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Transition exemptions
Section 35 provides no exemptions on the transition to FRS 102.
Principal transition adjustments
1) Reversal of prior year goodwill impairments since the date of transition
Reversal of an impairment for goodwill will not be allowed under Section 27 (subject to the implementation of the EU accounting directive 2013/34 by Ireland) however, under old GAAP the reversal of a previous impairment was allowed under certain circumstances. In the UK an impairment of goodwill cannot be reversed where a UK entity has applied the September 2015 amendments early as the EU directive has already been enacted. Therefore, where a reversal of an impairment on goodwill was recognised under old GAAP since the date of transition by a UK company and that company has early adopted the September 2015 amendments to FRS 102, a transition adjustment will be required.
Example 19: Reversal of prior year goodwill impairments reversal since the date of transition
Company A, a UK company (who has early adopted the September 2015 amendments to FRS 102) reversed a previous impairment booked on goodwill on 2 January 2014 as allowed under old GAAP. The date of transition is 1 January 2014. The amount of the goodwill impairment reversed was CU100,000. This reinstated goodwill was amortised over its remaining useful life of 5 years under old GAAP. Under FRS 102 this reversal is not permitted. The adjustments required on transition are:
Year ended 31 December 2014
|
|
CU |
CU |
|
Dr Reversal of Goodwill Impairment in P&L |
100,000 |
|
|
Cr Goodwill |
|
100,000 |
Being journal to reverse the previous reversal of the goodwill impairment
|
|
CU |
CU |
|
Dr Goodwill |
20,000 |
|
|
Cr Amortisation of Goodwill (CU100,000/5yrs) |
|
20,000 |
Being journal to reverse amortisation charged under old GAAP on reinstated goodwill.
Journals required for the year ended 31 December 2015 assuming the above journals are carried forward:
|
|
CU |
CU |
|
Dr Goodwill |
20,000 |
|
|
Cr Amortisation of Goodwill (CU100,000/5yrs) |
|
20,000 |
Being journal to reverse amortisation charged under old GAAP on reinstated goodwill.
2) Impairment loss on revalued asset posted directly to profit and loss under old GAAP and not set against revaluation reserve
Section 27 makes it clear that impairment losses should be recognised in the profit and loss account unless it relates to a revalued asset, in which case it will go to the revaluation reserve first. However, under old GAAP, impairment losses should be recognised in the profit and loss account regardless of whether the asset was revalued or not, where it was due to the consumption of economic benefits. Therefore, where an impairment review has been performed under old GAAP since the date of transition, a transition adjustment will be required where the entity has recognised an impairment on a previously revalued asset into the profit and loss account (due to the impairment being due to the consumption of economic benefits) without setting it against the revaluation reserve first as would be required under FRS 102.
Example 20: Impairment loss on revalued asset posted directly to profit and loss under old GAAP and not set against revaluation reserve
The transition date is 1 January 2014. Company A charged an impairment of CU200,000 in the year ended 31 December 2014 under old GAAP. This impairment was on a factory which had previously been revalued and an amount of CU100,000 was included in the revaluation reserve at the date the impairment was booked. As the impairment was due to the consumption of economic activities the CU200,000 was charged directly to the profit and loss account. Under FRS 102, CU100,000 of this amount should have been set against the CU100,000 revaluation reserve and the remaining amount posted to the profit and loss account. Assume the impairment charge would not be allowable for tax purposes, there is no tax effect. The journals required to correct this are:
Year ended 31 December 2014
|
|
CU |
CU |
|
Dr Revaluation Reserve |
100,000 |
|
|
Cr Impairment in P&L |
|
100,000 |
Being journal to recognise the net CU100,000 in the profit and loss and reduce the revaluation reserve to nil.
For the year ended 31 December 2015, no adjustment is required
Note if the impairment was for anything other than the general consumption of economic benefits then under old GAAP the revaluation reserve would have been decreased first and therefore no transition adjustment would be required.
3) Impairment set against intangible assets first and then against all other assets on a pro rate basis under old GAAP
Under Section 27.21 if a CGU is impaired the impairment will be first set against goodwill and then set against other assets on a pro-rata basis. In contrast under FRS 11 the impairment loss was set against goodwill first, then intangibles and then finally against other assets on a pro-rata basis. Section 35.9 makes it clear that assets which were derecognised under old GAAP cannot be re-recognised on adoption to FRS 102, hence any impairments where intangibles are reduced to nil cannot be reinstated on adoption to FRS 102. Therefore where a prior year impairment review has been performed on a CGU and where the CGU contained intangibles and the impairment did not result in the write off of all the assets in the CGU, a transition adjustment may be required where the intangible was not written off in full. It may be particularly relevant for impairments since the date of transition i.e. in the comparative year.
4) Impairment to be set against grossed up goodwill incorporating non-controlling interests not required to be included under old GAAP
When performing an impairment review of goodwill acquired in a business combination where a non-controlling interest exists, the carrying value of the goodwill is first grossed up to include goodwill attributable to any non-controlling interest. This was not required under old GAAP. Where an impairment of goodwill acquired in a business combination and a non-controlling interest has been booked under old GAAP in the consolidated financial statements at the transition date or since transition, a review will need to be performed to assess whether the impairment should be increased as a result of this change.
Example 21: Impairment loss on a CGU with goodwill and non-controlling interests
At 1 January 2013, Parent A acquired 70% of company X for CU100,000. On acquisition one CGU was only identified. The fair value of the assets acquired was CU80,000. Therefore goodwill of CU44,000 (CU100,000-CU80,000) being the fair value of net asset * 70% being the proportion of the net assets acquired) was recognised. The goodwill and identifiable assets are amortised over 10 years. At the date of acquisition; goodwill of CU44,000, CU80,000 of assets was recognised and CU24,000 (CU80,000*30%) was recognised in non-controlling interest.
At the 31 December 2014, due to a change in the market trends the demand for the product produced by the CGU reduced significantly. Therefore an impairment review was necessary. The value in use of the CGU at that time was estimated at CU50,000. The carrying value of goodwill at that date was CU35,200 (CU44,000/10yrs*8yrs) and the carrying amount of the identifiable assets was CU64,000 (CU80,000/10yrs*8yrs). Under old GAAP an impairment of CU49,200 was booked (the non-controlling interest was not incorporated)-CU35,200 against goodwill and CU14,000. However under old GAAP the non-controlling interest is required to be incorporated into the calculation. Assume a deferred tax rate of 10%.
Calculations required to determine the impairment under FRS 102.
In accordance with Section 27.16 when assessing the amount of impairment the notional non-controlling interest needs to be incorporated as per below.
|
|
CU |
|
Carrying Amount of Goodwill at the End of Year 2 |
35,200 |
|
Unrecognised Non-Controlling Interest in Goodwill * |
15,086 |
|
Carrying Amount of Identifiable Assets |
64,000 |
|
Notionally Adjusted Carrying Amount |
114,286 |
|
Recoverable Amount |
(50,000) |
|
Impairment |
64,286 |
The impairment loss of CU64,286 is first allocated against goodwill and the remaining to the identifiable assets assuming they have a nil fair value less costs to sell. The amount to be allocated to goodwill is the total carrying amount of goodwill including the non-controlling notional interest i.e. CU35,200+CU15,086= CU50,286. However only 70% of this CU50,286 relates to Parent A’s interest so the amount to be taken off Parent A’s goodwill is CU35,200
The remaining CU29,086 (CU64,286-CU35,200) is set against the carrying amount of the identifiable assets. In the consolidated accounts the 30% of the impairment of CU8,726 would be attributed to non-controlling interest. Therefore the carrying amount at the end of year 2 after the impairment would be:
|
|
Goodwill |
Identifiable assets |
Total |
|
Carrying Amount Before Impairment |
CU35,200 |
CU64,000 |
CU99,200 |
|
Impairment Loss |
(CU35,200) |
(CU29,086) |
(CU64,286) |
|
Carrying Amount after Impairment |
– |
CU34,914 |
CU34,914 |
*carrying amount notionally adjusted to include goodwill attributable to the non-controlling party which is then compared to the recoverable amount. Non-controlling interest in goodwill = CU44,000/0.7*0.3 = CU18,857 at the date of acquisition. There has been two years since acquisition and this would notionally have been amortised for two years which would mean the NBV would be CU15,086 (CU18,857/10yrs*8yrs).
Transition adjustments required:
At 1 January 2014
No journals required
At 31 December 2014
|
|
CU |
CU |
|
Dr Impairment in P&L |
15,086 |
|
|
Cr Property, plant and equipment (CU29,086 that should have been booked-CU14,000 actually booked) |
|
15,086 |
Being journal to reflect additional impairment required under FRS 102
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU15,086*10%) |
1,509 |
|
|
Cr Deferred Tax P&L |
|
1,509 |
Being journal to reflect deferred tax movement on the additional impairment assuming capital allowances are claimed.
Journals required in 31 December 2015 year end assuming the above journals are posted to profit and loss reserves etc
|
|
CU |
CU |
|
Dr PPE |
1,885 |
|
|
Cr Depreciation on Fixed Assets (CU15,086/8 years remaining life at time of impairment) |
|
1,885 |
Being journal to reflect depreciation booked under old GAAP which was impaired in 2014 under FRS 102.
|
|
CU |
CU |
|
Dr Deferred Tax Asset in P&L (CU1,885*10%) |
189 |
|
|
Cr Deferred Tax Asset |
|
189 |
Being journal to reflect deferred tax on the above journal.
5) Other differences where accounting adjustments are likely to occur on transition are:
- Section 27 states that an impairment review must be carried out when there are indicators of impairment. This contrasts with old GAAP where mandatory annual testing for goodwill and intangible assets with an estimated useful life of more than 20 years, property, plant and equipment of more than 50 years and on which no depreciation is charged on the grounds of immateriality. This will not result in transition adjustments occurring on transition.
- Section 27 does not require an entity to carry out post impairment monitoring whereas under old GAAP (FRS 11) subsequent monitoring of cash flows explicitly required for 5 years after the impairment was booked where the recoverable amount was based on value in use, with re-performance of original impairment calculation if actual cash flows are significantly less than forecast. This will not result in transition adjustments occurring on transition.
- Section 27 makes it clear where assets are held for service potential then it is possible to use the depreciated replacement cost as a measurement model. Old GAAP had no specific guidance.
- Under Section 27, deferred tax must be taken into account when determining the recoverable amount. This was not required under old GAAP. This will not result in transition adjustments occurring on transition.
- If goodwill cannot be allocated to an individual cash generating unit (CGU) or group of CGU’s on a non-arbitrary basis the test for impairment of goodwill should be carried out by determining the recoverable amount of either the acquired entity in its entirety; or the entire group of companies that have not been integrated. This concept was not in old GAAP. This will not result in transition adjustments occurring on transition.
- When performing an impairment review of goodwill acquired in a business combination, the carrying value of the goodwill is first grossed up to include goodwill attributable to any non-controlling interest. This was not detailed in old GAAP.
- Section 27 only requires disclosures of the amount of impairment losses recognised or reversed in the period and circumstances leading to it. This compares with old GAAP where the disclosures were more onerous and required details of discount rates, periods over which cash flows projected and growth rates used in the value in use calculation.
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