FRS 102 fair value calculations for Audit purposes.

INTRODUCTION

The Financial Reporting Standard 102 (FRS102) is mandatory and will be effective for large and medium sized companies for the financial period beginning on or after 01 January 2015 and for small companies for the period beginning on or after 01 January 2016.

For most companies the first accounting year-end affected is 31 December 2015 although there is also a requirement to prepare prior year comparisons under the same rules (the Transition Date). For periods commencing 01 January 2015 the Transition Date will be 01 January 2014.

THE KEY REQUIREMENTS

• FRS 102 requires that the movement in fair value of non-basic financial instruments, such as interest rate swaps and forward exchange contracts will be recognized in the profit & loss account as they occur, unless hedge accounting has been adopted.
• FRS 102 also requires that these complex financial instruments are recognized at fair value at each reporting date as either a financial asset or liability on the Balance Sheet.
• The fair value calculations will require auditing and it is likely that they will have to be independently verified by specialists with knowledge of measuring complex financial instruments.

IMPACT ON COMPANIES

• The future changes in accounting standards will result in more volatility as a result of the fair value movements in the profit & loss which could have an impact on banking covenants, profit related contracts or potential dividend payments.
• Companies may have previously relied on valuations provided by their bank counterparties however these valuations are unlikely to be regarded as independent audit evidence.
• For customers who do not have access to the appropriate data, pricing technology and market knowledge, complex financial instruments are difficult to value accurately and companies will need to either enhance their internal valuation methodologies or utilise the services of an independent 3rd party to provide valuations in a form acceptable to Auditors.
• Disclosures relating to derivatives and hedge accounting are therefore likely to add extra time, effort and cost to the financial reporting process.

WHAT SERVICES CAN PEGASUS PROVIDE?

• FRS 102 fair value calculations for Audit purposes, including Transition valuations.
• Independent structuring, pricing and valuation of complex financial instruments including; interest rate swaps, forward exchange contracts and inflation.
• Fixed rate loans and loans linked to observable indices such as HPI or inflation linked ground rents, can also be priced.
• The calculation of credit risk under IFRS 13 (either of the counterparty or of the company) is an important element of any derivative valuation according to the ICAEW and this can be factored into any valuation.
• EMIR direct reporting and reconciliation service.

  Pegasus Capital LLP provides independent expertise to assist companies and their advisors navigate the complex world of hedging & derivatives. Please do not hesitate to get in touch with Graeme Cullens or Mark Rule on 01689 823953 to discuss your requirements or email enquiries@pegcap.co.uk.