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Section 35 – Example 1 – Transition to the FRS
Extract from the accounting policy note
‘OmniPro Sample FRS 102 Limited is primarily engaged in the provision of construction services to both the private and commercial sectors. From their operations base and depot in Construction Place, Builders Lane, Dunblock, Any County they also sell pre-cast concrete products to private individuals and the construction industry. The company is supplied with the pre-cast concrete products by a wholly owned subsidiary company, which operates independently from a separate location.
The company is a limited liability company incorporated and domiciled in Ireland. The company is tax resident in Ireland.
This is the first set of financial statements prepared by OmniPro Sample FRS 102 Limited in accordance with accounting standards issued by the Financial Reporting Council, including the FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (“FRS 102”). The company transitioned from previously extant Irish and UK GAAP to FRS 102 as at 1 January 2014. An explanation of how transition to FRS 102 has affected the reported financial position and financial performance is given in note 2.
The significant accounting policies adopted by the Company and applied consistently in the preparation of these financial statements are set out below.’
Extract from the notes to the financial statements
-
TRANSITION TO FRS 102
Prior to 1 January 2014 the company prepared its financial statements under previously extant Irish GAAP. From 1 January 2013, the company has elected to present its annual financial statements in accordance with FRS 102 and the Companies Act 2014.
The comparative figures in respect of the 2014 financial statements have been restated to reflect the company’s adoption of FRS 102 from the date of transition at 1 January 2014.
Set out below are the changes in accounting policies which reconcile profit for the financial year ended 31 December 2014 and the total equity as at 1 January 2014 and 31 December 2014 between Irish GAAP as previously reported and FRS 102.
In preparing this financial information, the company has applied certain exceptions and exemptions from full retrospective application of FRS 102 as noted below.
Exceptions
Derecognition of financial assets and liabilities
In accordance with FRS 102, as a first-time adopter, the company did not retrospectively recognise financial assets and liabilities previously derecognised under Irish GAAP before the date of transition.
Accounting estimates
In accordance with FRS 102, as a first-time adopter, the company did not revise estimates on transition to reflect new information subsequent to the original estimates.
Non-controlling interests
In accordance with FRS 102, as a first-time adopter, the company did not revise how it previously accounted for changes in non-controlling interests prior to the date of transition.
Exemptions
Business combinations
The company has elected not to apply Section 19 of FRS 102 retrospectively to business combinations effected before 1 January 2014.
Rent free period for operating leases
Under previous Irish GAAP operating lease incentives such as rent free periods, were spread over the shorter of the lease period or the period to when the rental was set to a fair market rent. FRS 102 requires that such incentives to be spread over the lease period. The company has taken advantage of the exemption for existing leases at the transition date to continue to recognise these lease incentives on the same basis as previous Irish GAAP. Accordingly the FRS 102 accounting policy has been applied to new operating leases entered into since 1 January 2014.
Investments in subsidiaries
The company has adopted the carrying value of subsidiary investments under Irish/UK GAAP on the date of transition as their deemed cost rather than carrying out a valuation at the date of transition as permitted by FRS 102.
Share based payment transactions
The company has elected not to apply Section 26 Share based payment to equity instruments granted before the date of transition to FRS 102. FRS 20 has been applied to instruments granted prior to the date of transition
2. Example 19: FRS 102 Principle Adjustments
The reconciliation of the profit and loss prepared in accordance with Irish GAAP and in accordance with FRS 102 for the year ended 31 December 2014 and the reconciliation of the amount of total equity at 31 December 2014, before and after the application FRS 102, is as follows:
| Profit for the year ended 31- Dec | Total equity as at 01 – Jan | Total equity as at 31-Dec | |
| 2014 | 2014 | 2014 | |
| € | € | € | |
| As reported under Irish GAAP | 132,818 | 587,000 | 719,818 |
| Accounting policy changes | |||
| Impact of: | |||
| – Holiday pay accrual (a) | (12,000) | (62,000) | (74,000) |
| – Reversal of intangible asset (b) | (75,000) | (75,000) | |
| – Revaluation of freehold premises (f) | – | XXXX | – |
| – Additional depreciation on uplift as a result of revaluation of freehold premises (f) | (XXXX) | – | – |
| – Rent free period for operating leases (c) | (32,000) | (32,000) | |
| – Pension – recognition of group scheme | |||
| – Restatement of previous business combination – goodwill derecognised and reversal of amortisation | |||
| – Restatement of previous business combination – intangibles recognised and additional amortisation | |||
| – Recognition of deferred tax on business combinations entered into prior to transition | |||
| – Present valuing non-market rate loans/ financing transactions | |||
| – Pension unrecognised service costs | |||
| – Derivatives | |||
| Deferred tax impact of: | |||
| – Holiday pay accrual | 1,000 | 6,000 | 7,000 |
| – Reversal of intangible asset | 9,375 | 9,375 | |
| – Rent free period for operating leases | 4,000 | 0 | 4,000 |
| – Revaluation of freehold premises (f) | |||
| – Pension adjustments | |||
| – Revaluation of freehold premises (e) | – | (25,000) | 25,000 |
| 93,818 | 440,375 | 534,193 | |
| Correction of material errors | XXXX | XXXX | XXXX |
| Current tax effect on the correction error | (XXXX) | (XXXX) | (XXXX) |
| XXXX | XXXX | XXXX | |
| As reported under FRS 102 | 93,818 | 440,375 | 534,193 |
(a) Holiday pay accrual
Irish GAAP
Under Irish GAAP provisions for holiday pay accruals were not recognised and holiday pay was charged to the Profit and Loss account as it was paid.
FRS 102
FRS 102 requires short-term employee benefits to be charged to the profit and loss account as the employee service is received.
Impact
This has resulted in the company recognising a liability for holiday pay of €62,000 on transition to FRS 102. In the year to 31 December 2014 an additional charge of €12,000 was recognised in the profit and loss account and the liability at 31 December 2014 was €74,000.
(b) Intangible asset
Irish GAAP
Under Irish GAAP the company had capitalised expenditure incurred on the development of the company brand name.
FRS 102
FRS 102 does not allow that capitalisation of internally generated brand names.
Impact
This has resulted in the company reversing the asset value of €75,000 on transition to FRS 102.
(c) Rent free period for operating leases
Irish GAAP
Under Irish GAAP operating lease incentives, such as rent free periods were spread over the shorter of the lease period or the period to when the rental was set to a fair market rent.
FRS 102
FRS 102 requires that such incentives to be spread over the lease period. The company has taken advantage of the exemption for existing leases at the transition date to continue to recognise these lease incentives on the same basis as previous Irish GAAP. Accordingly the FRS 102 accounting policy has been applied to new operating leases entered into since 1 January 2014.
Impact
This has resulted in an increased operating lease charge of €32,000 for the year 31 December 2014 with a corresponding increase in the accrued lease liability at 31 December 2014.
(d) Revaluation of tangible assets
Under previous Irish GAAP the company had a policy of revaluing freehold premises. On transition to FRS 102 the company has elected to use the previous revaluation of certain premises at 31 December 2013 as the deemed cost for that asset. There is no effect on the balance sheet on transition. In the year ended 31 December 2014 the revaluation for the year ended 31 December 2014 is no longer recognised in Other Comprehensive income. As the revaluation was effected at the end of the financial year there was no change to the depreciation charge for the year ended 31 December 2014.
(e) Deferred taxation
The company has accounted for deferred taxation on transition as follows:
(i) Holiday pay accrual – Deferred tax of €7,000 has been recognised at 12.5% on the liability recognised on transition at 1 January 2014. In the year ended 31 December 2014 the company has recognised a charge of €1,000 in the profit and loss account in respect of the reduction of the holiday pay accrual.
(ii) Intangible asset – Deferred tax has been recognised at 12.5% of asset derecognised on transition at 1 January 2014. In the year ended 31 December 2014 the company has recognised a credit of €9,375 in the profit and loss account in respect of brand development costs not previously recognised in the profit and loss account.
(iii) Rent free period for operating leases – In the year ended 31 December 2014 the company has recognised a charge of €4,000 in the profit and loss account in respect of the increased operating lease charge.
(iv) Revaluation of freehold premises – Under previous Irish GAAP the company was not required to provide for taxation on revaluations. Under FRS 102 deferred taxation is provided on the temporary difference arising from the revaluation. A deferred tax charge of €25,000 arose on transition to FRS 102.
(f) Revaluation of tangible assets
Under previous Irish GAAP the company did not have a policy of revaluing freehold premises. On transition to FRS 102 the company has elected to use the revaluation of certain premises at 31 December 2013 as the deemed cost for that asset and continue to adopt a policy of non-revaluation from that date as permitted under Section 35 of FRS 102. The property is depreciated over its useful economic life from that date. Therefore as a result of availing of this exemption, property, plant and equipment has increased by €XXX and a non-distributable reserve created for the same amount at 1 January 2014 (date of transition).
In the year ended 31 December 2014, additional depreciation of €XXXX had to be charged to the profit and loss account on the uplift in the value of the property.
(g) Revaluation of tangible assets
Under previous Irish GAAP the company did not have a policy of revaluing freehold premises. On transition to FRS 102 the company has elected to adopt a revaluation policy going forward. The property is depreciated over its useful economic life from that date. Therefore as a result of this election, property, plant and equipment has increased by €XX and a revaluation reserve created for the same amount at 1 January 2014 (date of transition).
In the year ended 31 December 2014, additional depreciation of €XXXX had to be charged to the profit and loss account on the uplift in the value of the property and the movement during the year ended 31 December 2014 was posted through other comprehensive income to the revaluation reserve.
(h) Defined benefit pension scheme
(i) Past service costs
Irish GAAP
Under previous Irish GAAP, past service costs were recognised in profit and loss on a straight line basis over the period in which the increases in benefit vest.
FRS 102
FRS 102 requires that all past service costs are recognised immediately.
Impact
As a result of this difference, on transition, an unrecognised past service cost of €XXXX was recognised in profit and loss reserves and the defined benefit liability increased accordingly. Deferred tax of €XX was recognised on this adjustment.
i) Defined benefit scheme previously accounted for as a defined contribution scheme
The company is a member of a group defined benefit plan that shares risks between entities under common control.
Irish GAAP
Under previous Irish GAAP, this scheme was accounted for as a defined contribution scheme.
FRS 102
Under FRS 102, at least one member of the group companies must account for this as a defined benefit scheme, that being the entity that is legally responsible for the plan or alternatively the obligation is split between each group company based on a pre-defined legal split.
Impact
As a result of this difference, as this company is legally responsible for the scheme, the net deficit of €XXXX was included in the balance sheet at the date of transition with a corresponding debit to profit and loss reserves on 1 January 2014.
As a result of this change in the year ended 31 December 2014 comparative there was an additional charge to profit and loss of €XXX (being the difference between the contributions paid and the defined benefit accounting in the profit and loss) and an additional €XXX debited to other comprehensive income for the re-measurement in line with Section 28. The liability on the defined benefit liability at 31 December 2014 was €XXX. The related deferred tax asset of €XXX was recognised on the balance sheet at the date of transition and a deferred tax asset of €XXX for the year ended 31 December 2014 with €XXX of the movement in deferred tax posted to the profit and loss and the remaining €XXX posted to other comprehensive income.
ii) Net interest charge on defined benefit schemes
There is also a presentational change under FRS 102 with regard defined benefit obligations.
Irish GAAP
Under previous Irish GAAP, interest on the defined benefit pension schemes was based on the difference between the expected return on plan assets and the interest cost on the liabilities.
FRS 102
Under FRS 102, that interest must be calculated based on the net pension deficit/surplus using the discount rate.
Impact
As a result of this difference, the profit decreased by €XXX and the amount posted to other comprehensive income increased by the same amount. It had no effect on the net asset position or the defined liability carrying amount in the balance sheet.
iii) Recognition of pension surplus
Irish GAAP
Under previous Irish GAAP, the criteria for recognition of a defined benefit surplus was much more prescriptive. A surplus could only be recognised where there is a formal signed agreement with the trustees in relation to the reduction in future contributions or a refund.
FRS 102
FRS 102 allows a surplus to be recognised where it can show that it will be able to recover the surplus either through reduced contributions in the future or through refunds from the plan
Impact
As a result of this difference, the additional defined benefit surplus of €XXX has been recognised at the date of transition on 1 January 2014 a corresponding credit posted to retained earnings net of deferred tax of €XXX. As a result the defined pension surplus at 31 December 2014 increased by the same amount.
iv) Reclassification of deferred tax
Irish GAAP
Under old Irish GAAP, the deferred tax balance on the pension was netted against the carrying amount of the defined benefit pension.
FRS 102
Under Section 28 and Section 29, deferred tax should not be netted against the defined benefit liability/asset instead it should be shown separately in the deferred tax balance in the balance sheet.
Impact
A reclassification adjustment of €XXX was posted from the defined benefit liability to deferred tax included in provisions and liabilities at 31 December 2014.
(j) Acquisition of non-controlling interest
Irish GAAP
Under old Irish GAAP, the acquisition of non-controlling interests were accounted for as full acquisitions. Therefore the acquisitions were accounted for under acquisition accounting and goodwill recognised, and on disposal the profit/loss on disposal was recognised in the consolidated financial statements.
FRS 102
Section 9 requires that acquisitions or disposals in interests of subsidiaries that does not result in a change/loss of control after the transaction are accounted for as equity transactions.
Impact
As a result of this difference and given that during the year ended 31 December 2014 a non-controlling interest was acquired, at 31 December 2014, goodwill of €XXX and a fair value uplift on property, plant and equipment of €XXXX were derecognised. €XXXX was recognised in retained earnings attributable to the shareholders of the company.
OR
As a result of this difference and given that during the year ended 31 December 2014 a 20% of a non-controlling interest was disposed of, a transition adjustment was made to transfer the profit recognised on the disposal of €XXX on this interest from the profit and loss account in that year to profit and loss reserves.
(k) Investment properties
Irish GAAP
Under old Irish GAAP, changes in the open market value of investment properties were recorded in the statement of total recognised gains and losses and then to the revaluation reserve.
FRS 102
FRS 102 requires changes in fair value to be recognised in the profit and loss account.
Impact
As a result of this difference, for the year ended 31 December 2014 (comparative year) the movement on the valuation during that year of €XXX has been reclassified from the statement of recognised gains and loss to the profit and loss account. The amount in the revaluation reserve at the date of transition and 31 December 2014 was transferred to a non-distributable reserve. There was no impact on net assets as a result of this adjustment.
(l) Restatement of prior acquisitions
FRS 102 enables preparers of financial statements to avail of an exemption in respect of legacy business combinations and these can be accounted for based on previous GAAP at the transition date. The group has chosen not to avail of this exemption. The group has elected to restate all acquisitions since XX/XX/XX which includes the acquisitions of XX Limited
Irish GAAP
Under old GAAP, the creation of a separate intangible asset from goodwill was very difficult as it not only had to be measured reliably but also needed to be separable. Therefore where it did not meet the definition for recognition it was consumed within goodwill. Deferred tax was not recognised on the difference between fair value or net assets compared to its book value.
FRS 102
Under FRS 102 the intangible does not have to be separable and therefore more intangibles are likely to be recognised resulting in less goodwill requiring recognition. Deferred tax is required to be recognised on the difference between fair value or net assets compared to its book value (other than goodwill).
Impact
At the 1 January 2014, additional intangibles relating to brand names and customer relationships with a net book value of €XXX have been recognised, reducing the net book value of goodwill recognised of €XXX.
Additional amortisation of €XXX was recognised during the year ended 31 December 2014. The impact was to reduce the profit for the year and the net assets by €XXX.
A deferred tax liability of €XXX was recognised on the difference between the fair value of net assets acquired the book values at the date of transition. A movement of €XXX was posted during the year ended 31 December 2014.
OR
FRS 102 enables preparers of financial statements to avail of an exemption in respect of legacy business combinations and these can be accounted for based on previous GAAP at the transition date. The group has chosen to avail of this exemption. However no exemption is provided for the recognition of deferred tax on such business combinations.
Irish GAAP
Under old GAAP, deferred tax was not recognised on the difference between fair value or net assets compared to its book value.
FRS 102
Under FRS 102 deferred tax is required to be recognised on the difference between fair value or net assets compared to its book value (other than goodwill).
Impact
As a result of this difference, a deferred tax liability of €XX was recognised on the 1 January 2014 with the corresponding amount posted to retained earnings. Profit for the year ended 31 December 2014 was reduced by €XXX has a result as the movement on the deferred tax on this acquisition during that year.
(m) Loans and advances to group/related companies/directors
Irish GAAP
Under Irish GAAP, financial instruments at non-market rates or transactions which included a financing arrangement could be stated at the amount actually given.
FRS 102
Under FRS 102, debtors including loans receivable are classified as basic financial instruments and must be carried at amortised cost. Long term loans advanced to third parties have been assessed under the requirements of Section 11 of FRS 102 and a number of these loans were given at non-market rates and therefore are required to be measured at the present value of the future payments discounted at the market rate of interest for a similar debt instrument at the inception of the arrangement.
Impact
As a result of this difference, this has resulted in a difference between the amount previously recognised for these loans and the present value of the loan at a market rate of interest. The impact is as follows:
– The carrying amount of long term debtors decreased by €XXX at 1 January 2014 with a corresponding debit to profit and loss reserves. There is no deferred tax impact of these adjustments as these are not taxable.
– The carrying amount decreased by €XXX at 31 December 2014 with a corresponding credit to interest income in the profit and loss account to reflect the unwinding of the interest income showing the movement in the loan from 1 January to 31 December 2014. There is no deferred tax impact of these adjustments as these are not taxable.
(n) Loans and advances from group/related companies/directors
Irish GAAP
Under Irish GAAP, financial instruments at non-market rates or transactions which included a financing arrangement could be stated at the amount actually given.
FRS 102
Under FRS 102, creditors including loans payable are classified as basic financial instruments and must be carried at amortised cost. Long term loans received from various parties have been assessed under the requirements of Section 11 of FRS 102 and a number of these loans were received at non-market rates and therefore are required to be measured at the present value of the future payments discounted at the market rate of interest for a similar debt instrument at the inception of the arrangement.
Impact
As a result of this difference, this has resulted in a difference between the amount previously recognised for these loans and the present value of the loan at a market rate of interest. The impact is as follows:
– The carrying amount of long term loans/credits decreased by €XXX at 1 January 2014 with a corresponding credit to profit and loss reserves. There is no deferred tax impact of these adjustments as these are not taxable.
– The carrying amount decreased by €XXX at 31 December 2014 with a corresponding debit to interest expense in the profit and loss account to reflect the unwinding of the interest expense/discount showing the movement in the loan from 1 January to 31 December 2014. There is no deferred tax impact of these adjustments as these are not taxable.
(o) Derivative financial instruments (Forward foreign currency contracts and interest rate swaps)
Irish GAAP
Under Irish GAAP there was no requirement to recognise derivative financial statements at fair value, instead they were disclosed. For interest rate swaps, the net interest was accrued.
Alternatively, an entity could choose to retranslate the year end foreign currency balances at the average forward rate that covers the net exposure.
FRS 102
FRS 102 requires these derivatives to be recognised at fair value on the balance sheet with movement year on year recognised in the profit and loss where hedge accounting is not adopted. Year-end foreign currency balances cannot be retranslated at a forward rate, instead the year end spot rate must be used.
Impact
The fair value of forward foreign exchange contracts equated to a loss of €XXX at 1 January 2014 and to a profit of €XXX at 31 December 2014. As a result at the date of transition, creditors were increased by €XX at 1 January 2014 and the profit and loss reserve was debited with the same amount. Deferred tax of €XX was recognised on this adjustment and with the corresponding entry posted to profit and loss reserves.
The movement between the loss at the 1 January to 31 December 2014 was posted to the profit and loss thereby increasing profits by €XXX. Deferred tax of €XXX was recognised in the profit and loss account on this movement.
AND WHERE APPLICABLE IF CONTRACTED RATES USED TO RETRANSLATE FOREIGN CURRENCY BALANCES AT THE YEAR END DATE
An adjustment at the date of transition of €XXX and €XXX was made to reduce debtors and creditors respectively so as to show the foreign currencies at the year-end spot rate as opposed to the contracted rate. The net impact was posted to profit and loss reserves brought forward. Deferred tax of €XX was also recognised on this balance.
For the year ended 31 December 2014, €XXX and €XXX was made to reduce debtors and creditors respectively so as to show the foreign currencies at the year-end spot rate. The net impact was posted to foreign exchange costs in the profit and loss. Deferred tax of €XXX was recognised in the profit and loss for the tax effect on the movement between the prior year adjustment and the current year end adjustment.
OR WHERE HEDGE ACCOUNTING IS ADOPTED
The company uses financial instruments to hedge the company’s exposure to currency fluctuations. As these meet the requirements for hedge accounting and can be treated as cash flow hedge under FRS 102, the movement in the fair value of the hedge is accounted for through reserves. As a result, at 1 January 2014 the fair value of such derivatives at that date was €XXX. This asset was recognised on the balance sheet and the adjustment posted to the cash flow hedge reserve.
At 31 December 2014, the fair value of €XXX was recognised in the balance sheet with the movement on the prior year posted to other comprehensive income and then to the cash flow hedge reserve.
(p) Traded investments
Irish GAAP
Under Irish GAAP entities could carry traded investments in shares at cost.
FRS 102
Under Section 11 of FRS 102, such investments must be carried at their fair value with the movement in fair value recognised in the profit and loss. Section 29 also requires deferred tax to be recognised on the difference between the tax value and the carrying amounts.
Impact
On transition to FRS 102 on 1 January 2014, the carrying value of financial assets which were actively traded on a stock exchange was increased by €XXX with the corresponding amount being posted to profit and loss reserve. Deferred tax of €XXX was recognised on this adjustment with the corresponding amount posted to profit and loss reserves brought forward.
At 31 December 2014, the carrying value of financial assets which were actively traded on a stock exchange was increased by €XXX with the corresponding amount being posted to the profit and loss. The deferred tax liability was increased by €XXX at 31 December 2014 to reflect the difference between the tax value and the carrying amount at that date.
(q) Computer software
Old GAAP
Under old GAAP, website development costs and software were classified as property, plant and equipment.
FRS 102
Website development costs and software where the software is not an integral part of the hardware is required to be classified as intangibles under FRS 102.
Impact
Computer software, with a book value of €XXX at 1 January 2014 has been reclassified from property, plant and equipment to intangible assets. The amount reclassified at 31 December 2014 was €XXX. There is no impact on the profit or equity.
(r) Prior year adjustment – material error
The prior year adjustment is due to the omission of inventory located in an outside warehouse being excluded from the inventory at 31 December 2014 and 31 December 2013. The value of the inventory at 31 December 2014 was €100,000 and the value of the inventory at 31 December 2013 was €95,000. The financial statements for 2014 has been restated to correct this error.
The prior year adjustment resulted in an increase to the inventory balance at 31 December 2013 and 2014 of €95,000 and €100,000 respectively. This has resulted in the cost of sales for 31 December 2014 year end increasing by €5,000 and the profit and loss reserves increasing by €85,500 being the net of tax adjustment. The current tax liability in the comparative year has increased by €XXX as a result of this adjustment.
(s) Statement of cash flows
Irish GAAP
Under Irish GAAP, cash flows were presented separately for operating activities, returns on investment and servicing of finance, taxation, capital expenditure and financial investment, acquisitions and disposals, equity dividends paid and financing.
FRS 102
Under FRS 102, cash flows are required to be shown separately for three categories only, namely, operating, investing and financing. Additionally the cash flow statement reconciles to cash and cash equivalents whereas under previous Irish GAAP the cash flow statement reconciled to cash. Cash and cash equivalents are defined in FRS 102 as “cash on hand and demand deposits and short term highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value” whereas cash is defined in FRS 1 as “cash in hand and deposits repayable on demand with any qualifying institution, less overdrafts from any qualifying institution repayable on demand”.
Impact
Cash flows from taxation and returns on investments and servicing of finance shown under Irish GAAP are included as operating activities under FRS 102.
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