FRS 102: The UK Financial Reporting Standard

Financial Reporting Standard 102, or FRS 102, is the principal accounting framework for entities not publicly listed in the United Kingdom and Republic of Ireland. Issued by the Financial Reporting Council (FRC), it establishes the requirements for preparing financial statements that present a true and fair view of an entity’s financial performance and position. The standard replaced numerous standards that previously constituted UK Generally Accepted Accounting Practice (UK GAAP), creating a more unified framework.

FRS 102 is based on the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs), but it has been adapted to align with UK and Irish company law. The standard is subject to periodic reviews by the FRC to ensure it remains current, with amendments from the ‘Periodic Review 2024’ effective from January 2026.

Scope of FRS 102

FRS 102 is the default standard for entities not required to apply International Financial Reporting Standards (IFRS) and not eligible for more simplified regimes. A “qualifying entity,” which is a member of a group that prepares publicly available consolidated financial statements under IFRS, may also apply FRS 102 with reduced disclosures, such as omitting a cash flow statement. The framework contains different tiers to ensure the reporting burden is proportionate to an entity’s size, with simplified versions offering relief from the main standard’s disclosure requirements.

For smaller entities, Section 1A of FRS 102 provides a less onerous reporting framework. A company qualifies as “small” if it meets at least two of the following criteria: a turnover of £15 million or less, a balance sheet total of £7.5 million or less, and an average of 50 or fewer employees. These companies apply the recognition and measurement principles of FRS 102 but have substantially reduced presentation and disclosure requirements.

An even more simplified standard, FRS 105, is available for micro-entities. A “micro-entity” must meet at least two of these conditions: a turnover of £1 million or less, a balance sheet total of £500,000 or less, and an average of 10 or fewer employees. FRS 105 is simpler than Section 1A; for instance, it prohibits the revaluation of assets and the recognition of deferred tax.

Key Recognition and Measurement Principles

FRS 102 introduced revised principles for how transactions and balances are recorded, moving away from many of the historical cost-based rules of its predecessor. These changes affect how assets and liabilities are valued and how income and expenses are recognized, aiming to reflect a more current economic reality.

Financial Instruments

A significant area of change involves accounting for financial instruments, which are divided into ‘basic’ and ‘other’ categories. Basic instruments include items like trade debtors, trade creditors, and simple bank loans, which are measured at amortised cost. ‘Other’ financial instruments include more complex items such as derivatives, certain intercompany loans, and some equity investments. These instruments must be measured at fair value at each reporting date, with gains or losses from changes in fair value recognized in the profit and loss account.

Investment Property

Under FRS 102, investment property, which is property held to earn rentals or for capital appreciation, must be measured at fair value at the end of each reporting period. Any changes in this fair value are recognized in the profit and loss account. This fair value model is a mandatory requirement, contrasting with previous UK GAAP where entities had a choice. The approach provides a more current valuation but can also introduce volatility to reported profits due to property market fluctuations.

Goodwill and Other Intangible Assets

FRS 102 provides specific guidance for goodwill and other intangible assets, such as brand names, acquired in a business combination. These assets must be recognized separately from goodwill if they are identifiable and their fair value can be measured reliably. Both goodwill and other intangible assets are considered to have a finite useful life and must be amortised over that life. A provision of the standard is the rebuttable presumption that the useful life of these assets does not exceed ten years if a reliable estimate cannot be made. This requirement for systematic amortization contrasts with IFRS, where goodwill is not amortised but is instead tested annually for impairment.

Deferred Tax

The approach to deferred tax under FRS 102 is broader than under previous UK GAAP, requiring deferred tax to be recognized on a wider range of transactions. This includes recognizing deferred tax on the revaluation of assets, such as investment properties. If a transaction has a tax consequence in a different period from its accounting recognition, a deferred tax asset or liability must be recorded. For example, when an investment property is revalued upwards, a deferred tax liability is created to reflect the capital gains tax that would be payable if the property were sold at its revalued amount.

Presentation and Disclosure Requirements

FRS 102 sets out specific requirements for how financial information should be presented and what additional information must be disclosed in the notes. The standard prescribes the components of a complete set of financial statements to ensure they are understandable and comparable.

A complete set of financial statements under FRS 102 includes:

• The Statement of Financial Position, which presents an entity’s assets, liabilities, and equity.
• The Statement of Comprehensive Income, which shows the entity’s financial performance.
• The Statement of Changes in Equity, which reconciles the opening and closing balances of each component of equity.
• The Statement of Cash Flows, which reports cash inflows and outflows from operating, investing, and financing activities.

Beyond the primary statements, FRS 102 mandates extensive disclosures in the notes to the accounts. These notes provide narrative descriptions and detailed breakdowns of the amounts presented in the financial statements. For example, an entity must disclose the measurement bases and accounting policies used, such as the methods and assumptions applied in determining the fair value of investment properties, and for intangible assets and goodwill, the useful lives or amortization rates used must also be disclosed.

First Time Adoption of FRS 102

Transitioning to FRS 102 is governed by Section 35 of the standard, which outlines the procedures for moving from a previous accounting framework. The fundamental principle is the full retrospective application of the standard, meaning the entity must prepare its financial statements as if it had always applied FRS 102.

The starting point is the “date of transition,” the beginning of the earliest period for which an entity presents full comparative information. At this date, the entity must prepare an opening Statement of Financial Position in accordance with FRS 102, restating assets, liabilities, and equity from their previous carrying amounts.

To simplify this process, FRS 102 provides mandatory exceptions and optional exemptions from full retrospective application. Mandatory exceptions are areas where retrospective application is prohibited; for instance, an entity cannot retrospectively change its accounting for the derecognition of financial assets and liabilities that occurred before the transition date.

Optional exemptions are designed to reduce the cost and effort of transition. An entity may elect to use certain exemptions, such as using the fair value of an item of property, plant, and equipment at the date of transition as its “deemed cost” going forward. Another exemption relates to business combinations, where an entity can choose not to restate acquisitions that occurred before the transition date.