FRC proposes amendments to accounting for debt instruments

News types: Codes and Standards Announcements, Consultation Announcement

Published: 13 February 2014

PN 009/14
The Financial Reporting Council (FRC) has issued today proposals for consultation intended to reduce the need for businesses to measure debt instruments at fair value. The exposure draft, FRED 54: Draft Amendments to FRS 102 – Basic financial instruments proposes to amend the conditions that determine whether debt instruments can be measured at amortised cost or fair value under new UK and Irish GAAP (FRS 102).
Businesses of all sizes lend and borrow money. Depending on the terms and conditions of the debt instruments, new UK and Irish GAAP determines whether amortised cost or fair value is the appropriate method of measuring them.
 
Since the FRC issued new UK and Irish GAAP in March 2013 for mandatory implementation in 2015, businesses and their advisers have noted that the requirements setting out when a debt instrument can be measured at amortised cost may be overly restrictive. The FRC has therefore reconsidered the requirements to reduce the reporting burden and avoid unnecessary cost and effort for businesses. 
 
Roger Marshall, FRC Board Member and Chair of the FRC’s Accounting Council said:

“The issue addressed in this proposal was only highlighted after publication of new UK and Irish GAAP. It was important to act swiftly and we have drawn up a workable solution in a short space of time. We aim to finalise the new requirements by this summer in order to allow as much time as possible for implementation.”


The FRC invites comments on these proposals. The comment period is slightly shorter than three months and closes on 30 April 2014. The amendments are proposed to be effective from the same date as the new UK and Irish GAAP, 1 January 2015.
 
The FRC intends to finalise and clarify other aspects of new UK and Irish GAAP in the coming months before the mandatory implementation date:
  • It aims to issue FRS 103 Insurance Contracts by the end of March 2014 as it finalises its consideration of the responses to its recent consultation.

  • Taking into account the responses to the consultation on its hedging proposals (FRED 51), the FRC aims to finalise the new hedge accounting requirements before the summer.


In response to new EU legislation, the FRC will assess the impact of the newly agreed EU Accounting Directive, in particular for small companies and continues to consider the accounting requirements for micro-entities.
 
In respect of forthcoming changes to IFRS, the FRC does not intend to make amendments to new UK and Irish GAAP prior to 1 January 2015 concerning the impairment of financial assets. 
 
Notes to editors:
  1. The FRC is responsible for promoting high quality corporate governance and reporting to foster investment. It sets the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work. It represents UK interests in international standard-setting. It also monitors and takes action to promote the quality of corporate reporting and auditing. It operates independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.

  1. New UK and Irish GAAP are set out in FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (PDF). The proposed amendments to the classification conditions of debt instruments that may be measured at amortised cost in accordance with Section 11 of FRS 102 are set out in Financial Reporting Exposure Draft 54: Draft Amendments to FRS 102 – Basic financial instruments.

  1. Amortised cost is the amount at which the financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, and minus any reduction (directly or through the use of an allowance account) for impairment or uncollectability. Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.

  1. FRED 54 is available on the FRC website and can be found here. It will available to purchase from www.frcpublications.com.