The changes are mostly simplifications but important and the standard setter has claimed that they will reduce implementation costs and make the standard easier to use.

The main amendments will affect the financial statements including the removal of unnecessary cost or effort exemptions which are replaced, when relevant, by accounting policy options.

Paul George, executive director, corporate governance and reporting, said: ‘Based on stakeholder feedback, and other outreach, we believe that FRS 102 is working well in practice, but there are a small number of areas where a significant improvement could be made to the cost-effectiveness of FRS 102 without loss of useful information.’

The major change is the introduction of a description of a basic financial instrument to support the detailed conditions for classification as basic. The FRC says this will result in a relatively small number of financial instruments that breach the detailed conditions for classification as basic, now being considered to be basic and measured at amortised cost. In these cases measurement at amortised cost will provide relevant information for users of the financial statements.

‘There is a new principles-based definition of a basic financial instrument. This might mean that we see more financial instruments being classified as basic and therefore fewer needing to be held at fair value,’ said Anne Cowley, accounting and audit specialist at Wolters Kluwer.

’However, I think this might be a challenging area to pin down and we will see what transpires following the comment period.’

For small entities, the proposals provide a more proportionate accounting solution for a loan from a director who is a natural person and a shareholder in the small entity (or a close member of the family of that person), which will permit the loan to be initially measured at transaction price rather than present value.

Cowley said: ‘Small entities will not have to determine a market rate of interest on loans with directors who are also shareholders, and their close family. This only applies to loans from natural persons though, ie, does not extend to other types of related party loan (like intercompany loans).’

The “undue cost or effort” get-out has been removed, so investment property will need to be measured at fair value. To address implementation issues, an accounting policy choice is proposed for entities that rent investment property to another group entity, whereby they can choose to measure the investment property either at cost (less depreciation and impairment) or at fair value.

Fewer intangible assets will need to be separated from goodwill in business combinations, although there will be an option to separate more if preferred (as an accounting policy choice).

This will reduce the costs of compliance, while still providing users with useful information about the business combination. Entities may, on an asset-by-asset basis, choose to separately recognise additional intangible assets acquired in a business combination if this provides useful information to the entity and the users of its financial statements. When an entity chooses to recognise such intangible assets separately from goodwill, it shall apply that policy consistently to the relevant class of intangible assets.

After considering feedback about the definition of a financial institution, the FRC says the principle included in the financial institution definition has been amended to remove references to ‘generate wealth’ and ‘manage risk’. This change should help to reduce the interpretational difficulties in relation to implementing these concepts, and should reduce the number of entities meeting the definition of a financial institution.

Consequential amendments are proposed to FRS 101 Reduced Disclosure Framework and the other UK and Ireland accounting standards for consistency with FRS 102.

The FRC aims to finalise the amendments in December 2017, with an effective date of accounting periods beginning on or after 1 January 2019. Early application will be permitted.

The FRC  is also taking into account the upcoming IFRS standards, set to come into force from 2018 which could have a major impact on existing new UK GAAP.

It will consider whether to incorporate elements of the expected loss model of IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases as a separate phase of the three-year review.

Any proposals for changes will only be made after consideration of responses received to the consultation document issued in September 2016.  Any resulting amendments to FRS 102 will not be effective before 1 January 2022.

The proposals set out in financial reporting exposure draft (FRED) 67 have arisen as a result of the first three-year review of FRS 102, and after taking account of stakeholder feedback on the implementation of FRS 102.

Responses to FRED 67 should be sent to [email protected] by 30 June.

FRED 67 Draft amendments to FRS 102 – Triennial review 2017 – Incremental improvements and clarifications is here.