The impact of FRS102 on new subsidiaries

Subsidiary companies are often completely dependent on funding from their parent companies in the early stages of their development, whether they are located in the same country as the parent or internationally.

Under FRS102, which will impact many businesses for the first time this year, accounting for these transactions could become more complicated, and therefore more expensive to calculate and audit for the next financial year end than they have been in the past.

FRS102 requires basic debt instruments, including basic loans, to be measured at fair value in order to take account of implicit interest in the loan, unless the terms of the loan are specifically agreed in a written agreement.

If you are funding a subsidiary, or being funded by intra-group transactions, you should ensure the necessary documentation is in place. This should outline the terms of the loan - in particular the interest rate charged - which may give rise to measurement differences in the accounts of the lending group member and the borrowing group member.

Many start-up subsidiaries may incentivise their senior management with shares or share options in the company or its parent. For companies applying the FRSSE, these complex financial instruments did not need to be recognised in their financial statements. However, under FRS102, there is no longer an exemption for SMEs from recognising these amounts. Valuation of these instruments can be complicated, time consuming and expensive, and any company affected should start thinking about this well in advance of their year-end.

For more information, please contact Ben Hooper at .