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Turn up the dial

Adopting section 1A of FRS 102 can create challenges, but auditors can overcome them if they understand the signals being sent.

Applying a rigorous but efficient audit to a small UK client has never been an easy task, but the recent introduction of new UK GAAP and changes to company law present fresh challenges for auditors.

This article considers some of the particular problems that arise from adoption of FRS 102 The Financial Reporting Standard applicable in the UK and the Republic of Ireland (Section 1A Small Entities) and suggests some solutions to ease the audit process.

New accounting treatments

FRS 102 changes the recognition and measurement approach to a number of areas within UK GAAP. However, many smaller entities find that few, if any, of these issues are relevant to their circumstances and it’s common for such companies to report no policy adjustments on transition to the new standard. The challenge for auditors is to identify potential adjustments where none are evident and to deal with the changes that present themselves. In many cases, adjustments are relatively easy to process.

For example, measuring finance lease interest using an effective interest method (rather than on a straight-line basis, as permitted previously under the Financial Reporting Standard for Smaller Entities (FRSSE)), rarely presents a challenge to calculate or to audit. But financial instrument accounting, whether at fair value (for non-basic instruments such as derivatives or for equity investments) or at a discounted present value, is harder to deal with.

Unlike large firms with access to their own Bloomberg terminals and valuation specialists, many smaller audit firms struggle to find cost-effective sources for fair value evidence. We’ve seen specialist valuation firms charge over £1,000 per audit to supply fair value assessments on some relatively straightforward derivatives. Auditors need to tackle these areas early and ensure the client understands the extra work and cost involved.

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