It’s likely that some people who will be applying FRS 102, for the first time in their 2015 accounts are still thinking that financial instruments are nothing to do with them, but this view should be taken lightly.
FRS 102 introduces the concept of “basic” and “complex” financial instruments. Whilst some companies may be of the view that they do not engage in complex activities, there are some common pitfalls.
For example, any contracts that involve paying or receiving cash or shares are classed as financial instruments and these instruments must be reviewed. Many companies go nowhere near derivatives, but some might be using them without really knowing it, for instance if they have foreign currency forward contracts or if they have entered into an agreement with a bank to fix a loan interest rate, which actually takes the form of an interest rate swap.
Under FRS 102, these rate swap valuations must be recognised in the accounts. This means their fair value must be presented on the balance sheet and their yearly movements reflected in the profit and loss account. Derivatives can have either a positive or negative fair value, but a fixed interest rate swap instrument in the current economic climate is more likely to have a negative one.
Fair values can be volatile and this volatility will be reflected in the results and may impact on your tax liabilities, profit sharing and bonus arrangements and any banking covenants.
If you think your business may be affected by any of the changes of FRS 102, please contact Chris Johnson on 01254 679131 or click the button below to download our free FRS 102 help sheet.