As noted in Q1, most UK entities that are members of a group have a choice between FRS 102, FRS 101 or EU-IFRS. Companies that meet the Companies Act 2006 (“the Act”) definition of “small” and are eligible to apply the small companies’ regime also have an additional choice, for now, of adopting the FRSSE (see Q3). There is no choice for the group accounts of a listed parent company, which must be prepared in accordance with EU-IFRS.
To comply with the Act, a parent company and each of its subsidiaries must apply one of two available frameworks (the ‘consistency rule’). Therefore, each entity within your group could apply a mixture of FRS 102, FRS 101 and (where applicable) the FRSSE as these fall within the same framework (known as “Companies Act Accounts”). Alternatively, all entities within your group could apply EU-IFRS, which is the second framework (known as “IAS Accounts”).
There are two exemptions to the ‘consistency rule’ in the Act:
Firstly, if the parent company accounts and the group accounts are prepared using EU-IFRS. In this instance, (subject to the second exemption noted below), your subsidiaries can either apply a mixture of FRS 102, FRS 101, and (where applicable), the FRSSE, or they can all apply EU-IFRS.
Secondly, if there are ‘good reasons’ for using different frameworks.
It is up to the directors’ to form an opinion on whether there are ‘good reasons’ and BERR (formerly the DTI) issued guidance that the directors must be able to justify use of inconsistent frameworks to shareholders, regulators or other interested parties. The BERR guidance also included examples of ‘good reasons’ such as:
- It may not be practical for a newly-acquired subsidiary to switch to EU-IFRS in the first year of acquisition.
- Some subsidiaries use EU-IFRS because their securities are publicly traded, but this does not necessarily justifying use of EU-IFRS by the non-publicly traded subsidiaries.
- A subsidiary or the parent convert to EU-IFRS as they plan to apply for a listing but the rest of the group is not planning to apply for a listing.
- The costs of switching framework for minor or dormant subsidiaries outweigh the benefits.