FRS 102 for

Professional Services LLPs

Autumn 2013

Key issue
Acquisitions and mergers
Useful life of intangible assets and goodwill
Classification of leases and treatment of lease incentives
Defined benefit pension schemes
Multi-employer defined benefit pension schemes

Significant issue

Short term compensated absence (holiday pay)

Foreign currency translation

Financial statement presentation
Intra-group loans

Requiring consideration
Cash flow statement
Revenue
Related party disclosures:
key management personnel compensation
Investments in subsidiaries

Key dates:
Year end

First year end for

FRS 102 financial
statements

Transition date
(the opening balance sheet
of the comparative period)

31 December

31 December 2015

1 January 2014

31 March

31 March 2016

1 April 2014

30 April

30 April 2016

1 May 2014

Other date

year end in 2016

year end plus one day in 2014

FRS 102 and UK GAAP the key differences

In the long term, FRS 102 will have a number of advantages
over current UK GAAP. UK GAAP has become
increasingly complicated and cumbersome over the years,
and with different standards applying depending on whether
a company is private, a plc, listed on an EU-regulated market
or listed on any market, it can be confusing too. Inevitably,
the transition period will cause disruption but in the longer
term financial reporting will be more robust and more
straightforward.

FRS 102 is planned to be more stable, with amendments

made through an omnibus exposure draft every three years
It will be less complicated to determine which
requirements apply to a particular business and was
written with the needs of privately held businesses in
mind, with one set of rules for all entities adopting it
FRS 102 is a UK-adapted version of the IFRS for SMEs,
which is one small, self-contained standard. It was
deliberately written to be easier to read and more accessible
than full IFRS
It will be more comparable internationally, which is a
particular advantage for groups with overseas subsidiaries

Area of difference

UK GAAP

FRS 102

Acquisitions and mergers

Acquisition accounting, or
merger accounting where the
conditions are met

Use purchase method (essentially

acquisition accounting) for
nearly all combinations. Merger
accounting permitted for group
reorganisations but no concept of
true merger

Goodwill can arise

The excess of consideration over

fair value of assets and liabilities
needs to be broken down into its
constituent intangibles. It is no
longer simply goodwill but needs
to be set out as a list of intangibles
acquired (eg future profits on
contracts, brand etc)
Useful life of intangible assets
and goodwill

Option to have an indefinite

useful life, with annual
impairment reviews

No indefinite useful life permitted

for intangible assets and goodwill
if a useful life cannot be estimated
reliably, five years is used, but any
period that can be demonstrated to
be valid is acceptable

Classification of leases and

treatment of lease incentives

Based on transfer of
substantially all of risks and
rewards of ownership. If
present value of minimum lease
payments is 90% or more of the
fair value, normally classify as
finance lease.

Based on transfer of substantially

all of the risks and rewards of
ownership. Assessment made
against qualitative criteria

Lease incentive released over

period to first market rent review

Lease incentives are released over

the lease term

Area of difference

UK GAAP

FRS 102

Defined benefit pension

schemes

Valued based on the projected

unit credit method, with a full
actuarial valuation every three
years

Defined benefit liability will be

on individual balance sheet(s).
Simplifications permitted. No need
for independent actuary, albeit that
for all but the simplest scheme,
actuarial input is likely to be
required

Multi-employer defined benefit

pension schemes

Treat as defined contribution

where it is not possible to identify
own share of assets and liabilities

Treat as defined contribution

if sufficient information is not
available to use defined benefit
accounting
Recognise a liability for any funding
agreement
Group schemes - at least one entity
in the group must recognise the
liability

Short term compensated

absence (holiday pay)

No accrual is made for any

unused holiday entitlement at
the year end

An accrual is required for the value

of the unused holiday entitlement
carried over at a financial year end

Foreign currency translation

Option to use forward contract

rate where criteria are met*

No use of forward contract rate

(recognise foreign exchange
forward contracts as financial
instruments). Option to translate
into a different presentation
currency

Accounts are presented in local

currency
*only where FRS 26 is not applied

Financial statement
presentation

Current presentation requires a

balance sheet, a profit and loss
account, a statement of total
recognised gains and losses, a
cash flow statement and notes,
including accounting policies
The LLP SORP prescribes the
formats and headings required

FRS 102 requires the presentation

of a statement of financial
position, either a statement of
comprehensive income or an
income statement and statement
of comprehensive income, a
statement of changes in equity, a
statement of cash flows and notes,
including accounting policies
Presentation format continues to
be determined by the existing LLP
SORP

Area of difference

UK GAAP

FRS 102

Intra-group loans

Creditor recognised at the

amount payable. Debtor
recognised at the amount
receivable less any impairment

Both debtor and creditor measured

at fair value initially ie estimating
the cash flows and discounting at a
market rate
For some groups, the impact could
be significant

Cash flow statement

Exemption for 90% subsidiaries

and small companies

Exemption for qualifying subsidiary

and for qualifying parent company
individual accounts
Format changes (new headings)

Revenue

FRS 5 Application Note G

principles similar to IAS 18
Looks from point of view of
asset/liability recognition

Related party disclosures:

key management personnel
compensation

Requirement to disclosure
transactions and balances
between related parties, where
they are material to either party.

Derived from IAS 18. Mostly similar

to UK GAAP as UITF 40 and IAS
18 were drafted at the same time.
We are not aware of any significant
differences for professional service
firms in relation to the majority of
revenue types but do not take it for
granted they will be the same for
all circumstances
Similar requirement to disclose
transactions and balances between
related parties, where they are
material to either party
Additional requirement to disclose
the aggregate compensation
(remuneration plus benefits) paid
or payable to key management
personnel

Investments in subsidiaries

Cost or valuation, movements

go to STRGL

Cost or fair value. Movements go

to other comprehensive income or
profit or loss

Other commercial considerations

On the previous pages, we have
highlighted some of the areas you will
need to consider during any impact
assessment.
For an LLP, our view is that the
impact on the figures presented is only
part of the overall picture, with the
following further matters arising:
Does my members agreement set
out how I will deal with the financial
impact of transition to FRS 102?

We recommend that you review your

members agreement to assess whether
it has clauses within it that allow you to
vary the amount of profit you allocate to
your members so as to be able to adjust
for any such differences arising. Whilst
this may seem an academic issue, should
you have members joining or leaving
the LLP at the time, it is likely to lead to
concerns around what is equitable and
if you dont have a legally clear position
within your members agreement you
will have an unhelpful exposure.
When transitioning to FRS 102, most
will find themselves with issues that
lead to restatements of balances and
an impact on the cumulative members
interests position. This gives rise to the
need to consider how these restatements
interact with your historic and future
profit sharing arrangements, and
requires you to review your members
agreement to see whether it has clauses
within it that set out what to do in such
instances. We have yet to see a members
agreement that includes clauses that
set out the approach to be adopted
for differences arising on a change of
underlying accounting framework so our
feeling is that most will need to revise
their agreements.
Any of the adjustments arising from
the transition could give rise to a similar
issue ie finishing the UK GAAP era

Lets use an example to bring this to life:

For a 30 April year end, the first set of full financial statements to be
prepared under FRS 102 will be 30 April 2016.
This means that the 30 April 2015 financial statements will be the last ones
prepared under UK GAAP (as modified by the LLP SORP).
FRS 102 transition provisions mean that if you are part way through a lease
incentive period, provided the term of the lease commenced before the date of
transition to this FRS, you can elect to continue to recognise any residual benefit
or cost associated with these lease incentives on the same basis as that applied at
the date of transition to this FRS.
But if you enter into a lease incentive after your transition date (see earlier table),
there is an issue to be addressed:
At 30 April 2015, the firm is one year into a new 10 year lease.
They received a lease incentive of 2 million and this is being spread over a five
year period to the first full rent review.
If the members agreement requires profits to be allocated based on the profit
reported in the profit and loss account under UK GAAP, then the collective of
members within the business have received 1/5th of the lease incentive at that
time (they will have shared in the benefit of 0.4 million of the incentive). Under
FRS 102, such a lease incentive would be required to be spread over the full
period of the lease, rather than the period to the first rent review.
Although a prior year adjustment would be used to deal with the accounting
aspects of this, that wouldnt change the fact that 0.4 million of the incentive has
been allocated to members by this point. Therefore, as at 30 April 2015 (the prior
year position when the first set of FRS 102 financial statements are prepared) the
firm would be reporting its figures on the basis that it had only taken 1/10th of the
incentive to the profit and loss as a credit. This equates to only 0.2 million.
Within the balance sheet it would have deferred income of a further 1.8 million
to be released to profit, and therefore allocated to members in future years. So
as at 30 April 2015, it had allocated 0.4 million of the incentive, but under FRS
102 it would still have a further 1.8 million to allocate in future years. Unless
the profits to be allocated under the members agreement are able to be altered,
this would theoretically lead to 2.2 million of the 2 million lease incentive being
allocated over the period of the lease. Clearly that isnt something that would be
commercially viable and needs careful consideration to avoid disputes on arrival or
departure of members around this time.
If you consider also a need for a holiday pay accrual in the 2015 comparatives,
the over allocation of cumulative profits issue becomes greater see the
illustration below:

Year

2015

Capital account

1,000,000

Curent account

650,000

nil

Holiday pay accrual

(250,000)

Lease incentive adjustment

(200,000)

Revised comparative current account

Members interests
Allocated

FRS 102 transition

adjustment

2015
revised comparative
1,000,000

200,000

1,650,000

1,200,000

650,000

Allocated 450,000 more than

cumulative members interests

on 30 April 2015 with one figure for the cumulative members

interests figure, and yet opening up on day one of the new FRS
102 era with a restated brought forward cumulative members
interests figure. This needs careful consideration to avoid
disputes on arrival or departure of members around this time.

Managing expectations who should I consider?

You will have two audience classes the internal and

external ones.
Bank and
other
lenders

Do I continue to use the LLP SORP as a guide to

presentation and disclosure?

The initial plans to withdraw the LLP SORP (and other

SORPs) have been reversed with the position being that the
SORP should be used alongside FRS 102 in the same way
that it currently is alongside UK GAAP. The SORP should
therefore be used in conjunction with FRS 102 rather than
on a stand-alone basis. In the event of conflict, FRS 102 takes
precedence over the SORP but where the SORP adds further
requirements or details specific treatments or disclosures,
these will apply.
The requirement to disclose the aggregate remuneration
of key management personnel

Working on those LLPs who have adopted IFRS has

highlighted a very practical issue with the requirement now
adopted within FRS 102 under related parties disclosure to
disclose the aggregate remuneration of key management
personnel and that is, how do you define key management
personnel? From an entirely objective external viewpoint, we
would describe key management personnel as being those
members who make up the Board or equivalent.
However, the very personal nature of the members
involvement with their LLP has meant that we have seen
situations where discussion about who should or shouldnt be
included within this disclosed aggregate figure has become
quite an emotive subject. The standard did not set out to cause
disharmony amongst the member ranks by asking firms to
clarify who is or isnt considered key, and certainly wouldnt
expect any credible disclosure to include all members (in the
same way a corporate wouldnt consider all its shareholders to
be key simply because they hold shares) but do be prepared
for this to cause a degree of internal debate around whether
heads of practice groups, or high performing individuals are
key or not.

Suppliers

Members
and
employees

Regulator

Press

Internal - your members and employees: ensure that you

have done an impact assessment for consideration by the

management team, and then start to set out the key messages
to the members at an early stage so they arent left suddenly
wondering why the numbers changed.
External: these interested parties will have varying levels

of understanding of FRS 102 and therefore their ability to

understand the figures presented to them will be significantly
dependent upon the quality of the disclosure and narrative
contained within the initial set of FRS 102 financial statements
as part of the transition disclosures. These require you to:
disclose changes in accounting policies
provide a reconciliation of equity (read members interests
for an LLP) at the transition date and the period end date
of the last set of financial statements prepared under UK
GAAP, showing the differences between the UK GAAP
and FRS 102 positions
provide a reconciliation between the profit and loss
presented in the last set of financial statements prepared
under UK GAAP and the FRS 102 profit and loss for that
same period.
We will be working with the banks and regulators to
highlight the impact of the transition to FRS 102 but we
encourage you to prepare thorough presentations to these
external audiences when providing them with your first set of
FRS 102 financial statements.

How can Grant Thornton assist?

We have significant experience of assisting clients with transitions from one
accounting framework to another, and with much of FRS 102 being derived
from existing IFRS, much knowledge of the areas of impact.
If we are your existing auditors:
We can provide you with guidance, review and support as you prepare your
impact assessment, but need to ensure that, for audit independence reasons set
by statute, we do not prepare your FRS 102 adjustments.
If we are not your existing auditor:
We can perform all services, up to and including a full outsourcing by you of
the impact assessment and preparation of the revised figures under FRS 102.
Please do contact us if you wish to receive support
or discuss the above further.

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