To mark this momentous year for UK GAAP, I'm embarking on a mission to work my way through FRS 102, reading a portion on each working day of 2015 and writing a short blog entry on my thoughts and musings (be they few or many). We're about to finish both the week and section 9 all at the same time - hurrah!
DAY 15 (23 Jan)A couple of posts ago, I made a feeble crack about the difference between individual and separate financial statements, which may have left you wanting more (information, that is, not jokes, though you may have no choice on the latter). So what is the difference? Let's flip to the Glossary, which defines 'individual financial statements' in legal terms (e.g. the same meaning as 'individual accounts', in section 394 of the Companies Act). The definition goes on to clarify that 'separate financial statements are included in the meaning of this term'. Although the Glossary also defines 'separate financial statements', it does so instead by repeating 9.24 which sets out how subsidiaries, associates etc are treated in these accounts.
So what is this treatment? 9.26 states that:
'The parent shall select and adopt a policy of accounting for its investments in subsidiaries, associates and jointly controlled entities either:(a) at cost less impairment;(b) at fair value with changes in fair value recognised in other comprehensive income in accordance with paragraphs 17.15E and 17.15F; or(c) at fair value with changes in fair value recognised in profit or loss (paragraphs 11.27 to 11.32 provide guidance on fair value).
The entity shall apply the same accounting policy for all investments in a single class (subsidiaries, associates or jointly controlled entities), but it can elect different policies for different classes.'
This seems a bit unusual for old GAAP users - the ability to make an accounting policy decision not only about whether to use cost or fair value accounting but to also decide which bit of comprehensive income you'd like the movements to pass through. But there it is. From a practical point of view (assuming that in most cases, entities are likely to choose cost) the key word is impairment - not that this is a new requirement, but a clear reminder that if your subsidiary is flat broke, you can't go leaving it at cost without booking an impairment. If only all auditors would remember that...
This weekend I will be playing with steam trains. Back on Monday for more FRS 102 fun.
P.S. If you missed yesterday's instalment click here