Insights

Financial Reporting Council Issues Financial Reporting Exposure Draft 62 (FRED 62)

On 4 November 2015, the Financial Reporting Council (FRC) has issued a Financial Reporting Exposure Draft 62 (FRED 62) proposing limited scope improvements to FRS 102 relating to fair value hierarchy disclosure requirement, which will have an impact on the financial statements of investment funds.

What's Changed?

When old Irish GAAP converted to FRS 102, the methodology for determining the fair value hierarchy levels changed, which also resulted in difference in fair value hierarchy criteria from the IFRS 13 as shown below.

IFRS 13

Fair Value Methodology

FRS 102

Level 1

Quoted prices for identical instruments in active  markets

Level A

 Level 2

Prices of recent transactions for identical  instruments

Level B

Valuation techniques using observable market  data

Level C

 Level 3

Valuation techniques using non-observable  (unobservable)

 

This will have a significant impact on the financial statements of funds, which primarily hold level 2 investments including fixed income securities and Over the Counter (“OTC”) derivatives, including non-complex derivatives, as these investments now have to be classified in Category C under FRS 102. Consequently, there is a risk that users of financial statements may automatically assume that Category C under FRS 102 and Level 3 under IFRS 13 are comparable when in reality there are significant differences in the classifications.

The key amendments relate to section 34 of FRS 102, for financial instruments held at fair value in the statement of financial position to bring fair value hierarchy disclosure requirement in line with IFRS 13 that users of the financial statements will often be familiar with. 

Insights

Prior to FRS 102 the fair value hierarchy disclosures required under old Irish GAAP, US GAAP and IFRS are broadly in line with each other, accordingly the disclosures regarding financial instruments were comparable. When old Irish GAAP converted to FRS 102, the methodology for determining the fair value hierarchy levels changed. This exposure draft, if approved, will bring Irish GAAP back in line with the other reporting standards and should again allow the reader of the financial statements to compare against financial statements prepared under other standards.

What's Next

The FRC is requesting comments on FRED 62 by 31 January 2016. Comments are invited in writing on all aspects of the draft standard. When these draft amendments are finalised these amendments will be added into FRS 102. Information on how to submit comments and the FRC’s policy in relation to responses is set out on Financial Reporting Exposure Draft 62 (FRED 62).

The proposals are intended to be effective for accounting periods beginning on or after 1 January 2017, with early application permitted. And it is expected that this exposure draft will be approved by the FRC in March 2016. This means it is possible that financial statements for the year ended 31 December 2015 can be prepared applying the new amendments.

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