FRS 102: An Introduction

Companies operating in the UK are able to comply with different financial reporting standards. Some may opt to adhere to a global framework, such as International Financial Reporting Standards (IFRS). Others may elect to base accounting policies around a national standard. FRS 102 is part of the UK’s domestic set of accounting standards (also known as UK Generally Accepted Accounting Practice, or UK GAAP). The standards are published by the Financial Reporting Council (FRC). 

FRS 102 applies to all accounting periods beginning on or after January 1st 2015. It provides guidance for companies on presenting financial statements, including how to account for share-based payments.  

What is the purpose of FRS 102?

A key principle of FRS 102, as with all financial reporting and accounting standards, is proportionality. The FRC aims “to enable users of accounts to receive high-quality understandable financial reporting proportionate to the size and complexity of the entity and users’ information needs.” In practice, this means that smaller companies are expected to abide by less stringent standards compared to entities that turn over billions and which employ many thousands of people.

In this context, FRS 102 is designed to provide clear and unambiguous guidance to companies on how they should present their financial and accounting information. Since its inception in 2015/16, there have been several amendments to FRS 102: find a complete list of amendments here.

Which companies must adhere to FRS 102?

FRS 102 applies to any for-profit or non-profit company that is not classified as a ‘small business’ or ‘micro-entity’. Small businesses and micro-entities can opt to adhere to FRS 102 guidelines, particularly Section 1A, but they are also able to follow FRS 105, the financial reporting standard applicable to smaller businesses (more on FRS 105 later). 

But what do these categories mean?

Small businesses are companies which have the following:

• turnover of £10.2 million or less
• Max of £5.1 million on the balance sheet
• 50 employees or fewer

Micro-entities are companies which have the following:

• turnover of £632,000 or less
• Max of £316,000 on the balance sheet
• 10 employees or fewer

If these companies do choose to comply with FRS 102, they should follow “the recognition and measurement requirements of FRS 102, but apply the presentation and disclosure requirements of Section 1A,” according to the Institute of Chartered Accountants in England and Wales (ICAEW).

Disclosure exemptions

Generally, comprehensive disclosure of companies’ financial positions, including cash flow statements, balance sheets and profit and loss statements, are expected under FRS 102. However, FRS 102 includes certain disclosure exemptions for different groups of businesses. 

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For instance, FRS 102 includes exemptions for dormant companies, which can remain under UK GAAP accounting until there is a material change on their balance sheets again (if any such change occurs). FRS 102 also outlines exemptions for subsidiaries, or “members of groups where the parent of that group prepares publicly available consolidated financial statements”. These companies, also known as ‘qualifying entities’, do not have to disclose: 

• Statements of cash flow
• Management compensation
• Most share-based payment information (as long as the parent’s consolidated accounts include share-based payment reporting)
• The number of shares outstanding

One area where there are no exemptions is the type of share plan that companies use. Companies must disclose details of all government-approved employee plans, including Save As You Earn (SAYE) plans, Share Incentive Plans (SIPs) and Employee Stock Purchase Plans (ESPPs).

FRS 102 and FRS 105: what’s the difference?

There is some variance in the financial reporting of smaller companies that elect to abide by FRS 105 compared with the guidance under FRS 102. For instance, companies using FRS 105 don’t have to record deferred taxes. For equity-settled share-based payments, companies using FRS 102 should determine the fair value of share options at the grant date. For FRS 105, equity-settled share-based payments are not recognised in accounts until shares are issued.

First-time implementation of FRS 102

When implementing FRS 102, applying the guidance retrospectively can be extremely arduous. it can be prudent to take advantage of optional exemptions for first-time adopters of FRS 102 which are laid out in the accounting standard documentation (paragraph 35.10). Share-based payments and fair value calculations are additional exemptions open only to smaller companies, as the Association of Certified Chartered Accountants (ACCA) suggests in its technical guide. ACCA says, “This exemption also applies to liabilities arising from share-based payment transactions that were settled prior to the date of transition”.

IFRS 2 vs FRS 102 Section 26

In FRS 102 Section 26, companies record the value of these shares or stock options based on what they're worth at the time they were given to the employees. This value is usually determined when the shares or options are granted.

However, in IFRS 2, things are a bit different. Companies also record the value of these shares or stock options, but they do it differently. Instead of just looking at the value when they were given, they also consider any changes in value that happen afterward. So if the shares or options go up or down in value before the employees can use them, that's also taken into account.

How Ledgy helps supercharge financial reporting and compliance

Financial reporting software that saves people time and reduces business risk adds significant value for teams across the business, from finance through to legal and operations. Ledgy’s equity and cap table management software lets you prepare documentation ahead of tax filings as well as preparing for conversations with auditors and regulators. 

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