparing consolidated accounts in both sections 400 and 401 are subject to various conditions including ‘equivalence’ (in respect of section 401, which is discussed at 2.1.6 above). The detailed conditions for the above exemptions from preparing group accounts under the CA 2006 are discussed further in Chapter 8 at 3.1.1.

If a UK parent company does not meet all of the conditions set out in either section 400 or section 401 (and is not otherwise exempt under the CA 2006) then it must prepare consolidated financial statements. Such consolidated financial statements cannot be prepared under FRS 101. However, the parent entity could still prepare its individual financial statements under FRS 101.

At the time of writing this chapter, the company law requirements of sections 400-401 have not been altered as a result of Brexit. However, the government has published draft legislative proposals – The Accounts and Reports (Amendment) (EU Exit) Regulations 2018. See Chapter 8 at 3.1.1.G for discussion of these draft proposals.

2.4 Interim financial statements

FRS 101 does not address the preparation of interim financial statements. However, entities applying FRS 101 to annual financial statements may use FRS 104 – Interim Financial Reporting – as a basis for their interim financial reports. FRS 104 is discussed in Chapter 34.

3.1 Companies Act restrictions on changes to FRS 101

Under the CA 2006, a company that wishes to change from preparing IAS individual accounts to preparing individual accounts under FRS 101 may do so either:

• if there is a ‘relevant change of circumstance’ as defined in section 395(4) of the CA 2006; or
• for financial years ending on or after 1 October 2012, for a reason other than a relevant change of circumstance, once in a five year period. [FRS 100 Appendix II.14].

There is no restriction on the number of times an entity can move from Companies Act accounts to IAS accounts or vice versa. Theoretically, an entity could ‘flip’ from IAS accounts to FRS 101 and back again several times without a ‘relevant change in circumstance’ provided such flips are done no more than once every five years and provided that the entity is also complying with the requirements of the CA 2006 such as those relating to consistency of financial reporting within groups (see 3.2 below).

There are no Companies Act restrictions on a change from FRS 102 or FRS 105 to FRS 101 and back again or vice versa since these are all Companies Act accounts.

3.2 Consistency of financial statements within the group

The CA 2006 requires that the directors of a UK parent company secure that the individual accounts of the parent company and of each of its subsidiary undertakings are prepared under the same financial reporting framework, be it IAS accounts or Companies Act accounts, except to the extent that in the directors' opinion there are good reasons for not doing so. [s407(1)]. However, this rule does not apply:

• if the parent company does not prepare group accounts; [s407(2)]
• if the accounts of the subsidiary undertaking are not required to be prepared under Part 15 of the CA 2006 (for example, foreign subsidiary undertakings); [s407(3)] or
• to any subsidiary undertakings that are charities (charities and non-charities within a group are not required to use the same accounting framework). [s407(4)]. This is because charities are not permitted to prepare either IAS group or individual accounts. [s395(2), s403(3)].

Additionally, a UK parent company that prepares both consolidated and separate financial statements under EU-adopted IFRS (i.e. IAS group accounts and IAS individual accounts) is not required to ensure that its subsidiary undertakings all prepare IAS individual accounts. However, it must ensure that each of its subsidiary undertakings use the same accounting framework in their individual accounts unless there are good reasons for not doing so. [s407(5)].

Therefore, a group that decides to use FRS 101 for any of its UK subsidiary undertakings, must ensure, unless there are good reasons for not doing so, that all its UK subsidiary undertakings prepare Companies Act individual accounts (i.e. the same financial reporting framework). This requirement only applies to subsidiary undertakings in scope of the section 407 consistency requirements.

Although not explicitly stated by FRS 100, there appears to be no requirement that all UK subsidiary undertakings in a group must use FRS 101 for their Companies Act individual accounts. Some subsidiary undertakings could also use FRS 102, since these are all Companies Act individual accounts and therefore they are all under the same financial reporting framework. However, while this approach would comply with the statutory requirements, groups that use a ‘mix’ of GAAP in the individual financial statements may be challenged by HMRC, particularly if this results in tax arbitrage.

Examples of ‘good reasons’ for not preparing all individual accounts within a group using the same reporting framework are contained in the document Guidance for UK Companies on Accounting and Reporting: Requirements under the Companies Act 2006 and the application of the IAS Regulation issued by the Department for Business Enterprise and Regulatory Reform (BERR) in June 2008.

3.3 Transition from EU-adopted IFRS to FRS 101

In substance, the transition requirements for entities that have been applying EU-adopted IFRS prior to conversion to FRS 101 treat the qualifying entity as not having changed its financial reporting framework. Disclosure is required only where changes are made on transition. [FRS 100.12, FRS 101.7A]. FRS 101 modifies EU-adopted IFRS in certain respects, in order to comply with the Companies Act and the Regulations.

A qualifying entity that is applying EU-adopted IFRS prior to the date of transition to FRS 101 will then be preparing Companies Act individual accounts in accordance with s395(1)(a) of the CA 2006 (rather than IAS individual accounts in accordance with s395(1)(b) of the CA 2006). It therefore must consider whether amendments are required to comply with paragraph 5(b) of FRS 101 – see 4 and 5 below – but it does not reapply the provisions of IFRS 1. Where amendments in accordance with paragraph 5(b) of FRS 101 are required, the entity should determine whether the amendments have a material effect on the first FRS 101 financial statements presented. [FRS 100.12]. Details of measurement differences between EU-adopted IFRS and FRS 101 which might result in a material effect on the financial statements are discussed at 4 below.

Where there is no material effect of such changes, the qualifying entity should disclose that it has undergone transition to FRS 101 and give a brief narrative of the disclosure exemptions taken for all periods presented in the financial statements. [FRS 100.12(a)].

Where there is a material effect caused by such changes, the qualifying entity's first FRS 101 financial statements should include: [FRS 100.12(b)]

• a description of the nature of each material change in accounting policy;
• reconciliations of its equity determined in accordance with EU-adopted IFRS to its equity determined in accordance with FRS 101 for both the date of transition to FRS 101 and for the end of the latest period presented in the entity's most recent annual financial statements prepared in accordance with EU-adopted IFRS; and
• a reconciliation of the profit or loss determined in accordance with EU-adopted IFRS to its profit or loss determined in accordance with FRS 101 for the latest period presented in the entity's most recent annual financial statements prepared in accordance with EU-adopted IFRS.

This means that, for an entity adopting FRS 101 for the first time in its annual financial statements ending on 31 December 2019 (and presenting one comparative period), reconciliations will be required of:

• equity as at 1 January 2018 and 31 December 2018; and
• profit or loss for the year ended 31 December 2018.

There is no requirement for a transition balance sheet to be prepared. [FRS 100.12, FRS 101.7A].

Amendments with a material effect must be applied retrospectively on transition unless impracticable. When it is impracticable to apply the amendments retrospectively, the qualifying entity should apply the amendment to the earliest period for which it is practicable to do so and it should identify the data presented for prior periods that are not comparable with the data for the period in which it prepares its first financial statements that conform to FRS 101. [FRS 100.13]. ‘Impracticable’ is defined in IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors.

Paragraph 5(b) of FRS 101 cross-refers to Application Guidance 1 to the standard (which forms an integral part of the standard) that includes presentational as well as recognition and measurement modifications to EU-adopted IFRS required when applying the standard. The transitional rules contain no explicit requirement to disclose material presentational changes such as the use of balance sheet and profit and loss formats in accordance with the Regulations (especially where statutory rather than adapted formats are used). However, we recommend that entities explain any material presentational changes compared to EU-adopted IFRS arising from adoption of FRS 101 in order to assist readers' understanding of the financial statements.

3.4 Transition from another version of UK GAAP or another GAAP to FRS 101

In substance, the transition requirements treat conversion to FRS 101 from another version of UK GAAP (currently FRS 102 or FRS 105) or another GAAP as a full first time conversion to EU-adopted IFRS (as modified by FRS 101).

A qualifying entity that transitions to FRS 101 should, unless it is applying EU-adopted IFRS prior to the date of transition (see 3.3 above), apply the requirements of paragraphs 6 to 33 of IFRS 1 (as adopted by the EU) including the relevant appendices, except for the requirement of paragraphs 6 and 21 to present an opening statement of financial position at the date of transition. References to IFRSs in IFRS 1 are interpreted to mean EU-adopted IFRS as amended in accordance with paragraph 5(b) of FRS 101. [FRS 100.11(b)]. This means that all of the recognition, measurement and disclosure rules for an IFRS first-time adopter apply (except for the requirement to present an opening statement of financial position) to the extent they do not conflict with EU-adopted IFRS as amended by paragraph 5(b) of FRS 101. First-time adoption of IFRS is discussed in Chapter 5 of EY International GAAP 2019.

IFRS 1 sets out specific requirements for where a subsidiary becomes a first-time adopter later than its parent (‘the D16 election’). or where a parent becomes a first-time adopter later than its subsidiary or a parent becomes a first-time adopter in its separate financial statements earlier or later than in its consolidated financial statements (‘the D17 requirements’). [IFRS 1.Appendix D.16-17]. These requirements are both amended by FRS 101 as described at 3.4.1 and 3.4.2 below.

3.5 The impact of transition on realised profits

There may be circumstances where a conversion to FRS 101 eliminates a qualifying entity's realised profits or turns those realised profits into a realised loss. TECH 02/17BL – Guidance on Realised and Distributable Profits under the Companies Act 2006 – issued by the ICAEW and ICAS, (TECH 02/17BL) states that the change in the treatment of a retained profit or loss as realised (or unrealised) as a result of a change in the law or in accounting standards or interpretations would not render unlawful a distribution already made out of realised profits determined by reference to ‘relevant accounts’ which had been prepared in accordance with generally acceptable accounting principles applicable to those accounts. This is because the CA 2006 defines realised profits or losses for determining the lawfulness of a distribution as ‘such profits and losses of the company as fall to be treated as realised in accordance with principles generally accepted at the time when the accounts are prepared, with respect to the determination for accounting purposes of realised profits or losses’. [TECH 02/17BL.3.28-29].

The effects of the introduction of a new accounting standard or of the adoption of IFRS become relevant to the application of the common law capital maintenance rule only in relation to distributions accounted for in periods in which the change will first be recognised in the accounts. This means that a change in accounting policy known to be adopted in a financial year needs to be taken into account in determining the dividend to be approved by shareholders in that year. Therefore, for example, an entity converting to FRS 101 in 2019 must have regard to the effect of adoption of FRS 101 in respect of all dividends payable in 2019 (including any final dividends in respect of 2018) even though the ‘relevant accounts’ may still be those for 2018 prepared under another GAAP. [TECH 02/17BL.3.30-37].

Statutory ‘interim accounts’ are required to be prepared under sections 836(2) and 838 of the CA 2006 (and delivered to the Registrar if the company is a public company) if a proposed distribution cannot be justified by reference to the relevant accounts. See Chapter 1 at 5.5 for further discussion.

4.1 Positive goodwill and indefinite-life intangible assets

No changes have been made to EU-adopted IFRS in respect of positive goodwill that is not amortised. Instead, FRS 101 states that paragraph B63(a) of IFRS 3 – Business Combinations, which requires that goodwill is measured at cost less impairment, should be read in accordance with paragraph A2.8 of FRS 101. [FRS 101.AG1(f)]. The non-amortisation of goodwill required by IFRS 3 conflicts with paragraph 22 of Schedule 1 to the Regulations (and its equivalents in Schedules 2 and 3) which require that an intangible asset (including goodwill) must be written off over its useful economic life.

FRS 101 notes that the non-amortisation of goodwill will usually be a departure, for the overriding purpose of giving a true and fair view, from the requirements of the Regulations. FRS 101 goes on to state that this is not a new instance of the use of the ‘true and fair override’ and it would have been required for companies reporting under previous UK GAAP which used an indefinite life for goodwill as permitted by FRS 10 – Goodwill and intangible assets. [FRS 101 Appendix II.8, 1 Sch 22].

This means that the FRC expects that entities with positive goodwill should not amortise that goodwill under FRS 101. Those entities should invoke a true and fair override as permitted by paragraph 10(2) of Schedule 1 to the Regulations (or its equivalents in Schedules 2 and 3) to overcome the requirement to write off goodwill over its useful economic life in paragraph 22 of Schedule 1 to the Regulations (or its equivalents in Schedules 2 and 3). The use of the true and fair override requires disclosure of the particulars of the departure from the Regulations, the reasons for it and its effect. [FRS 101 Appendix II.8, 1 Sch 10(2)]. Continuation of goodwill amortisation, if permitted under previous GAAP, is not allowed by FRS 101.

It is anticipated that the use of a true and fair override in respect of goodwill amortisation will be limited in application since, in individual financial statements, there will only be goodwill where a business that is not an entity has been acquired.

FRS 101 goes on to state that similar considerations (i.e. the need for a true and fair override) may apply to other intangible assets that are not amortised because they have an indefinite life and intangible assets that have a residual value that is not zero (i.e. intangible assets that are not written off over their useful economic life). [FRS 101 Appendix II.8A, 1 Sch 22].

4.2 Presentation of fair value gains and losses attributable to changes in own credit risk on financial liabilities designated at fair value through profit or loss in other comprehensive income

IFRS 9 requires qualifying entities to present fair value gains or losses attributable to changes in own credit risk on financial liabilities designated at fair value through profit or loss in other comprehensive income. The Note on Legal Requirements to FRS 101 observes that this will usually be a departure from the requirement of paragraph 40 of Schedule 1 of the Regulations (and its equivalents in Schedules 2 and 3) for the overriding purpose of giving a true and fair view. As a result, when applicable, disclosure will need to be given in the notes to the accounts of ‘particulars of the departure, the reasons for it and its effect’. [FRS 101 Appendix II.7F].

FRS 101 is silent about the other two circumstances in IFRS 9 in which accounting for fair value gains and losses are required in other comprehensive income. In our view:

• accounting for changes in the fair value of an equity instrument through other comprehensive income (without recycling of fair value changes to profit and loss) makes use of the alternative accounting rules in the Regulations and does not therefore require the use of a true and fair override (see Chapter 6 at 10.2); and
• the model used for accounting for changes in the fair value of a debt instrument through other comprehensive income is similar, but not identical, to the available-for-sale asset model under IAS 39 – Financial Instruments: Recognition and Measurement. In our view, it is inferred from FRS 101's silence on the matter that this model is included within the fair value accounting rules in the Regulations (see Chapter 6 at 10.3) and does not therefore require the use of a true and fair override to apply.

4.3 Negative goodwill

FRS 101 changes paragraph 34 of IFRS 3 so that any gain arising from a bargain purchase (i.e. negative goodwill) is not recognised immediately in profit and loss. Instead, any amount of negative goodwill resulting from a business combination should be shown on the face of the statement of financial position on the acquisition date, immediately below goodwill, and followed by a subtotal of the net amount of positive and negative goodwill. Subsequently, the negative goodwill up to the fair value of the non-monetary assets acquired should be recognised in profit and loss in the periods in which the non-monetary assets are recovered. Any amount of the negative goodwill in excess of the fair values of the non-monetary assets acquired should be recognised in profit or loss in the periods expected to be benefited. [FRS 101.AG1(c)].

This change to EU-adopted IFRS was necessary because the Accounting Directive (on which the requirements in the Regulations are based) may be inconsistent with the recognition requirements for negative goodwill under EU-adopted IFRS. [FRS 101 Appendix II Table 1].

Monetary assets are defined in EU-adopted IFRS as ‘money held and assets to be received in fixed or determinable amounts of money’. [IAS 38.8]. Conversely, an essential feature of a non-monetary asset is the absence of a right to receive a fixed or determinable number of units of currency. IAS 21 – The Effects of Changes in Foreign Exchange Rates – gives examples of non-monetary assets as amounts prepaid for goods and services, goodwill, intangible assets, inventories and property, plant and equipment. [IAS 21.16]. IFRS 9 states that investments in equity instruments are non-monetary items. [IFRS 9.B5.7.3]. This suggests that equity investments in subsidiaries, associates or joint ventures are also non-monetary items.

4.4 Contingent consideration balances arising from business combinations

Contingent consideration balances arising from business combinations whose acquisition dates are on or after the date an entity first applied the amendments to company law, set out in The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 (SI 2015/980), i.e. generally the start of accounting periods beginning on or after 1 January 2016 when SI 2015/980 was not early adopted, should be accounted for in accordance with IFRS 3. [FRS 101.AG1(d)]. This means that contingent consideration is initially recognised at fair value with subsequent changes in the fair value of contingent consideration not classified as equity recognised in profit or loss. [IFRS 3.58].

Contingent consideration balances arising from business combinations whose acquisition dates preceded the date when an entity first applied the amendments to company law set out in SI 2015/980 should not be adjusted as a result of the change in company law. Instead, the entity's previous accounting policies for contingent consideration should continue to apply. [FRS 101.AG1(d)]. Prior to the July 2015 amendments which incorporate SI 2015/980, FRS 101 required that an adjustment to the cost of a business combination contingent on future events be recognised only if the estimated amount of the adjustment was probable and could be measured reliably. If the potential adjustment was not recognised at the acquisition date but subsequently became probable and could be measured reliably, the additional consideration was treated as an adjustment to the cost of the combination (i.e. goodwill).

FRS 101 is silent on accounting for contingent consideration on the acquisition of a subsidiary, associate or joint venture which is accounted for as an investment under IAS 27. However, in practice, if contingent consideration is included in the initial measurement of the asset, subsequent payments are either recognised in profit or loss or capitalised as part of the cost of the asset. We believe that, consistent with the view expressed in Chapter 8 at 2.1.1 of EY International GAAP 2019, until the IASB issues further guidance, differing views remain about the circumstances in which, and to what extent, variable payments, such as contingent consideration should be recognised when initially recognising the underlying asset. There are also differing views about the extent to which subsequent changes should be recognised through profit or loss or capitalised as part of the cost of the asset. Where entities have made an accounting policy choice regarding recognition of contingent consideration and subsequent changes in accounting for the cost of investments in subsidiaries, associates or joint ventures in separate financial statements, the policy should be disclosed and consistently applied.

4.5 Government grants deducted from the cost of fixed assets

FRS 101 has deleted paragraph 28 of IAS 16 – Property, Plant and Equipment – and has amended or deleted paragraphs 24 to 29 of IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance – in order to eliminate the option in IFRS that permits a government grant relating to an asset to be deducted in arriving at the carrying amount of the asset. Consequently, all government grants related to assets should be presented in the financial statements by setting up the grant as deferred income that is recognised in profit or loss on a systematic basis over the useful life of the asset. In addition, the option in paragraph 29 of IAS 20 that permits grants related to income to be deducted in reporting the related expense has been deleted. Consequently, in profit or loss the grant must be reported either separately or under a general heading such as ‘Other operating income’. [FRS 101.AG1(l)-(r)].

These changes to EU-adopted IFRS were necessary because the Regulations prohibit off-setting of items that represent assets against items that represent liabilities unless specifically permitted or required. [FRS 101 Appendix II Table 1].

4.6 Provisions, contingent assets and contingent liabilities

FRS 101 changes paragraph 92 of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets – to state that when, in extremely rare cases, disclosure of some or all of the information required by paragraphs 84-89 of IAS 37 can be expected to prejudice seriously the position of the entity in a dispute with other parties, on the subject matter of the provision, contingent liability or contingent asset, the entity need not disclose all of the information required by those paragraphs insofar as it relates to the dispute, but should disclose at least the following: [FRS 101.AG1(s)]

• in relation to provisions:
  • a table showing the reconciliation required by paragraph 84 in aggregate, including the source and application of any amounts transferred to or from provisions during the reporting period;
  • particulars of each provision in any case where the amount of the provision is material; and
  • the fact that, and reason why, the information required by paragraphs 84 and 85 has not been disclosed.
• in relation to contingent liabilities:
  • particulars and the total amount of any contingent liabilities (excluding those which arise out of insurance contracts) that are not included in the statement of financial position;
  • the total amount of contingent liabilities which are undertaken on behalf of or for the benefit of:
    • any parent or fellow subsidiary of the entity;
    • any subsidiary of the entity; or
    • any entity in which the reporting entity has a participating interest,

      should each be stated separately; and

• • the fact that, and reason why, the information required by paragraph 86 has not been disclosed.

• In relation to contingent assets, the entity should disclose the general nature of the dispute, together with the fact that, and reason why, the information required by paragraph 89 has not been disclosed.

This amendment was made because the ‘seriously prejudicial’ exemption in IAS 37 does not apply to disclosures required by the Regulations. Although this matter is implicitly covered by paragraph 4A of FRS 101, which requires that the requirements of the Regulations must be complied with (see 2 above), the FRC decided to specifically highlight this constraint on the IAS 37 exemption. [FRS 101.BC79].

These amended disclosures apply to all entities applying FRS 101, not just entities subject to the requirements of the Regulations.

4.7 Realised profits

FRS 101 has changed paragraph 88 of IAS 1 to clarify the precedence of the Regulations over IFRS in this matter by adding the words ‘or unless prohibited by the Act’ after ‘an entity should recognise all items of income and expense arising in a period in profit or loss unless an IFRS requires or permits otherwise’. [FRS 101.AG1(k)].

Paragraph 13(a) of Schedule 1 to the Regulations (and its equivalents in Schedules 2 and 3 (the related requirement in Schedule 3 is modified)) require that only profits realised at the balance sheet date are included in the profit or loss account. [FRS 101 Appendix II.12]. Paragraph 39 of Schedule 1 to the Regulations (and its equivalents in Schedules 2 and 3) allow stocks, investment property and living animals or plants to be held at fair value in Companies Act accounts. [FRS 101 Appendix II.13]. Paragraph 40(2) of Schedule 1 to the Regulations (and its equivalents in Schedules 2 and 3) require that, in general, movements in the fair value of financial instruments, stocks, investment properties or living animals and plants are recognised in the profit and loss account notwithstanding the usual restrictions allowing only realised profits and losses to be included in the profit and loss account. Therefore, paragraph 40 of Schedule 1 overrides paragraph 13(a) of Schedule 1 and such fair value gains can be recognised in profit and loss under FRS 101. [FRS 101 Appendix II.14].

The legal appendix to FRS 101 states that entities measuring investment properties, living animals or plants, or financial instruments at fair value may transfer such amounts to a separate non-distributable reserve instead of carrying them forward in retained earnings but are not required to do so. The FRC suggests that presenting fair value movements that are not distributable profits in a separate reserve may assist with the identification of profits available for that purpose. [FRS 101 Appendix II.15].

Whether profits are available for distribution must be determined in accordance with applicable law. Entities may also refer to TECH 02/17BL to determine the profits available for distribution. [FRS 101 Appendix II.16].

4.8 Equalisation provisions

FRS 101 has changed paragraph 14(a) of IFRS 4 – Insurance Contracts – to insert the words ‘unless otherwise required by the regulatory framework that applies to the entity’ at the beginning of the sentence which prohibits the recognition of catastrophe provisions and equalisation provisions. In addition, the following sentence has been added to the end of the paragraph. ‘The presentation of any such liabilities should follow the requirements of the Regulations (or other legal framework that applies to that entity).’ [FRS 101.AG1(fA)].

The purpose of these amendments was to remove a conflict between IFRS 4 (which does not permit the recognition of equalisation and catastrophe provisions for claims that have not been incurred) and Schedule 3 to the Regulations (which requires the recognition of equalisation provisions as a liability).

However, following the implementation of the Solvency II regulatory regime, with effect from 1 January 2016, the UK regulatory framework no longer allows insurers to recognise catastrophe provisions and equalisation provisions (although Schedule 3 to the Regulations was not amended). However, insurers may recognise equalisation or catastrophe provisions if permitted under another legal framework.

4.9 Equity accounting for investments in subsidiaries, associates and joint ventures

IAS 27, Schedule 1 to the Regulations and the LLP Regulations permit the use of equity accounting for investments in subsidiaries, associates and joint ventures.

The use of equity accounting for these interests is conditional on the investment in subsidiary, associate or joint venture qualifying as a participating interest (see Chapter 6 at 5.3.4.D), which will usually be the case. If participating interests are accounted for using the equity method and the profit attributable to a participating interest recognised in profit and loss account exceeds the amount of any dividends (including dividends already paid and those whose payment can be claimed), the difference must be placed in a reserve which cannot be distributed to shareholders. [1 Sch 29A(2)(b)].

However, Schedule 2 and Schedule 3 to the Regulations do not permit the use of equity accounting for participating interests. Therefore, entities applying either Schedule 2 or Schedule 3 to the Regulations (i.e. banking and insurance entities, respectively) may not take advantage of the option in paragraph 10(c) of IAS 27 to account for investments in subsidiaries, joint ventures and associates using the equity method. [FRS 101 Appendix II.7E].

4.10 Investment entities

FRS 101 does not apply to consolidated financial statements. However, a parent that meets the definition of an investment entity under IFRS 10, and is therefore required (in most situations) to measure its investment in a subsidiary at fair value through profit or loss, must measure that investment in the same way in its separate financial statements, as required by paragraph 11A of IAS 27. In other words, a qualifying entity that meets the definition of an investment entity must measure its investment in subsidiaries at fair value through profit or loss in its individual financial statements. [FRS 101 Appendix II.17].

An investment entity which measures its investments in subsidiaries at fair value through profit or loss will be required to make the additional disclosures required by paragraph 36(4) of Schedule 1 to the Regulations (see 6.3 below). [FRS 101 Appendix II.20].

4.11 Limited liability partnerships (LLPs)

LLPs applying FRS 101 will be doing so in conjunction with The Limited Liability Partnerships, (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008 (SI 2008/1911) and the LLP Regulations, both as amended. It is considered by the FRC that in many cases these regulations are similar to the Regulations, limiting the situations in which legal matters relevant to the financial statements of LLPs are not addressed in Appendix II to FRS 101. [FRS 101 Appendix II.21].

Therefore, generally, the issues identified in relation to Schedule 1 to the Regulations at 4.1 to 4.10 above also apply to Schedule 1 to the LLP Regulations.

5.1 Balance sheet and profit and loss formats required by FRS 101

Qualifying entities subject to Schedule 1 to the Regulations have a choice regarding the presentation of the balance sheet and the profit and loss account. These entities can either:

• comply with the balance sheet and profit and loss format requirements in Section B of Part 1 of Schedule 1 to the Regulations (i.e. use ‘statutory formats’); or
• adapt one of the balance sheet or profit and loss account formats in Section B of Part 1 of Schedule 1 to the Regulations (i.e. use ‘adapted formats’) so as:
  • (in the case of the balance sheet) to distinguish between current and non-current items in a different way; and
  • provided that (for both the balance sheet and profit and loss account):
    • the information given is at least equivalent to that which would have been required by the use of such format had it not been thus adapted; and
    • the presentation is in accordance with generally accepted accounting principles or practice. [1 Sch 1A].

The LLP Regulations allow the same choice for LLPs. [1 Sch 1A (LLP)].

The choice to apply the adapted balance sheet and profit and loss formats (i.e. the presentation requirements of IAS 1) is available only for those entities applying Schedule 1 to the Regulations or the LLP Regulations. The choice is not available to entities applying Schedule 2 to the Regulations (banking companies) or Schedule 3 to the Regulations (insurance companies).

FRS 101 states that when a qualifying entity chooses to use the adapted formats as described above, it should apply the relevant presentation requirements of IAS 1 and, in addition, the profit and loss account (whether presented as a component of the statement of comprehensive income, or as a separate statement) should disclose ‘profit or loss before taxation’. [FRS 101.AG1(h)-(i)]. The presentation requirements of IAS 1 are discussed in Chapter 3 at 3 of EY International GAAP 2019.

A qualifying entity not permitted or not choosing to apply the adapted formats, [1 Sch 1A(1)-(2)], should comply with the balance sheet format requirements and present the components of profit or loss in the statement of comprehensive income (in either the single statement or two statement approach) in accordance with the profit and loss account formats of the CA 2006 (i.e. the statutory formats), instead of paragraphs 54 to 76, 82, and 85 to 86 of IAS 1.

A qualifying entity should apply, as required by company law, either Part 1 ‘General Rules and Formats’ of Schedule 1 to the Regulations; Part 1 ‘General Rules and Formats’ of Schedule 2 to the Regulations; Part 1 ‘General Rules and Formats’ of Schedule 3 to the Regulations; or Part 1 ‘General Rules and Formats’ of Schedule 1 to the LLP Regulations (‘the General Rules to the formats’). [FRS 101.AG1(h)-(i)].

The General Rules to the formats apply to statutory formats. So far as is practicable, the General Rules to the formats (set out in paragraphs 2 to 9A of Section A of Part 1 of Schedule 1 to the Regulations) also apply to the adapted formats. [1 Sch 1A(3)]. There are similar requirements in the LLP Regulations. The General Rules to the formats are discussed in Chapter 6 at 4.4.

When an asset or liability relates to more than one item in the balance sheet, the relationship of such asset or liability to the relevant items must be disclosed either under those items or in the notes to the accounts. [1 Sch 9A]. This requirement in the General Rules to the formats applies to both statutory and adapted formats.

Therefore, banking and insurance companies, as well as those entities applying Schedule 1 to the Regulations but choosing not to use the adapted formats, must use the statutory balance sheet and profit and loss account formats set out in Section B of Part 1 of the relevant schedule to the Regulations. The legal appendix to FRS 101 confirms that the requirements of paragraphs 54 to 76, 82 and 85 to 86 of IAS 1 do not apply unless the adapted formats in Schedule 1 to the Regulations (i.e. the option to use the IAS formats) are chosen. [FRS 101 Appendix II Table 1].

FRS 101 can also be applied by qualifying entities not subject to the Regulations or the LLP Regulations. The requirements in the Application Guidance to FRS 101 apply to all entities not just companies. [FRS 101.5(b)]. A qualifying entity must also ensure it complies with any relevant legal requirements applicable to it. [FRS 101.4A]. FRS 102 is more specific and requires entities to apply the formats included in one of Schedules 1, 2 or 3 to the Regulations or the LLP Regulations (so allowing the choice of statutory or adapted formats where Schedule 1 to the Regulations or the LLP Regulations are applied), except to the extent that these requirements are not permitted by any statutory framework under which such entities report. [FRS 102.4.1, 4.2, 5.1, 5.5, 5.7]. It seems likely a similar approach is intended under FRS 101.

The required format to be used by a qualifying entity that is not a company or an LLP may be determined by the legal framework governing the financial statements of such entities (see discussion in Chapter 6 at 4.2 on which formats apply to different types of entities). In other cases, management of such entities must apply judgement in determining the most appropriate format in the Regulations or LLP Regulations to use for the circumstances of the entity concerned, where the statutory framework is not prescriptive.

The General Rules to the formats to Schedule 1 to the Regulations state that once a particular format (in Section B of Part 1 to that schedule) for the balance sheet (or profit and loss account) has been adopted for any financial year, the company's directors must use the same format in preparing Companies Act accounts for subsequent financial years, unless in their opinion there are special reasons for a change. Particulars of any such change must be given in a note to the accounts in which the new format is first used, and the reasons for the change must be explained. [1 Sch 2, 6 Sch 1]. Schedule 1 to the Regulations provides a choice of two balance sheet and two profit and loss account statutory formats. There is a similar requirement in the LLP Regulations. There is, however, no choice of statutory formats available in Schedules 2 or 3 of the Regulations.

The above paragraph is discussing a change in the statutory format adopted but, as the paragraph is included in the General Rules to the formats, its requirements apply so far as is practicable where adapted formats are used.

FRS 101 is silent on how an entity would implement a change from a statutory balance sheet and profit and loss account format to an IAS 1 format (i.e. adapted format) (or vice versa) in an accounting period subsequent to adoption of FRS 101. In our view, this is a voluntary change in accounting policy to which IAS 8 applies. Consequently, the change should be applied retrospectively, prior periods should be restated and the disclosures required by paragraph 29 of IAS 8 must be made (as well as the disclosures required by the Regulations described above).

5.2 Notes to the financial statements

Schedule 1 to the Regulations (and its equivalents in Schedule 2 and Schedule 3 and the LLP Regulations) require the notes to the financial statements to be presented in the order in which, where relevant, the items to which they relate are presented in the statement of financial position and the income statement. [1 Sch 42(2)]. A qualifying entity preparing financial statements in accordance with FRS 101 should have regard to this requirement when determining a systematic manner for the presentation of its notes to the financial statements in accordance with paragraphs 113 and 114 of IAS 1. [FRS 101 Appendix II.11A].

5.3 Extraordinary items

IFRS has no concept of ‘extraordinary items’. The concept of extraordinary items has also been removed for entities applying Schedule 1 to the Regulations or the LLP Regulations.

Consequently, only entities applying Schedule 2 or Schedule 3 to the Regulations (i.e. banking companies and insurance companies) are still required to present extraordinary items separately in the profit and loss account. However, we would expect this requirement to have no practical impact as we would not expect to see any extraordinary items under FRS 101. The legal appendix to FRS 101 states that ‘entities should note that extraordinary items are extremely rare as they relate to highly abnormal events or transactions’. [FRS 101 Appendix II.11].

Ordinary activities (for entities reporting under Schedule 2 or Schedule 3 to the Regulations) are defined as ‘any activities which are undertaken by a reporting entity as part of its business and such related activities in which the reporting entity engages in furtherance of, incidental to, or arising from, these activities. Ordinary activities include any effects on the reporting entity of any event in the various environments in which it operates, including the political, regulatory, economic and geographical environments, irrespective of the frequency or unusual nature of the events’. [FRS 101.AG1(j)].

Extraordinary activities are ‘material items possessing a high degree of abnormality which arise from events or transactions that fall outside the ordinary activities of the reporting entity and which are not expected to recur. They do not include items occurring within the entity's ordinary activities that are required to be disclosed by IAS 1.97, nor do they include prior period items merely because they relate to a prior period’. [FRS 101.AG1(j)].

5.4 Presentation of discontinued operations

FRS 101 amends IFRS 5 to: [FRS 101.AG1(g)]

• remove the option to present the analysis of discontinued operations into its component parts (i.e. revenue, expenses, pre-tax profit, related income tax expense, gain or loss on remeasurement to fair value less costs to sell or on disposal of the discontinued operation and the related income tax expense) in the notes to the financial statements. This analysis must be presented on the face of the statement of comprehensive income;
• require the analysis above to be shown on the face of the statement of comprehensive income in a column identified as related to discontinued operations (i.e. separately from continuing operations);
• require a total column (i.e. the sum of continuing and discontinued operations) to be presented on the face of the statement of comprehensive income; and
• remove the option to present income from continuing operations and from discontinued operations attributable to owners of the parent in the notes to the financial statements. This analysis must be presented on the face of the statement of comprehensive income.

This amended presentation is required for all entities applying FRS 101, even those who have chosen to apply the adapted (i.e. IAS 1) balance sheet and profit and loss account presentation formats (see 5.1 above).

In substance, this means that the single line presentation of discontinued operations in IFRS is replaced by a three-column approach with the detailed analysis of the results from the discontinued operation shown on the face of the statement of comprehensive income. This is illustrated in the following example which uses the Schedule 1 statutory formats:

6.1 Disclosure exemptions

Qualifying entities are permitted the following disclosure exemptions from EU-adopted IFRS from when the relevant standard is applied: [FRS 101.7-8]

• the requirement of paragraphs 6 and 21 of IFRS 1 to present an opening statement of financial position at the date of transition and related notes on first-time adoption of FRS 101 (see 3.4 above);
• the requirements of paragraphs 45(b) and 46 to 52 of IFRS 2 – Share-based Payment – provided that for a qualifying entity that is:
  • a subsidiary, the share-based payment arrangement concerns equity instruments of another group entity;
  • an ultimate parent, the share-based payment arrangement concerns its own equity instruments and its separate financial statements are presented alongside the consolidated financial statements of the group;

    and, in both cases, provided that equivalent disclosures are included in the consolidated financial statements of the group in which the entity is consolidated (see 6.1.1 below);

• the requirements of paragraphs 62, B64(d), (e), (g), (h), (j) to (m), n(ii), (o)(ii), (p), (q)(ii), B66 and B67 of IFRS 3 provided that equivalent disclosures are included in the consolidated financial statements of the group in which the entity is consolidated (see 6.1.2 below);
• the requirements of paragraph 33(c) of IFRS 5 provided that equivalent disclosures are included in the consolidated financial statements of the group in which the entity is consolidated (see 6.1.3 below);
• the requirements of IFRS 7 provided that equivalent disclosures are included in the financial statements of the group in which the entity is consolidated (see 6.1.4 below). However, entities which are subject to the CA 2006 and the Regulations (or the LLP Regulations) are legally required to provide disclosures related to financial instruments including those measured at fair value (see 6.3 and 7.2 below). Qualifying entities that are financial institutions do not receive this exemption and must apply the disclosure requirements of IFRS 7 in full (see 6.4 below);
• the requirements of paragraphs 91 to 99 of IFRS 13 provided that equivalent disclosures are included in the consolidated financial statements of the group in which the entity is consolidated (see 6.1.5 below). However, entities which are subject to the CA 2006 and the Regulations (or the LLP Regulations) are legally required to provide disclosures related to financial instruments including those measured at fair value (see 6.3 and 7.2 below). Qualifying entities that are financial institutions can only take advantage of the exemptions to the extent that they apply to assets and liabilities other than financial instruments (see 6.4 below);
• the requirements of the second sentence of paragraph 110 and paragraphs 113(a), 114, 115, 118, 119(a) to (c), 120 to 127 and 129 of IFRS 15 (see 6.1.6 below).
• the requirements of paragraph 52, the second sentence of paragraph 89, and paragraphs 90, 91 and 93 of IFRS 16 as well as the requirements of paragraph 58 of IFRS 16, provided that the disclosure of details of indebtedness required by paragraph 61(1) of Schedule 1 to the Regulations is presented separately for lease liabilities and other liabilities, and in total (see 6.1.7 below);
• the requirement in paragraph 38 of IAS 1 to present comparative information in respect of:
  • paragraph 79(a)(iv) of IAS 1;
  • paragraph 73(e) of IAS 16;
  • paragraph 118(e) of IAS 38 – Intangible Assets;
  • paragraphs 76 and 79(d) of IAS 40 – Investment Property; and
  • paragraph 50 of IAS 41 – Agriculture (see 6.1.8 below);
• the requirements of paragraphs 10(d), 10(f), 16, 38A to 38D, 40A to 40D, 111 and 134 to 136 of IAS 1 (see 6.1.9 below). However, qualifying entities that are financial institutions are not permitted to take advantage of the exemptions in paragraphs 134 to 136 of IAS 1 (see 6.4 below);
• the requirements of IAS 7 – Statement of Cash Flows (see 6.1.10 below);
• the requirements of paragraphs 30 and 31 of IAS 8 (see 6.1.11 below);
• the requirements of paragraphs 17 and 18A of IAS 24 – Related Party Disclosures – and the requirements in IAS 24 to disclose related party transactions entered into between two or more members of a group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member (see 6.1.12 below); and
• the requirements of paragraphs 130(f)(ii), 130(f)(iii), 134(d) to 134(f) and 135(c) to 135(e) of IAS 36 – Impairment of Assets – provided that equivalent disclosures are included in the consolidated financial statements of the group in which the entity is consolidated (see 6.1.13 below).

When a paragraph within a given standard cross-refers to the requirements of an exempted paragraph listed above, the qualifying entity is nevertheless permitted to take the exemption in the exempted paragraph. [FRS 101.8A].

Use of the disclosure exemptions is conditional on the following disclosures in the notes to the financial statements: [FRS 101.5(c)]

1. a brief narrative summary of the exemptions adopted; and
2. the name of the parent of the group in whose consolidated financial statements the reporting entity is consolidated and from where those financial statements may be obtained (i.e. the parent identified in the term ‘qualifying entity’).

There is no requirement to list all of the disclosure exemptions in detail. Reporting entities can also choose to apply the disclosure exemptions on a selective basis. This may be necessary, for example, where not all of the relevant ‘equivalent’ disclosures are made in the consolidated financial statements of the parent on the grounds of materiality (see 6.2 below).

Each of the disclosure exemptions listed above is discussed below.

6.2 ‘Equivalent’ disclosures

Certain of the disclosure exemptions in FRS 101 are dependent on the provision of ‘equivalent’ disclosures in the publicly available consolidated financial statements of the parent in which the entity is included.

The following table summarises which disclosure exemptions need ‘equivalent’ disclosures in the consolidated financial statements of the parent and which do not.

FRS 101 refers to the Application Guidance in FRS 100 in deciding whether the consolidated financial statements of the group in which the reporting entity is included provides disclosures that are ‘equivalent’ to the requirements of EU-adopted IFRS from which relief is provided. [FRS 101.9].

The Application Guidance in FRS 100 states that:

• it is necessary to consider whether the publicly available consolidated financial statements of the parent provide disclosures that meet the basic disclosure requirements of the relevant standard or interpretation issued (or adopted) by the relevant standard setter without regarding strict conformity with each and every disclosure. This assessment should be based on the particular facts, including the similarities to and differences from the requirements of the relevant standard from which relief is provided. The concept of ‘equivalence’ is intended to be aligned to that described in section 401 of the CA 2006; [FRS 100.AG8-9] and
• disclosure exemptions for subsidiaries are permitted where the relevant disclosure requirements are met in the consolidated financial statements, even where the disclosures are made in aggregate or abbreviated form, or in relation to intra-group balances, those intra-group balances have been eliminated on consolidation. If, however, no disclosure is made in the consolidated financial statements on the grounds of materiality, the relevant disclosures should be made at the subsidiary level if material in those financial statements. [FRS 100.AG10].

This means that a qualifying entity must review the consolidated financial statements of its parent to ensure that ‘equivalent’ disclosures have been made for each of the above exemptions that it intends to use. Where a particular ‘equivalent’ disclosure has not been made (unless the disclosure relates to an intra-group balance eliminated on consolidation) then the qualifying subsidiary cannot use the exemption in respect of that disclosure.

6.3 Disclosures required by the Regulations in the financial statements for certain financial instruments (and other assets) which may be held at fair value

Paragraph 36(4) of Schedule 1 to the Regulations (and its equivalents in Schedule 2 and Schedule 3 to the Regulations and the LLP Regulations) 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. [FRS 101 Appendix II.6]. The reference to ‘international accounting standards’ in this context means EU-adopted IFRS.

The legal appendix to FRS 101 confirms that a qualifying entity that has financial instruments measured at fair value in accordance with the requirements of paragraph 36(4) of Schedule 1 to the Regulations (or its equivalents) is legally required to provide the relevant disclosures set out in extant EU-adopted IFRS. [FRS 101 Appendix II.7]. The most logical interpretation of this is that an entity should make all material disclosures required by IFRS 7 and IFRS 13 in respect of such instruments.

The financial instruments referred to by paragraph 36(4) of Schedule 1 of the Regulations (and its equivalents) are those listed in paragraphs 36(2)(c) and 36(3) of Schedule 1 to the Regulations (and its equivalents). These are: [1 Sch 36]

• any financial liability which is not held for trading or a derivative, i.e. a financial liability measured or designated at fair value through profit or loss (FVPL) under paragraphs 4.2.2, 4.3.5 or 4.3.6 of IFRS 9;
• loans and receivables originated by the reporting entity, not held for trading purposes, and measured or designated at either fair value through other comprehensive income (FVOCI) or FVPL under paragraphs 4.1.2A, 4.1.4 or 4.1.5 of IFRS 9;
• interests in subsidiary undertakings, associated undertakings and joint ventures accounted at FVOCI or FVPL under IFRS 9 via paragraphs 10, 11 or 11A of IAS 27 or paragraph 18 of IAS 28 – Investments in Associates and Joint Ventures;
• contracts for contingent consideration in a business combination measured at FVPL; 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.

In addition, qualifying entities that are preparing Companies Act accounts must provide the disclosures required by paragraph 55 of Schedule 1 to the Regulations (and its equivalents in Schedules 2 and 3 to the Regulations and the LLP Regulations) which set out requirements relating to financial instruments at fair value. [FRS 100 Appendix II.7D]. These disclosures relate to financial instruments and other assets held at fair value generally and not just to those financial instruments measured at fair value in accordance with paragraph 36(4) as discussed above. Disclosures are required of: [1 Sch 55]

• the significant assumptions underlying the valuation models and techniques used when determining the fair value of the instruments or other assets;
• for each category of financial instrument or other asset, the fair value of the assets and the changes in value included directly in the profit and loss account or credited to or debited from the fair value reserve in respect of those assets;
• for each class of derivatives, the extent and nature of the instruments, including significant terms and conditions that may affect the amount, timing and certainty of future cash flows; and
• where any amount is transferred to or from the fair value reserve during the financial year, disclosure (in tabular form) of the opening and closing balance of the reserve, the amount transferred to or from the reserve during the year and the source and application respectively of the amounts so transferred.

6.4 Disclosure exemptions for financial institutions

Financial institutions are permitted to apply FRS 101 but receive fewer disclosure exemptions. A qualifying entity which is a financial institution may take advantage in its individual financial statements of the disclosure exemptions set out at 6.1 above except for: [FRS 101.7]

• the disclosure exemptions from IFRS 7;
• the disclosure exemptions from paragraphs 91 to 99 of IFRS 13 to the extent that they apply to financial instruments. Therefore, a financial institution can take advantage of the disclosure exemptions from paragraphs 91 to 99 of IFRS 13 for assets and liabilities other than financial instruments (e.g. property plant and equipment, intangible assets, and investment property); and
• the capital disclosures of paragraphs 134 to 136 of IAS 1.

Entities which are subject to the CA 2006 and the Regulations or the LLP Regulations are legally required to provide disclosures related to financial instruments and assets and liabilities including those measured at fair value (see 6.3 above and 7.2 below).

The FRC has opted not to provide a generic definition of a financial institution. Instead, it has provided a list of entities that are stated to be financial institutions. A ‘financial institution’ is stated to be any of the following: [FRS 101 Appendix I]

1. a bank which is:
   1. a firm with a Part 4A permission (as defined in section 55A of the Financial Services and Markets Act 2000 or references to equivalent provisions of any successor legislation) which includes accepting deposits and:
      1. which is a credit institution; or
      2. whose Part 4A permission includes a requirement that it complies with the rules in the General Prudential sourcebook and the Prudential sourcebook for Banks, Building Societies and Investment Firms relating to banks, but which is not a building society, a friendly society or a credit union;
   2. an EEA bank which is a full credit institution;
2. a building society which is defined in section 119(1) of the Building Societies Act 1986 as a building society incorporated (or deemed to be incorporated) under that Act;
3. a credit union, being a body corporate registered under the Co-operative and Community Benefit Societies Act 2014 as a credit union in accordance with the Credit Unions Act 1979, which is an authorised person;
4. custodian bank or broker-dealer;
5. an entity that undertakes the business of effecting or carrying out insurance contracts, including general and life assurance entities;
6. an incorporated friendly society incorporated under the Friendly Societies Act 1992 or a registered friendly society registered under section 7(1)(a) of the Friendly Societies Act 1974 or any enactment which it replaced, including any registered branches;
7. an investment trust, Irish investment company, venture capital trust, mutual fund, exchange traded fund, unit trust, open-ended investment company (OEIC); or
8. [deleted]
9. any other entity whose principal activity is similar to those listed above but is not specifically included in that list.

   A parent entity whose sole activity is to hold investments in other group entities is not a financial institution.

The Triennial review 2017 removed stockbrokers (from item (d) above) and a retirement benefit plan (previously (h) above) from the list of entities considered to be a financial institution. In addition, (i) above was amended to remove the words highlighted in italics, ‘any other entity whose principal activity is to generate wealth or manage risk through financial instruments. This is intended to cover entities that have business activities similar to those listed above but are not specifically included in the list above’. The purpose of this latter change was to help reduce interpretational difficulties and to reduce the number of entities meeting the definition of a financial institution. Accordingly, an entity which generated wealth or managed risk through financial instruments but which is not similar to those listed at (a) to (g) above is no longer to be a financial institution. [FRS 101.BC19]. These changes may be an incentive for some entities to early adopt the Triennial review 2017.

However, in some cases, judgement, based on the facts and circumstances, may be needed in assessing whether an entity's principal activities are similar to those listed at (a) to (g) above. For example, the Basis for Conclusions observes that judgement will need to be applied in determining whether a group treasury company is similar to the other entities listed in the definition of a financial institution. [FRS 101.BC21].

7.1 Existing Companies Act disclosures in the financial statements for EU-adopted IFRS and UK GAAP reporters that also apply under FRS 101

FRS 100 identifies the following required disclosures: [FRS 100 Appendix II.19]

• section 410A – Off-balance sheet arrangements;
• section 411 – Employee numbers and costs;
• section 412 – Directors' benefits: remuneration;
• section 413 – Directors' benefits: advances, credit and guarantees;
• sections 414A to 414D – Strategic report;
• sections 415 to 419 – Directors' report;
• sections 420 to 421 – Directors' remuneration report; and
• section 494 – Services provided by auditor and associates and related remuneration.

The disclosures identified by FRS 100 above is incomplete and omits, for example, the information about related undertakings required by section 409. There are also certain disclosure exemptions for small companies and medium-sized companies (see Chapter 5 at 12 and Chapter 1 at 6.6.2).

LLPs are not subject to equivalent statutory requirements to those in sections 412 to 421 above although banking and insurance LLPs are required to prepare a strategic report for financial years beginning on or after 1 January 2017.

In addition, other Companies Act or related disclosures may apply depending on individual circumstances such as the disclosures required for a parent taking advantage of the exemption from preparing group accounts under either section 400 or section 401 of the CA 2006.

7.2 Disclosures required by the Regulations and the LLP Regulations in FRS 101 financial statements but not required under EU-adopted IFRS

The Regulations and the LLP Regulations require various disclosures in financial statements. In particular, Part 3 of Schedules 1 to 3 to the Regulations (and Part 3 of Schedule 1 to the LLP Regulations) require certain disclosures to be made in the notes to the financial statements if not given in the primary statements. The relevant paragraphs are as follows:

• Schedule 1 paragraphs 42 to 75;
• Schedule 2 paragraphs 52 to 92B;
• Schedule 3 paragraphs 60 to 90B; or
• the LLP Regulations paragraphs 42 to 70B.

Although some of these disclosure requirements are replicated in EU-adopted IFRS, others are not. Entities that move to FRS 101 from FRS 102 will have made these disclosures previously and therefore these requirements will not increase their reporting burden. Entities that move to FRS 101 from EU-adopted IFRS will not have made these disclosures previously or any other disclosures required by the applicable schedule above and should consider carefully the impact of these new requirements against the benefits of the reduced disclosures discussed at 6 above.

In addition, entities subject to the Regulations and LLP Regulations are required to present the notes to the financial statements in the order in which, where relevant, the items to which they relate are presented in the balance sheet and profit and loss accounts (see 5.2 above). The General Rules to the formats in the Regulations and LLP Regulations require that where an asset or liability relates to more than one item in the balance sheet, the relationship of such asset or liability to the relevant items must be disclosed either under those items or in the notes to the accounts (see 5.1 above). [1 Sch 9A].

Some examples of disclosures not required under EU-adopted IFRS in individual or separate financial statements are shown below. The disclosures illustrated below are not intended to be an exhaustive list of additional disclosures required by the Regulations and LLP Regulations for entities applying FRS 101 that have previously reported under EU-adopted IFRS.

1. Schedule 1 companies (i.e. companies other than banking and insurance companies):
   • disclosures required for certain financial instruments which may be held at fair value (see 6.3 above); [1 Sch 36]
   • a statement required by large companies that the accounts have been prepared in accordance with applicable accounting policies; [1 Sch 45]
   • disclosures in respect of share capital and debentures including information about shares and debentures allotted and contingent rights to shares; [1 Sch 47-50]
   • disclosure of the split of land between freehold and leasehold and the leasehold land between that held on a long lease and that held on a short lease; [1 Sch 53]
   • disclosure of information about listed investments; [1 Sch 54]
   • disclosure of information about the fair value of financial assets and liabilities, investment property, living animals and plant which, in substance, ‘reinstates’ some parts of IFRS 7 and IFRS 13. In particular, there are requirements to disclose significant assumptions underlying the valuation models and techniques used when determining fair value of the instruments, details of the fair value of financial instruments by category and details concerning significant terms and conditions of derivatives (see 6.3 above); [1 Sch 55]
   • disclosure of information about creditors due after five years; [1 Sch 61]
   • disclosure of information about guarantees and other financial commitments including charges on assets to secure liabilities, the particulars and total amount of any guarantees, contingencies and commitments not recorded in the balance sheet, the nature and form of valuable security given and separate disclosure of pension commitments and guarantees and commitments given to certain related entities; [1 Sch 63]
   • disclosure of information about loans made in connection with the purchase of own shares; [1 Sch 64]
   • disclosure of particulars of taxation; [1 Sch 67] and
   • disclosure of information about turnover by class of business and geographical markets. IFRS 8 does not require segmental information if an entity's debt or equity instruments are not traded in a public market or the entity is not in the process of filing financial statements for that purpose. However, the disclosures in the Regulations are required even if the entity is out of scope of IFRS 8. See also 5.2.1 above. [1 Sch 68].

The profit and loss account of a company that falls within section 408 of the CA 2006 (individual profit and loss account where group accounts prepared) need not contain the information specified in paragraphs 65 to 69 of Schedule 1. [Regulations 3(2)].

2. Schedule 2 companies (i.e. banking companies)
   • a statement that the accounts have been prepared in accordance with applicable accounting policies; [2 Sch 54]
   • disclosures in respect of share capital and debentures including information about shares and debentures allotted and contingent rights to shares; [2 Sch 58-61]
   • disclosure of the split of land between freehold and leasehold and the leasehold land between that held on a long lease and that held on a short lease; [2 Sch 64]
   • disclosure of a specific maturity analysis for loans and advances and liabilities; [2 Sch 72]
   • disclosure of arrears of fixed cumulative dividends; [2 Sch 75]
   • disclosure of information about guarantees and other financial commitments including charges on assets to secure liabilities, the particulars and total amount of any guarantees, contingencies and commitments not recorded in the balance sheet, the nature and form of valuable security given and separate disclosure of pension commitments and guarantees and commitments given to certain related entities; [2 Sch 77]
   • disclosure of details of transferable securities; [2 Sch 79]
   • disclosure of leasing transactions; [2 Sch 80]
   • disclosure of assets and liabilities denominated in a currency other than the presentational currency; [2 Sch 81]
   • disclosure of details of unmatured forward transactions; [2 Sch 83]
   • disclosure of loans made in connection with the purchase of own shares; [2 Sch 84]
   • disclosure of particulars of taxation; [2 Sch 86] and
   • disclosure of certain profit and loss account information by geographical markets. IFRS 8 does not require segmental information if an entity's debt or equity instruments are not traded in a public market or the entity is not in the process of filing financial statements for that purpose. However, the disclosures in the Regulations are required even if the entity is out of scope of IFRS 8. [2 Sch 87].

The profit and loss account of a banking company that falls within section 408 of the CA 2006 (individual profit and loss account where group accounts prepared) need not contain the information specified in paragraphs 85 to 91 of Schedule 2. [Regulations 5(2)].

3. Schedule 3 companies (i.e. insurance companies)
   • a statement that the accounts have been prepared in accordance with applicable accounting policies; [3 Sch 62]
   • disclosures in respect of share capital and debentures including information about shares and debentures allotted and contingent rights to shares; [3 Sch 65-68]
   • disclosure of the split of land between freehold and leasehold and the leasehold land between that held on a long lease and that held on a short lease; [3 Sch 71]
   • disclosure of information about listed investments; [3 Sch 72]
   • disclosure of creditors due after five years; [3 Sch 79]
   • disclosure of information about guarantees and other financial commitments including charges on assets to secure liabilities, the particulars and total amount of any guarantees, contingencies and commitments not recorded in the balance sheet, the nature and form of valuable security given and separate disclosure of pension commitments and guarantees and commitments given to certain related entities; [3 Sch 81]
   • disclosure of loans made in connection with the purchase of own shares; [3 Sch 82]
   • disclosure of particulars of taxation; [3 Sch 84]
   • disclosure of certain profit and loss account information by type of business and by geographical area. IFRS 8 does not require segmental information if an entity's debt or equity instruments are not traded in a public market or the entity is not in the process of filing financial statements for that purpose. However, the disclosures in the Regulations are required even if the entity is out of scope of IFRS 8; [3 Sch 85-87] and
   • disclosure of total commissions for direct insurance business. [3 Sch 88].

The profit and loss account of an insurance company that falls within section 408 of the CA 2006 (individual profit and loss account where group accounts prepared) need not contain the information specified in paragraphs 83 to 89 of Schedule 3. [Regulations 6(2)].

Banking and insurance companies are financial institutions (see 6.4 above) and therefore must comply with IFRS 7 disclosures in full and IFRS 13 disclosures in respect of financial instruments, including disclosures about the fair value of financial assets and liabilities.

4. LLPs (i.e. entities subject to the LLP Regulations)
   • a statement required by large companies that the accounts have been prepared in accordance with applicable accounting policies; [1 Sch 45 (LLP)]
   • disclosures in respect of loans and debts due to members; [1 Sch 47 (LLP)]
   • disclosures in respect of debentures; [1 Sch 48 (LLP)]
   • disclosure of the split of land between freehold and leasehold and the leasehold land between that held on a long lease and that held on a short lease; [1 Sch 51 (LLP)]
   • disclosure of information about listed investments; [1 Sch 52 (LLP)]
   • disclosure of information about the fair value of financial assets and liabilities, stocks, investment property and living animals and plant where those assets and liabilities have been valued at fair value which, in substance, ‘reinstates’ some parts of IFRS 7 and IFRS 13. In particular, there are requirements to disclose information about significant assumptions where the fair value of a financial instrument results from generally accepted valuation models and techniques, details of the fair value of financial instruments by category and details concerning significant terms and conditions of derivatives (see 6.3 above); [1 Sch 53 (LLP)]
   • disclosure of information about creditors due after five years; [1 Sch 59 (LLP)]
   • disclosure of information about guarantees and other financial commitments including charges on assets to secure liabilities, the particulars and total amount of any guarantees, contingencies and commitments not recorded in the balance sheet, the nature and form of valuable security given and separate disclosure of pension commitments and guarantees and commitments given to certain related entities; [1 Sch 60 (LLP)]
   • disclosure of particulars of taxation; [1 Sch 64 (LLP)]
   • disclosure of information about turnover by class of business and geographical markets. IFRS 8 does not require segmental information if an entity's debt or equity instruments are not traded in a public market or the entity is not in the process of filing financial statements for that purpose; [1 Sch 65 (LLP)] and
   • disclosure of particulars of members. [1 Sch 66 (LLP)].

8.1 IFRS 17 – Insurance Contracts

In May 2017, the IASB issued IFRS 17. As a result of the 2017/18 review cycle, it was concluded that a more detailed consideration of this standard is required but that this would be deferred until a clearer picture of the progress of the endorsement of the standard is known. Company law contains specific requirements for insurance companies, in terms of both the presentation and determination of provisions. IFRS 17 will need to be considered in more detail to determine whether there are any inconsistencies with company law, and if so what options might be available for addressing them. [FRS 101.BC61A].