Section 35 – Optional Exemptions

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Optional exemptions – business combinations

Extract from FRS102: Section 35.10(a)

35.10 An entity may use one or more of the following exemptions in preparing its first financial statements that conform to this FRS:

(a) Business combinations, including group reconstructions

A first-time adopter may elect not to apply Section 19 Business Combinations and Goodwill to business combinations that were effected before the date of transition to this FRS. However, if a first-time adopter restates any business combination to comply with Section 19, it shall restate all later business combinations. If a first-time adopter does not apply Section 19 retrospectively, the first-time adopter shall recognise and measure all its assets and liabilities acquired or assumed in a past business combination at the date of transition to this FRS in accordance with paragraphs 35.7 to 35.9 or if applicable, with paragraphs 35.10(b) to (r) except for:

(i) intangible assets other than goodwill – intangible assets subsumed within goodwill shall not be separately recognised; and

(ii) goodwill – no adjustment shall be made to the carrying value of goodwill.

OmniPro comment

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. 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. Therefore without this exemption entities would have to review all prior business combinations and identify the additional intangibles that would be recognised under Section 19.

The above exemption allows entities to not restate the business combinations and goodwill recognised on business combinations entered into prior to the date of transition. Goodwill cannot be adjusted on transition where this exemption is taken. Without this exemption entities would have the difficult task of determining the fair values of assets and liabilities at the date of acquisition for every business combination entered into prior to the date of transition.

Under old GAAP, deferred tax was not required to be recognised on all differences between the fair value of the assets and liabilities acquired and the book value in the acquirees books. Section 19 requires deferred tax to be recognised on all differences with the exception of goodwill. Even where the above exemption is taken, entities will still be required to recognise deferred tax under Section 29 on the differences between the book values of the acquirer and the fair values at the original date of acquisition (except goodwill). The adjustment would be posted to profit and loss reserves brought forward as goodwill cannot be adjusted.

In addition, if under FRS 102, assets or liabilities were not recognised under the rules of old GAAP, an adjustment to retained earnings will be required where this adjustment is required. It is unlikely for adjustments to be required in this area where the previous entity adopted old GAAP as the requirements for measurement and recognition were similar other than the requirement to recognise deferred tax.

See illustration of the deferred tax adjustments below:

Example 7: Adjustments for deferred tax on business combinations prior to date of transition where transition exemption availed of

Parent A acquired 100% of the ordinary shares of Company B for CU1,000,000 on 1 January 2013. Assume the deferred tax rate is 10% and the date of transition is 1 January 2014. Assume deferred tax has been recognised correctly on the book amounts transferred.

Assume the deferred tax on the adjustments to reflect the fair value of the monetary assets reverses in the first year. Assume the amortisation on intangibles and PPE is over a period of 10 years from the date of acquisition.

Details of the book value and fair value at the time of acquisition is detailed below:

		Old GAAP	FRS 102
	Book value	Fair value	Fair value
Property, Plant and Equipment	CU300,000	CU550,000	CU550,000
Intangible Assets	CUnil	CU100,000	CU100,000
Inventory	CU150,000	CU170,000	CU170,000
Cash	CU100,000	CU100,000	CU100,000
Debtors	CU20,000	CU25,000	CU25,000
Creditors	(CU100,000)	(CU100,000)	(CU100,000)
Contingent Liabilities	CU-	(CU10,000)	(CU10,000)
Deferred Tax	(CU60,000)	(CU60,000*)	(CU86,500*)
Total Net Assets	CU410,000	CU775,000	CU748,500
Consideration		CU1,000,000	CU1,000,000
Goodwill		CU225,000	CU251,500

The deferred tax to be recognised on acquisition under FRS 102, not recognised under old GAAP:

	Date of Acquisition	Book Amount at Date of Transition
Uplift in Property, Plant and Equipment	CU150,000	CU135,000**
Uplift in Intangible Assets	CU100,000	CU90,000**
Uplift in Inventory	CU20,000	CU0**
Uplift in Cash	CUnil	N/a
Uplift in Contingent Liabilities	(CU10,000)	CU0**
Uplift in Debtors	CU5,000	CU0**
Uplift in Creditors	CUnil	CUN/a
Total Timing Difference*	CU265,000	CU225,000
Deferred Tax*	CU26,500	CU22,500

*Once the above exercise is completed management should assess the rate that the asset/liabilities are expected to be reversed. Here the debtors, inventory, contingent liability property, plant and equipment are going to be reversed during trading as they are trading assets. In relation to the intangible assets, if it is assumed these will be used throughout the trade and have little residual value then the trade tax rate should be used in measuring the deferred tax and not the sales tax rate. The deferred tax liability to recognise as a result of the uplift in value at acquistion is:

CU265,000 * 10%= CU26,500. Therefore total deferred tax to be shown in the consolidated financial statements is on the date of acquisition under FRS 102 = CU26,500+CU60,000=CU86,500

At date of transition is CU22,500 (CU225,000*10%)

**Carrying amount of fair value adjustment in the consolidated financial statements at date of acquisition is:

PPE = CU135,000 (CU150,000/10yrs*9yrs being the years left on the asset at date of transition).

Intangibles = CU90,000 (CU100,000/10yrs*9yrs being the years left on the asset at date of transition).

Other non-monetary assets is nil as it is assumed the difference has reversed.

Therefore the deferred tax which would have been recognised under FRS 102 was CU22,500.

The journals required on transition are:

On 1 January 2014

	CU	CU
Dr Profit and Loss Reserves	22,500
Cr Deferred Tax Liability		22,500

Being journal to recognise the deferred tax on fair value differences at date of transition

Note goodwill is not adjusted instead profit and loss reserves is adjusted as Goodwill cannot be adjusted where the exemption is claimed.

Journals to be posted at 31 December 2014 assuming the above journal is posted to reserves:

Dr Deferred Tax Liability

2,500

Cr Deferred Tax in P&L

((CU150,000+CU100,000)/10yrs)*10%)

2,500

Being journal to reflect the reversal of deferred tax to match depreciation posted on fair value differences in consolidated financial statements

Journals to be posted at 31 December 2015 assuming the above journal is posted to reserves:

The same journal will be required for 31 December 2015 as for 2014 above

Example 8: Adjustments to business combinations where it occurs after the date of transition

Adjustment required to combinations entered into after the date of transition assuming exemption for non-restatement of prior year combinations is claimed

Where companies have entered into a business combination after the date of transition i.e. in the comparative year or the current year, a transition adjustment will be required to restate the business combination to what it should have been under FRS 102. The principal differences that are likely to arise are:

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. Under FRS 102 the intangible does not have to be separable and therefore more intangible are likely to be recognised resulting in less goodwill requiring recognition.

Possible amortisation to be recognised on intangibles where new intangibles are recognised under FRS 102 for the aforementioned reason which may result in an additional tax deduction or acceleration of a deduction due to it having a differing useful lives than goodwill.

Less amortisation on goodwill where more assets are identified under FRS 102 than old GAAP for the aforementioned reasons. Where goodwill has been allowed as a deduction in the tax computation, there may be a deferred tax impact.

The recognition of deferred tax balances for the difference between book value and fair value (other than on goodwill) whereas this was not required under old GAAP. Hence a transition adjustment will be required to recognise the deferred tax on acquisition and the carrying amount required at each year end.

FRS 102 does not allow an indefinite useful life where old GAAP did, therefore a life will have to be determined at the acquisition date under FRS 102 and where this cannot be determined it should be set at a maximum of 10 years where the September 2015 amendments to FRS 102 are early adopted by UK companies. If not then a maximum of 5 years should be applied as the 10 year is not mandatory until periods beginning after 1 January 2016. (Currently 5 years in the Republic of Ireland until the EU directive is enacted which is expected in 2016). Not included in this example but included in example 24 below.

Parent A acquired 100% of the ordinary shares of Company B for CU1,000,000 on 2 January 2014. Assume the deferred tax rate is 10% and the date of transition is 1 January 2014. Assume deferred tax has been recognised correctly on the book amounts transferred. Assume the useful life of goodwill is 10 years.

Assume the deferred tax on the adjustments to reflect the fair value of the monetary assets reverses in the first year and the useful life of PPE is 10 years.

Details of the book value and fair value at the time of acquisition for Old GAAP and FRS 102 purposes is detailed below:

		Old GAAP	FRS 102
	Book value	Fair value	Fair value	Difference
Property, Plant and Equipment	CU300,000	CU550,000	CU550,000	CUNil
Intangible Assets	CUnil	CUnil	CU100,000	(CU100,000)
Inventory	CU150,000	CU170,000	CU170,000	CUNil
Cash	CU100,000	CU100,000	CU100,000	CUNil
Debtors	CU20,000	CU25,000	CU25,000	CUNil
Creditors	(CU100,000)	(CU100,000)	(CU100,000)	CUNil
Contingent Liabilities	CU-	(CU10,000)	(CU10,000)	CUNil
Deferred Tax	(CU60,000)	(CU60,000*)	(CU86,500*)	CU26,500
Total Net Assets	CU410,000	CU675,000	CU748,500	(CU73,500)
Consideration		CU1,000,000	CU1,000,000	CUNil
Goodwill		CU325,000	CU251,500	CU73,500

Given the threshold for identifying intangible is not as stringent under FRS 102 as it does not have to be separable from goodwill, under FRS 102, intangibles of CU100,000 should have been recognised. Assume the useful life of intangibles is 5 years.

The deferred tax to be recognised on acquisition under FRS 102, not recognised under old GAAP:

Uplift in Property, Plant and Equipment	CU150,000
Uplift in Intangible Assets	CU100,000
Uplift in Inventory	CU20,000
Uplift in Cash	CUnil
Uplift in Contingent Liabilities	(CU10,000)
Uplift in Debtors	CU5,000
Uplift in Creditors	CUnil
Total Timing Difference	CU265,000
Deferred Tax (CU265,00010%)	CU26,500

CU265,000 * 10%= CU26,500. Therefore total deferred tax to be shown in the consolidated financial statements is = CU26,500+CU60,000=CU86,500

Adjustment required to the comparative financial statements:

At 31 December 2014

	CU	CU
Dr Intangible Assets (CU100,000 less nil)	100,000
Cr Goodwill (CU325,000-CU251,500)		73,500
Cr Deferred Tax Liability (as above)		26,500

Being journals required to post adjustments so as to show the correct fair values and goodwill under FRS 102

Journal for change in amortisation

	CU	CU

Dr Amortisation of Intangibles in P&L***	20,000***
Dr Accumulated Amortisation of Goodwill	7,350
Cr Accumulated Amortisation of Intangibles		20,000
Cr Amortisation of Goodwill in P&L**		7,350**

Being journal to reflect reduction in goodwill amortisation and increase in intangible amortisation due to Old GAAP figures posted being different.

**The goodwill balance has decreased by CU73,500 under FRS 102 on acquistion. However under old GAAP the goodwill of CU325,000 was depreciated over 10 years so therefore depreciation of CU32,500 (CU325,000/10yrs) was charged in the old GAAP consolidated financial statements.

The amortisation that should have been charged under FRS 102 is = CU251,500/10yrs= CU25,150.

Therefore additional charge of CU7,350 (CU32,500-CU25,150) posted under old GAAP is to be reversed.

***The intangible balance has increased by CU100,000 under FRS 102 on acquisition which has to be amortised. However under old GAAP there was no intangible as it did not meet the definition for recognition. The amortisation that should have been charged under FRS 102 is = CU100,000/5yrs= CU20,000.

Therefore additional charge of CU20,000 (CU20,000-CUnil) to be posted under FRS 102 is to be recognised.

Journal for change in deferred tax

Dr Deferred Tax Liability

6,015

Cr Deferred Tax in P&L

((CU4,515 +CU1,500)

6,015****

Being journal to reflect the reversal of deferred tax to match depreciation posted on fair value differences and release of monetary assets in the year in consolidated financial statements

****Reversal of the timing difference of inventory (CU20,000), contingent liability (CU10,000) and debtors (CU5,000) = (CU20,000-CU10,000+CU5,000)*10%= CU1,500

Reversal of the timing difference on fair value adjustment on PPE and intangibles for the depreciation/amortisation charge in the year = (CU25,150+CU20,000)*10%=CU4,515.

Adjustments required in the 31 December 2015 year end accounts assuming the above journals are posted into reserves where relevant:

The same type of journals would be posted for the amortisation/depreciation on intangible, goodwill and PPE in the 2015 as the 2014 year assuming consolidated financial statements have first been performed under old GAAP. Deferred tax of CU4,515 would only be posted as the monetary differences have been reduced to nil in the prior year.

If the intangible was allowed for tax purposes an adjustment may be required on the corporation tax computation for the tax deduction not previously allowable on goodwill. This deduction would be obtained in line with the tax transition rules issued by the tax authorities.

The above example assumes shares were acquired, the principals would be the same for a trade acquisition (when meets the definition of a business as per Section 19). Deferred tax may not be as applicable as it may have already have been provided or the intangible is allowed for capital allowance purposes with the deduction claimed being equal to the amortisation for the year.

Example 9: Adjustments to business combinations where it occurs before date of transition but exemption Section 35.10(a) not claimed

2) Adjustment required to combinations entered into pre date of transition assuming exemption is not claimed

Some entities may decide not to claim the exemption contained in Section 35.10(a) (possibly for tax purposes to get access to deductions for intangible assets acquired not previously recognised). The entity has a choice to apply the restatements back as far back as it likes. However from that date any combinations entered into date must be accounted for under FRS 102. The entity cannot pick and choose which ones to adjust. Under old GAAP it is likely that less intangible assets would have been recognised as FRS 102 is less strict in what can be classified as intangibles. The main reason for the variances will be:

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. Under FRS 102 the intangible does not have to be separable and therefore more intangible are likely to be recognised results in less goodwill requiring recognition.

Possible amortisation to be recognised on intangibles where new intangibles are recognised under FRS 102 for the aforementioned reasons. This may also result in additional tax deductions or an acceleration of tax deductions.

Less amortisation on goodwill where more assets are identified under FRS 102 than old GAAP for the aforementioned reasons.

The recognition of deferred tax balances for the difference between book value and fair value (other than on goodwill) whereas this was not required under old GAAP. Hence a transition adjustment will be required to recognise the deferred tax on acquisition and the carrying amount required at each year end.

FRS 102 does not allow an indefinite useful life where old GAAP did, therefore a life will have to be determined at the acquisition date under FRS 102 and where this cannot be determined it should be set at a maximum of 10 years assuming UK companies early adopt the September 2015 FRS 102 amendments. If a UK company does not early adopt it applies for periods beginning after 1 January 2016. (currently 5 years in the Republic of Ireland until the EU Directive is enacted which is expected in 2016).

On transition where this exemption is not claimed there may be a possible adjustment to inventory as under old GAAP the value to be placed on any inventory where the inventory is not traded in a market in which the acquirer participates as both a buyer and a seller at the date of acquisition is the lower of replacement cost or net realisable value. Under FRS 102 fair value should be used regardless of whether the acquirer participates in an active market in which they are both buyers and sellers. This has not been incorporated into the below example but is included for reference purposes.

NOTE: even where the entity decides to restate prior business combinations as per Section 35.9(e) the entity cannot account for changes in the parents ownership interest in a subsidiary that do not result in a loss of control through the equity method as would be required under FRS 102. The accounting should remain the same as under Old GAAP for combinations where such acquisitions exists (i.e. Under old GAAP goodwill is recognised on acquisition and a disposal recognised on disposal).

Assume the deferred tax on the adjustments to reflect the fair value of the monetary assets reverses in the first year and the useful life of PPE is 10 years.

Details of the book value and fair value at the time of acquisition for old GAAP and FRS 102 purposes is detailed below:

		Old GAAP	FRS 102
	Book value	Fair value	Fair value	Difference
Property, Plant and Equipment	CU300,000	CU550,000	CU550,000	CUNil
Intangible Assets	CUnil	CUnil	CU100,000	(CU100,000)
Inventory	CU150,000	CU170,000	CU170,000	CUNil
Cash	CU100,000	CU100,000	CU100,000	CUNil
Debtors	CU20,000	CU25,000	CU25,000	CUNil
Creditors	(CU100,000)	(CU100,000)	(CU100,000)	CUNil
Contingent Liabilities	CU-	(CU10,000)	(CU10,000)	CUNil
Deferred Tax	(CU60,000)	(CU60,000*)	(CU86,500*)	CU26,500
Total Net Assets	CU410,000	CU675,000	CU748,500	(CU73,500)
Consideration		CU1,000,000	CU1,000,000	CUNil
Goodwill		CU325,000	CU251,500	CU73,500

Given the threshold for identifying intangibles is not as stringent under FRS 102 as it does not have to be separable from goodwill, under FRS 102, intangibles of CU100,000 should have been recognised. Assume the useful life of intangibles is 5 years.

The deferred tax to be recognised on acquisition under FRS 102, not recognised under old GAAP:

Uplift in Property, Plant and Equipment	CU150,000
Uplift in Intangible Assets	CU100,000
Uplift in Inventory	CU20,000
Uplift in Cash	CUnil
Uplift in Contingent Liabilities	(CU10,000)
Uplift in Debtors	CU5,000
Uplift in Creditors	CUnil
Total Timing Difference	CU265,000
Deferred Tax (CU265,00010%)	CU26,500

CU265,000 * 10%= CU26,500. Therefore total deferred tax to be shown in the consolidated financial statements is = CU26,500+CU60,000=CU86,500

Adjustment required:

At 1 January 2014

	CU	CU
Dr Intangible Assets (CU100,000 less nil)	100,000
Cr Goodwill (CU325,000-CU251,500)		73,500
Cr Deferred Tax Liability (as above)		26,500

Being journals required to post adjustments so as to show the correct fair values and goodwill under FRS 102

Journal for change in amortisation

	CU	CU

Dr Amortisation of Intangibles in P&L Reserves***	20,000***
Dr Accumulated Amortisation of Goodwill	7,350
Cr Accumulated Amortisation of Intangibles		20,000
Cr Amortisation of Goodwill in P&L Reserves**		7,350**

Being journal to reflect reduction in goodwill amortisation and increase in intangible amortisation due to old GAAP figures posted being different up to the date of transition so that the correct NBV is shown.

**The goodwill balance has decreased by CU73,500 under FRS 102 on acquisition. However under old GAAP the goodwill of CU325,000 was amortised over 10 years so therefore amortisation of CU32,500 (CU325,000/10yrs) was charged in the old GAAP consolidated financial statements.

The amortisation that should have been charged under FRS 102 is = CU251,500/10yrs= CU25,150.

Therefore additional charge of CU7,350 (CU32,500-CU25,150) posted under old GAAP is to be reversed to profit and loss reserves for 1 year (being the period from the date of acquisition to the date of transition of 1 January 2014).

Therefore additional charge of CU20,000 (CU20,000-CUnil) to be posted under FRS 102 is to be reversed for 1 year (being the period from the date of acquisition of 1 January 2013 to the date of transition of 1 January 2014) to profit and loss reserves.

Journal for change in deferred tax

Dr Deferred Tax Liability

6,515

Cr Profit and Loss Reserves

((CU4,515+CU1,500)

6,515****

Being journal to reflect the reversal of deferred tax to match depreciation posted on fair value differences and release of monetary assets in consolidated financial statements up to the date of transition

****Reversal of the timing difference of inventory (CU20,000), contingent liability (CU10,000) and debtors (CU5,000) = (CU20,000-CU10,000+CU5,000)*10%= CU1,500

Reversal of the timing difference on fair value adjustment on PPE and intangibles for the depreciation/amortisation charged in the year = (CU25,150+CU20,000)*10%=CU4,515.

Journals required to be posted at 31 December 2014 assuming the above journals are brought forward

Journal for change in amortisation

	CU	CU
Dr Amortisation of Intangibles in P&L***	20,000***
Dr Accumulated Amortisation of Goodwill	7,350
Cr Accumulated Amortisation of Intangibles		20,000
Cr Amortisation of Goodwill in P&L**		7,350**

Being journal to reflect reduction in goodwill amortisation and increase in intangible amortisation due to old GAAP figures posted being different.

**The goodwill balance has decreased by CU73,500 under FRS 102 on acquistion. However under old GAAP the goodwill of CU325,000 was amortised over 10 years so therefore amortisation of CU32,500 (CU325,000/10yrs) was charged in the old GAAP consolidated financial statements.

The amortisation that should have been charged under FRS 102 is = CU251,500/10yrs= CU25,150.

Therefore additional charge of CU7,350 (CU32,500-CU25,150) posted under old GAAP is to be reversed.

Therefore additional charge of CU20,000 (CU20,000-CUnil) to be posted under FRS 102 is to be reversed.

Journal for change in deferred tax

	CU	CU
Dr Deferred Tax Liability	4,515
Cr Deferred Tax in P&L		4,515****

Being journal to reflect the reversal of deferred tax to match depreciation/amortisation posted on fair value differences in the year in consolidated financial statements not accounted for under old GAAP.

****Reversal of the timing difference on fair value adjustment on PPE and intangibles for the depreciation/amortisation charged in the year = (CU25,150+CU20,000)*10%=CU4,515.

Adjustments required in the 31 December 2015 year end accounts assuming the above journals are posted into reserves where relevant:

The same type of journals would be posted in the 2015 as the 2014 year assuming consolidated financial statements have first been performed under old GAAP.

Example 10: Transition adjustment for goodwill previously determined infinite where Section 35.10(a) is claimed

Company A had goodwill with a carrying amount on transition of CU10,000. This was not previously amortised under old GAAP as it was deemed to have an infinite life. The useful life is now determined to be 10 years. Assume transition exemption 35.10(a) is claimed and the date of transition is 1 January 2014 and the goodwill was not previously allowed for tax purposes. Assume this is a UK entity which has early adopted the September 2015 amendments to FRS 102.

The adjustment to be recognised in the 31 December 2014 books is:

Dr Goodwill Amortisation

CU1,000

Cr Goodwill Accumulated Amortization

(CU10,000/10yrs being remaining UEL)

CU1,000

Being journal to recognise amortisation on goodwill as under old GAAP it was considered infinite.

The same journal will be required in the 31 December 2015 TB and the above journal should be posted to the profit and loss reserve.

Example 11: Transition adjustment for goodwill where previously used the default life 20 years where Section 35.10(a) is claimed

Company A had goodwill with a carrying amount on transition of CU10,000. This was previously amortised under old GAAP at the default rate of 20 years. There are 15 years remaining at the date of transition. If in the unlikely event that the remaining useful life cannot be justified and a life cannot be determined then the default rate under FRS 102 of 10 years should be used (5 year in Ireland until the EU directive is enacted and 5 year for UK entities who have not early adopted the September 2015 FRS 102 amendments). The useful life is now determined to be 10 years. Assume transition exemption 35.10(a) is claimed, the date of transition is 1 January 2014 and the UK entity has early adopted the September 2015 FRS 102 amendments.

The adjustment to be recognised in the 31 December 2014 books is:

	CU	CU
Dr Goodwill Amortisation	500
Cr Goodwill Accumulated Amortisation		500*

Being journal to recognise the additional amortisation on goodwill required under FRS 102.

*under old GAAP the amortisation charge for 2014 would have been CU500 (CU10,000/20yrs).

On transition to FRS 102, the life was determined to be 10 years by default. Therefore the amortisation should have been CU1,000 (CU10,000/10yrs). Therefore an adjustment is required in 31 December 2014 to increase the charge by CU500.

The same journal will be required in the 31 December 2015 TB.

If in the above example the remaining useful life of goodwill was less than 10 years then it may be appropriate to use the lower useful life. If this was an Irish entity or a UK entity which has not early adopted the September 2015 FRS 102 amendments a default rate of 5 years should be used in the example above.

Optional exemptions – Share based payment transactions

Extract from FRS102: Section 35.10(b)

35.10(b) Share-based payment transactions

A first-time adopter is not required to apply Section 26 Share-based Payment to equity instruments (including the equity component of share-based payment transactions previously treated as compound instruments) that were granted before the date of transition to this FRS, or to liabilities arising from share-based payment transactions that were settled before the date of transition to this FRS. Except that a first-time adopter previously applying FRS 20 (IFRS 2) Share-based Payment or IFRS 2 Share-based Payment shall, in relation to equity instruments (including the equity component of share-based payment transactions previously treated as compound instruments) that were granted before the date of transition to this FRS, apply either FRS 20/IFRS 2 (as applicable) or Section 26 of this FRS at the date of transition.

In addition, for a small entity that first adopts this FRS for an accounting period that commences before 1 January 2017, this exemption is extended to equity instruments that were granted before the start of the first reporting period that complies with this FRS, provided that the small entity did not previously apply FRS 20 or IFRS 2.

A small entity that chooses to apply this exemption shall provide disclosures in accordance with paragraph 1AC.31.

OmniPro comment

If under old GAAP equity settled share based payments were not required to be accounted for, then this exemption allows such an entity not to account for any equity settled share based payments issued prior to the date of transition. For small entities as defined in Section 1A, such entities do not have to account for any equity settled share based payments granted prior to the first reporting date. This exemption is only likely to apply to entities who previously followed the FRSSE as under old GAAP equity settled transaction were required to be accounted for.

An entity previously applying old GAAP, would have accounted for equity settled share based payments under FRS 20. For any equity settled share based payments issued prior to the date of transition, the entity can choose to apply Section 26 guidance or continue to apply FRS 20 guidance. For any equity settled share based payments granted after the date of transition these would be accounted for under Section 26.

Optional exemptions – Fair value or revaluation as deemed cost

Extract from FRS102: Section 35.10(c) and Section 35.10(d)

35.10(c) Fair value as deemed cost

A first-time adopter may elect to measure an:

(i) item of property, plant and equipment;

(ii) investment property; or

(iii) intangible asset which meets the recognition criteria and the criteria for revaluation in Section 18 Intangible Assets other than Goodwill on the date of transition to this FRS at its fair value and use that fair value as its deemed cost at that date.

35.10(d) Revaluation as deemed cost

A first-time adopter may elect to use a previous GAAP revaluation of an:

(i) item of property, plant and equipment;

(ii) investment property; or

(iii) intangible asset which meets the recognition criteria and the criteria for revaluation in Section 18 at, or before, the date of transition to this FRS as its deemed cost at the revaluation date.

OmniPro comment

This exemption provides entities with a once off opportunity to revalue the above assets. Note the exemption to investment property will not be that applicable as it is likely the open market value used under old GAAP will equate to fair value. See the below examples showing the effect of this exemption.

Example 12: Previous GAAP revaluation as deemed cost

A company previously chose the revaluation option and revalued the buildings under Old GAAP. The date of transition is 1 January 2014. The original cost of the building was CU300,000. A previous valuation was performed on 31 December 2012 and was stated at CU500,000 which was included in the GAAP accounts. The useful life of this asset was determined to be 20 years. The remaining useful life at 1 January 2014 was 15 years and the NBV is CU464,285. The amount in the revaluation reserve at 31 December 2013 was CU260,000. Under the exemption at the date of transition, the company has elected to use the CU464,285 as its deemed cost going forward and not to adopt a policy of revaluation going forward. Note however deferred tax will still have to be recognised on the difference between the tax value and the carrying value on the date of transition. Assume the rate of deferred tax is 10% (non-CGT rate). See below adjustments required on transition:

Dr Non-Distributable Reserve

16,429

Cr Deferred Tax in Balance Sheet

(CU464,285 – CU300,000) * 10%)

16,429

Being journal to recognise deferred tax on the uplift at the date of transition to the non-distributable reserve

	CU	CU
Dr Revaluation Reserve	260,000
Cr Non Distributable Reserve		260,000

Being journal to reclassify previous revaluations under old GAAP to a non-distributable reserve to set against the deferred tax recognised on transition.

From that date on, the increase in deferred tax should be recognised in the profit and loss account as the asset is depreciated. The asset is depreciated over its remaining life of 15 years so the depreciation charge will be the same as was posted under old GAAP.

In the 31/12/14 i.e. the comparative year for FRS 102, a journal adjustment would be required to account for the depreciation and the deferred tax impact as follows (assuming the opening adjustments above are carried forward):

Cr Deferred Tax in Profit and Loss

1,095

Dr Deferred Tax in Balance Sheet

((CU464,285-CU300,000)/15yrs=CU10,952) * 10%)

1,095

Being journal to reflect deferred tax movement to account for the decrease in the NBV of fixed assets due to depreciation for the year

Dr Non-Distributable Reserve

9,857

Cr Profit and Loss Reserves

(CU10,952-CU1,095)

9,857

Being journal to transfer the depreciation on the revalued amount net of deferred tax from profit and loss reserves to the non-distributable reserve

The 2015 journal will be the very same as the 2014 journal above assuming the above journals are brought forward to reserves.

Example 13: Fair value as deemed cost

A company previously chose the cost model under old GAAP. The date of transition is 1 January 2014 and the company intends to continue to use the cost model under FRS 102. The useful life of this asset was determined to be 20 years. The original cost was CU600,000. The remaining useful life at 1 January 2014 was 15 years and the NBV is CU450,000. The company has obtained a valuation representing fair value at 31 December 2013 of CU700,000. Under the exemption at the date of transition, the company can elect to use the CU700,000 as its deemed cost going forward and no further revaluation will be required as the entity has chosen to apply a cost model. Assume the deferred tax rate is 10% (non-CGT rate). Note however deferred tax will still have to be recognised on the difference between the tax value and the carrying value on the date of transition. This transition exemption gives companies a one off opportunity to bolster the balance sheet of the company on the date of transition. It is also worth nothing where applicable the fair value should be split into each of its component parts. Note a valuation prepared after the date of transition cannot be used as the deemed cost, the valuation must be a valuation of the PPE on the date of transition. The journals required on transition using the above example are:

On 1 January 2014

Dr PPE

(CU700,000-CU450,000)

250,000

Cr Other Non-Distributable Reserve

250,000

Being journal to reflect the uplift in value on the date of transition

Dr Non-Distributable Reserve

25,000

Cr Deferred Tax Liability

(CU250,000*10%)

25,000

Being journal to recognise deferred tax on the uplift in value

	CU	CU
Dr Depreciation in Profit and Loss	16,667
Cr Accumulated Depreciation ((CU700,000-CU450,000)/15yrs)		16,667
Dr Deferred Tax Liability (CU16,667*10%)	1,667
Cr Deferred Tax in P&L		1,667

Being journal to recognise the additional depreciation charge in the 2014 year and the release of the related deferred tax.

The 2015 journal will be the very same as the 2014 journal above assuming the above journals are brought forward to reserves.

Example 14: Revaluation option chosen under old GAAP, reverting to the cost model on transition

A company previously chose the revaluation option and revalued the buildings under Old GAAP. On transition to FRS 102 the company decided to revert back to the cost model. The date of transition is 1 January 2014. The original cost of the property was CU300,000 purchased 5 years from the date of transition. A previous valuation was performed on 31 December 2012 and was stated at CU500,000 which was included in the Old GAAP accounts. The useful life of this asset was determined to be 20 years. The remaining useful life at 1 January 2014 was 15 years and the NBV is CU464,285. Assume the CU300,000 was allowed for capital allowance purposes. The journals posted to reflect this are:

On 1 January 2014

	CU	CU
Dr Revaluation Reserve	243,750**
Cr PPE		239,285*
Cr Profit and Loss Reserves (CU243,750-CU239,285)		4,465

Being journal to restate the balance to a cost basis and eliminate the revaluation reserve

* total of the adjustment is the difference between the carrying amount at 1 January 2015 and the amount this would have been stated at if no revaluation policy had of occurred.

Original cost = CU300,000/20yrs * 15yrs being the number of years remaining up to 1 January 2014 = CU225,000. Therefore the adjustment required is =CU464,285-CU225,000= CU239,285

**the value in the revaluation reserve at 1 January 2014 assuming depreciation each year was transferred to the revaluation reserve. Total revaluation posted at 31 December 2013 was CU300,000/20yrs * 16yrs being the years held at cost up to date of revaluation=NBV of CU240,000. The uplift at that time was CU500,000-CU240,000= CU260,000.

Therefore the additional depreciation on this revaluation during 2013 was CU16,250 (CU260,000/16yrs being number of years remaining at time of revaluation on 31/12/12 * 1 yr being the length of time from revaluation to date of transition = CU16,250. Total carrying amount in reserve at 1 January 2014 was CU243,750 (CU260,000-CU16,250).

Note deferred tax is not effected here as under old GAAP deferred tax would only have been recognised on the cost. The revaluation was a permanent difference.

Example 15: Deferred tax on revaluation where a previous revaluation is used as deemed cost for intangibles

Company A previously had a policy of revaluation on intangibles. The original cost was CU600,000. Assume the date of transition is 1 January 2014. The intangibles were revalued on 31 December 2012 to CU700,000 and at 31 December 2013, the carrying amount was CU630,000 (useful life of 10 years at that time – amortisation charge of CU70,000). The amount in the revaluation reserve at 31 December 2013 was CU30,000. On transition to FRS 102, the company has decided to discontinue adopting the revaluation option and instead use the previous revaluation as the deemed cost. On the date of transition, assuming the intangible can be sold separately a deferred tax liability should be recognised for the uplift in value above its tax cost which was not required under old GAAP. Assume deferred tax is 10%. The deferred tax to be recognised is as follows:

Deferred tax = CU630,000 less CU600,000 = CU30,000 * 10%= CU3,000.

Journal required be posted on transition i.e. 1 January 2014 is:

	CU	CU
Dr Non Distributable Reserve	3,000
Cr Deferred Tax Liability		3,000

Being journal to recognise deferred tax on the uplift at the date of transition to the non-distributable reserve

	CU	CU
Dr Revaluation Reserve	30,000
Cr Non Distributable Reserve		30,000

Being journal to reclassify previous revaluations under old GAAP to a non-distributable reserve.

In the 31/12/14 (comparative year) and 31/12/15, deferred tax will also be required to be posted for the deferred tax on the movement on the carrying amount in relation to additional amortisation posted on the revalued amount each year. From 1 January 2014 the CU630,000 is depreciated over its useful economic life at that date, that being 9 years (CU630,000/9 years=CU70,000). The additional amortisation on the revalued amount is therefore CU333 ((CU630,000-CU600,000)/9 yrs)*10%).

The journal required to be posted in relation to deferred tax for each year is:

Dr Deferred Tax Liability

(CU30,000/9yrs *10%)

333

Credit Profit and Loss–Deferred Tax

333

Being journal to reflect release of deferred tax for depreciation charged in the year. This deferred tax journal will also be required in the 2015 year.

No adjustment is required for depreciation as the depreciation charge in 2014 and 2015 is equal to what should have been charged.

Optional exemptions – Individual and separate financial statements

Extract from FRS102: Section 35.10(d)

35.10(f) Individual and separate financial statements

When an entity prepares individual or separate financial statements, paragraphs 9.26, 14.4 and 15.9 require the entity to account for its investments in subsidiaries, associates, and jointly controlled entities either at cost less impairment or at fair value.

If a first-time adopter measures such an investment at cost, it shall measure that investment at one of the following amounts in its individual or separate opening statement of financial position, as appropriate, prepared in accordance with this FRS:

(i) cost determined in accordance with Section 9 Consolidated and Separate Financial Statements, Section 14 Investments in Associates or Section 15 Investments in Joint Ventures; or

(ii) deemed cost, which shall be the carrying amount at the date of transition as determined under the entity’s previous GAAP.

OmniPro comment

This exemption allows entities to deem the carrying amount stated under previous GAAP as its deemed costs. Alternatively, where an entity intends to apply fair value accounting from transition, it can treat that amount as its deemed cost. Note however where an entity does not intend to apply fair value accounting going forward it cannot use the fair value as deemed cost going forward. If a fair value option is chosen an adjustment will be required on transition.

Alternatively the entity can chose to apply FRS 102 guidance i.e. to state the investment:

At cost less impairment
Fair value through the profit and loss account
Fair value through other comprehensive income

See examples below which show how this would be accounted for.

Under old GAAP investment in subsidiaries in the individual financial statements could only be carried at cost less impairment. However on transition to FRS 102, these is a choice to either carry these are cost less impairment, fair value through profit and loss or fair value through OCI. Where investments in subsidiaries are recognised at fair value in the individual financial statements on transition to FRS 102, deferred tax will need to be recognised on transition as well as an adjustment to reflect the investment at its fair value. The deferred tax rate to be used depends on the tax rate that will be payable on settlement i.e. whether the investment is held for dividend income or for future sale. In reality it may be the sales tax rate.

Example 16: Adoption of fair value through profit and loss on transition

Company A in its individual financial statements has adopted a policy of fair valuing investments in subsidiaries through the profit and loss. Assume 1 January 2014 is the date of transition. The carrying value under old GAAP was CU100,000 at 1 January 2014 and 31 December 2014 & 2015 which represented the original cost. The fair value of the investment at 1 January 2014, 31 December 2014 and 31 December 2015 was CU120,000, CU95,000 and CU125,000 respectively. Assume a deferred tax rate of 20% (being the capital gain tax rate as it will be settled through sale for the purposes of this example).

The adjustments required on transition to reflect the fair value policy and the related deferred tax are:

1 January 2014

Dr Investments in Subsidiaries

(CU120,000-CU100,000)

20,000

Cr Profit and Loss Reserves

20,000

Being journal to reflect uplift in value on transition to show fair value

Dr Deferred Tax in P&L

(CU20,000*20%)

4,000

Cr Deferred Tax Liability

4,000

Being journal to reflect deferred tax on the uplift

Journals required in the 31 December 2014 year assuming the above journals are posted to reserves etc.

Dr Fair Value Movement in Subsidiaries in P&L

25,000

Cr Investments in Subsidiaries

(CU120,000-CU95,000)

25,000

Being journal to reflect fall in value at 31 December 2014

Dr Deferred Tax Liability

4,000

Cr Deferred Tax in P&L

(CU20,000*20%)

4,000

Being journal to reverse deferred tax recognised at 1 January 2014 as the investment is now stated below cost. No deferred tax asset recognised as assumed it is not probable there will be taxable profits to utilise the loss. If there was taxable profits then the deferred tax asset of CU500 would be recognised ((CU100,000-CU95,000)*10%)

Journals required in the 31 December 2015 year assuming the above journals are posted to reserves

Dr Investments in Subsidiaries

(CU125,000-CU95,000)

30,000

Cr Fair Value Movement in Subsidiaries in P&L

30,000

Being journal to reflect uplift in value from 2014 to 2015

Dr Deferred Tax in P&L

((CU125,000-CU100,000)*20%)

5,000

Cr Deferred Tax Liability

5,000

Being journal to reflect deferred tax on the uplift. The movement of CU95,000 to CU100,000 was not recognised in 2014 as per the narrative above as the asset was not deemed recoverable.

Note if the investment were to be settled or realised through receipt of future dividends, the tax rate on the receipt of the dividend should be used in the above example.

Example 17: Adoption of fair value through other comprehensive income on transition

If we take example 16 above and assume Company A in its individual financial statements has adopted a policy of fair valuing investments in associates through other comprehensive income this time. The journals required would be as follows.

1 January 2014

Dr Investments in Subsidiaries

(CU120,000-CU100,000)

20,000

Cr Revaluation Reserve

20,000

Being journal to reflect uplift in value on transition to show fair value

Dr Deferred Tax in Revaluation Reserve

(CU20,000*20%)

4,000

Cr Deferred Tax Liability

4,000

Being journal to reflect deferred tax on the uplift

Journals required in the 31 December 2014 year assuming the above journals are posted to reserves

	CU	CU
Dr Fair Value Movement in Profit and Loss	5,000
Dr Fair Value Movement in Subsidiaries in OCI/Revaluation Reserve	20,000
Cr Investments in Subsidiaries (CU120,000-CU95,000)		25,000

Being journal to reflect fall in value at 31 December 2014. The CU5,000 is posted to the profit and loss as there is nothing left in the revaluation reserve after the CU20,000 has been debited in line with Section 17

Dr Deferred Tax Liability

4,000

Cr Deferred Tax in Revaluation Reserve

(CU20,000*20%)

4,000

Journals required in the 31 December 2015 year assuming the above journals are posted to reserves

	CU	CU
Dr Investments in Subsidiaries (CU125,000-CU95,000)	30,000
Cr Profit and Loss Fair Value Movement		5,000
Cr Fair Value Movement in Subsidiaries in Revaluation Reserve/OCI		25,000

Being journal to reflect uplift in value from 2014 to 2015. CU5,000 credit to profit and loss as CU5,000 had previously been debited to the profit and loss for the downward valuation.

Dr Deferred Tax in Revaluation Reserve/OCI

((CU125,000-CU100,000)*20%)

5,000

Cr Deferred Tax Liability

5,000

Being journal to reflect deferred tax on the uplift. The movement of CU95,000 to CU100,000 was not recognised in 2014 as per narrative above as the asset was not deemed recoverable.

Note if the investment were to be settled or realized through receipt of future dividends the tax rate on the receipt of the dividend should be used for the deferred tax rate in the above example.

Optional exemptions – Compound financial instruments

Extract from FRS102: Section 35.10(g)

35.10(g) Compound financial instruments

Paragraph 22.13 requires an entity to split a compound financial instrument into its liability and equity components at the date of issue. A first-time adopter need not separate those two components if the liability component is not outstanding at the date of transition to this FRS.

OmniPro comment

Accounting for compound financial instruments under old GAAP is the same as the accounting required under FRS 102. Therefore this exemption is unlikely to be applicable where entities are transitioning from old GAAP.

The effect of this exemption is that split accounting does not have be performed if the liability component was settled prior to the date of transition. See Section 22 of this website for an example of how to apply split accounting.

Optional exemptions – Decommissioning liabilities included in the cost of property, plant and equipment

Extract from FRS102: Section 35.10(l)

35.10(l) Decommissioning liabilities included in the cost of property, plant and equipment

Paragraph 17.10(c) states that the cost of an item of property, plant and equipment includes the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. A first-time adopter may elect to measure this component of the cost of an item of property, plant and equipment at the date of transition to this FRS, rather than on the date(s) when the obligation initially arose.

OmniPro comment

Where an entity previously applied old GAAP the entity was also required to recognise a liability for the future decommissioning cost therefore a provision should already have been made, hence the exemption would not be applicable.

Optional exemptions – Dormant companies

Extract from FRS102: Section 35.10(m)

35.10(m) Dormant companies

A company within the Companies Act definition of a dormant company may elect to retain its accounting policies for reported assets, liabilities and equity at the date of transition to this FRS until there is any change to those balances or the company undertakes any new transactions.

OmniPro comment

Where this exemption is claimed, this fact must be disclosed in the financial statements prepared under old GAAP rules.

A company is considered to be dormant where it had no significant accounting transactions in the period and its assets and liabilities comprise only permitted assets and liabilities (i.e. investments in shares of, and amounts due to or from, other group undertakings. In determining whether or when a company is dormant, the following shall be disregarded:

(a) any transaction arising from the taking of shares in the company by a subscriber to the constitution as a result of an undertaking of his or her in connection with the formation of the company;

(b) any transaction consisting of the payment of—

    (i) a fee to the Companies House Registrar on a change of the company’s name;
    (ii) a fee to the Companies House Registrar on the re-registration of the company; or
    (iii) a fee to the Companies House Registrar for the registration of an annual return.

Where an entity becomes non-dormant in the future and therefore can no longer apply old GAAP accounting principles it cannot claim any of the first time adoption exemptions mentioned in this Section as technically that year is not the first year of transition.

Optional exemptions – Deferred development costs as a deemed cost

Extract from FRS102: Section 35.10(n)

35.10(n) Deferred development costs as a deemed cost

A first-time adopter may elect to measure the carrying amount at the date of transition to this FRS for development costs deferred in accordance with SSAP 13 Accounting for research and development as its deemed cost at that date.

OmniPro comment

This exemption only applies if the entity had previously adopted a capitalisation policy. On transition as a result of this exemption the entity does not have to assess whether the amount capitalised meets the criteria for capitalisation under FRS 102.

Where an entity expensed all development costs in the past, this exemption is not applicable. Instead Section 18 would have to be applied retrospectively. In applying Section 18, recognition criteria an entity must not capitalise costs incurred before the recognition criteria were met.

Optional exemptions – Borrowing costs

Extract from FRS102: Section 35.10(o)

35.10(o) Borrowing costs

An entity electing to adopt an accounting policy of capitalising borrowing costs as part of the cost of a qualifying asset may elect to treat the date of transition to this FRS as the date on which capitalisation commences.

OmniPro comment

The effect of this transition is that where an entity adopts a policy of capitalisation for the first time, they do not need to undertake a difficult task to retrospectively adjust opening balances for prior borrowing costs incurred instead it is applied prospectively.

Optional exemptions – lease incentives

Extract from FRS102: Section 35.10(p)

35.10(p) Lease incentives

A first-time adopter is not required to apply paragraphs 20.15A and 20.25A to lease incentives provided the term of the lease commenced before the date of transition to this FRS. The first-time adopter shall continue to recognise any residual benefit or cost associated with these lease incentives on the same basis as that applied at the date of transition to this FRS.

OmniPro comment

Under old GAAP any lease incentives received were released from the beginning of the lease up to the date of the first market rent review. Under FRS 102 these incentives are released over the length of the lease. In effect, it is released over a shorter period under old GAAP.

Therefore, where lease incentives were received prior to the date of transition these leases can continue to be released in line with old GAAP (i.e. over the life of the lease) where this exemption is claimed. All leases entered into from the date of transition have to be accounted for in line with Section 20 of FRS 102.

If the entity does not claim this exemption, retrospective adjustments are required to restate the lease incentive accrual to what it should be based on Section 20 in FRS 102.

Where a lease incentive is received since the date of transition (i.e. in the comparative period) a transition adjustment will be required to account for this incentive over the life of its lease. The below example illustrates this.

Example 18: Lease incentives since date of transition

Company A’s date of transition is 1 January 2014 i.e. 31 December year end. Company A entered into a lease on 2 January 2014 for 10 years with a landlord for a premises it occupies. As part of the agreement the landlord provided a 3 month rent free period (lease incentive of CU200,000/12mths*3mths=CU50,000). The rent payable on the lease per annum is CU200,000. As part of the agreement, the landlord agreed to provide the first 3 months rent free. A rent review/break clause was included which could be initiated at the end of year 5. Under old GAAP, this lease incentive was released to the P&L over the 5 years as was dictated by that GAAP. Therefore at 31 December 2014 the lease incentive accrual under old GAAP was CU40,000 (i.e. the value of the rent free period of CU50,000 / 5 years * 4 years that remain) and the rent cost in the P&L was CU190,000. Assume deferred tax is at 10%. The adjustment will be tax deductible over a 5 year period in the tax computation.

Under Section 20, the lease incentive needs to be written off over the life of the lease which is 10 years. See below for the calculation of what should have been accrued at the 31 December 2014.

The journals required to be posted in Company A’s TB at the 31 December 2014 to correct the old GAAP postings are:

Dr Rental Expense in P&L

(CU45,000-CU40,000)

5,000*

Cr Lease Incentive Accrual BS

5,000

Being journal to reverse understatement of accrual under old GAAP.

From year 2 on, the CU45,000 is written back to the profit and loss and set against the rental expense i.e. at the end of year 2 the accrual would be reduced to CU40,000 (CU50,000-CU5,000 for 2014 – CU5,000 for 2015) to show the net cost of CU195,000 per annum.

If in the above example the landlord provided a contribution of CU50,000 towards the cost of fixed assets or towards the cost of relocating, the treatment would be the same.

* Calculate the actual total rental payments over the 10 years i.e. actual rent payments are only paid for 9 years and 9 months = CU200,000 *9.75 years= CU1,950,000. Therefore the total amount of rent to be charged over the life of the lease is = CU1,950,000/10 years = CU195,000 per annum or CU16,250 per month. Therefore for the first 3 months an accrual is required as no payment is made. The accrual is then reduced over the life of the lease (the value of the rent free period was CU50,000). Therefore the accrual required at 31 December 2014 was CU45,000 (CU50,000 less the amount utilised in 2014 of CU5,000 (being CU50,000 / 10 years) compared to the old GAAP accrual of CU40,000.

Given that the company has already been taxed on the additional credit posted in old GAAP of CU500, a deferred tax asset should recognised for the fact that this will be recouped in future tax computations

The journals required are:

Dr Deferred Tax Asset

(CU5,000*10%)

500

Cr Deferred Tax P&L

500

Being journal to reflect deferred tax on the above adjustment

For the year ended 31 December 2015, a similar adjustment will be required (plus the profit and loss reserve adjustment for 2014), however no deferred tax will be required on the 2015 adjustment as the tax computation has not been submitted to tax authorities at the time of preparing the financial statements. 1/5^th of the deferred tax asset of CU500 recognized in 2014 will have to be released in 2015 for the fact that a deduction will be obtained in the tax computation for this 1/5^th in 2015. The journal required is:

	CU	CU
Dr Deferred Tax in P&L	100
Cr Deferred Tax Asset		100

Being journal to release 1/5^th of the deferred tax asset to match the tax deduction claimed that year.

Optional exemptions – Public benefit entity combinations

Extract from FRS102: Section 35.10(q)

35.10(q) Public benefit entity combinations

A first-time adopter may elect not to apply paragraphs PBE34.75 to PBE34.86 relating to public benefit entity combinations to combinations that were effected before the date of transition to this FRS. However, if on first-time adoption a public benefit entity restates any entity combination to comply with this section, it shall restate all later entity combinations.

OmniPro comment

This allows entities to claim exemption from retrospectively adjusting business combinations that were entered into prior to the date of transition.

Optional exemptions – Assets and liabilities of subsidiaries, associates and joint ventures

Extract from FRS102: Section 35.10(r)

35.10(r) Assets and liabilities of subsidiaries, associates and joint ventures

If a subsidiary becomes a first-time adopter later than its parent, the subsidiary shall in its financial statements measure its assets and liabilities at either:

(i) the carrying amounts that would be included in the parent’s consolidated financial statements, based on the parent’s date of transition to this FRS, if no adjustments were made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary; or

(ii) the carrying amounts required by the rest of this FRS, based on the subsidiary’s date of transition to this FRS. These carrying amounts could differ from those described in (i) when:

(a) the exemptions in this FRS result in measurements that depend on the date of transition to this FRS; or

(b) the accounting policies used in the subsidiary’s financial statements differ from those in the consolidated financial statements. For example, the subsidiary may use as its accounting policy the cost model in Section 17 Property, Plant and Equipment, whereas the group may use the revaluation model. A similar election is available to an associate or joint venture that becomes a first-time adopter later than an entity that has significant influence or joint control over it.

However, if an entity becomes a first-time adopter later than its subsidiary (or associate or joint venture) the entity shall, in its consolidated financial statements, measure the assets and liabilities of the subsidiary (or associate or joint venture) at the same carrying amounts as in the financial statements of the subsidiary (or associate or joint venture), after adjusting for consolidation (and equity accounting) adjustments and for the effects of the business combination in which the entity acquired the subsidiary (or transaction in which it acquired the associate or joint venture). Similarly, if a parent becomes a first-time adopter for its separate financial statements earlier or later than for its consolidated financial statements, it shall measure its assets and liabilities at the same amounts in both financial statements, except for consolidation adjustments.

OmniPro comment

Section 35.10(r) provides a choice to subsidiaries, associates, joint ventures who adopt to FRS 102 later than its group to measure its assets and liabilities at either:

the carrying amounts that was included in the parent’s consolidated financial statements based on the parent’s date of transition to FRS 102, if excluding adjustments made for consolidation procedures and for the effects of business combination in which the parent acquired the subsidiary; or

the carrying amounts required by the rest of FRS 102 based on the subsidiaries date of transition.

In effect the subsidiaries etc can choose to apply the choices taken by the parent in the consolidated financial statements and roll these forward to the date of transition for the subsidiary. For example in the Group financial statements the parent may have decided to apply a revaluation as a deemed cost for its subsidiaries on transition to FRS 102 and then not apply the revaluation option. It adjusted the subsidiary results based on this exemption. Assume this revalued amount was CU100,000. The subsidiary can take this CU100,000 as deemed cost and apply depreciation on this to get to the opening balance under FRS 102 at the subsidiarys date of transition. Once the parent has made a choice the subsidiary cannot change that choice.

If not the entity can decide on its own exemptions and measure these at its date of transition. Taking the above example, the entity could decide it will apply a policy of revaluation for fixed assets.

Consolidated financial statements on the other hand where the subsidiary has not been transitioned to FRS 102 before that date need to determine what the subsidiary results would be under FRS 102 when preparing its first set of FRS 102 financial statements, there are no exemptions.

Optional exemptions – Hedge accounting

Extract from FRS102: Section 35.10(t)

(t) Hedge accounting

(i) A hedging relationship existing on the date of transition

A first-time adopter may choose to apply hedge accounting to a hedging relationship of a type described in paragraph 12.19 which exists on the date of transition between a hedging instrument and a hedged item, provided the conditions of paragraphs 12.18(a) to (c) are met on the date of transition to this FRS and the conditions of paragraphs 12.18(d) and (e) are met no later than the date the first financial statements that comply with this FRS are authorised for issue. This choice applies to each hedging relationship existing on the date of transition.

Hedge accounting as set out in Section 12 Other Financial Instruments Issues of this FRS may commence from a date no earlier than the conditions of paragraphs 12.18(a) to (c) are met. In a fair value hedge the cumulative hedging gain or loss on the hedged item from the date hedge accounting commenced to the date of transition, shall be recorded in retained earnings (or if appropriate, another category of equity). In a cash flow hedge and net investment hedge, the lower of the following (in absolute amounts) shall be recorded in equity (in respect of cash flow hedges in the cash flow hedge reserve):

(a) the cumulative gain or loss on the hedging instrument from the date hedge accounting commenced to the date of transition; and

(b) the cumulative change in fair value (i.e. the present value of the cumulative change of expected future cash flows) on the hedged item from the date hedge accounting commenced to the date of transition.

(ii) A hedging relationship that ceased to exist before the date of transition because the hedging instrument has expired, was sold, terminated or exercised prior to the date of transition

A first-time adopter may elect not to adjust the carrying amount of an asset or liability for previous GAAP accounting effects of a hedging relationship that has ceased to exist.

A first-time adopter may elect to account for amounts deferred in equity in a cash flow hedge under a previous GAAP, as described in paragraph 12.23(d) from the date of transition. Any amounts deferred in equity in relation to a hedge of a net investment in a foreign operation under a previous GAAP shall not be reclassified to profit or loss on disposal or partial disposal of the foreign operation.

(iii) A hedging relationship that commenced after the date of transition

A first-time adopter may elect to apply hedge accounting to a hedging relationship of a type described in paragraph 12.19 that commenced after the date of transition between a hedging instrument and a hedged item, starting from the date the conditions of paragraphs 12.18(a) to (c) are met, provided that the conditions of paragraphs 12.18(d) and (e) are met no later than the date the first financial statements that comply with this FRS are authorised for issue.

The choice applies to each hedging relationship that commenced after the date of transition.

(iv) Entities taking the accounting policy choice under paragraphs 11.2(b) or (c) or paragraphs 12.2(b) or (c) to apply IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments

A first-time adopter adopting an accounting policy set out in paragraphs 11.2(b) or (c) or paragraphs 12.2(b) or (c) shall not apply the transitional provisions of paragraphs (i) to (iii) above. Such a first-time adopter shall apply the transitional requirements applicable to hedge accounting in IFRS 1 First–time adoption of International Financial

Reporting Standards, paragraphs B4 to B6, except that the designation and documentation of a hedging relationship may be completed after the date of transition, and no later than the date the first financial statements that comply with this FRS are authorised for issue, if the hedging relationship is to qualify for hedge accounting from the date of transition.

A first-time adopter adopting an accounting policy set out in paragraphs 11.2(b) or (c) or paragraphs 12.2(b) or (c) that has entered into a hedging relationship as described in IAS 39 or IFRS 9 in the period between the date of transition and the reporting date for the first financial statements that comply with this FRS may elect to apply hedge accounting prospectively from the date all qualifying conditions for hedge accounting in IAS 39 or IFRS 9 are met, except that an entity shall complete the formal designation and documentation of a hedging relationship no later than the date the first financial statements that comply with this FRS are authorized for issue.

OmniPro comment

Section 35.10(t) deals with derivatives. It allows entities the choice to apply hedge accounting from the date of transition if the conditions for hedge accounting are met and the documentation requirements stated in Section 12.18(d) and 12.19(e) before the first set of FRS 102 financial statements are authorised for issue. Section 35.10(t) also allows entities who met the conditions at period ends after the date of transition to apply hedge accounting if the conditions for hedge accounting are met and the documentation requirements stated in Section 12.18(d) and 12.19(e) before the first set of FRS 102 financial statements are authorised for issue.

Therefore where an entity chooses to apply hedge accounting from the date of transition, transition adjustments will be required to recognise the amount to be recognised in the cash flow hedge at that date. See Section 12 for examples of the adjustments required.

Optional exemptions – Small entities – fair value measurement of financial instruments and financing transactions involving related parties

Extract from FRS102: Section 35.10(u) and Section 35.10(v)

35.10(u) Small entities – fair value measurement of financial instruments

A small entity that first adopts this FRS for an accounting period that commences before 1 January 2017 need not restate comparative information to comply with the fair value measurement requirements of Section 11 Basic Financial Instruments or Section 12, unless those financial instruments were measured at fair value in accordance with the small entity’s previous accounting framework.

A small entity that chooses to present comparative information that does not comply with the fair value measurement requirements of Sections 11 and 12 in its first year of adoption:

(a) shall apply its existing accounting policies to the relevant financial instruments in the comparative information and is encouraged to disclose this fact;

(b) shall disclose the accounting policies applied (in accordance with paragraph 1AC.3); and

35.10(v) Small entities – financing transactions involving related parties

A small entity that first adopts this FRS for an accounting period that commences before 1 January 2017 need not restate comparative information to comply with the requirements of paragraph 11.13 only insofar as they related to financing transactions involving related parties.

A small entity that chooses to present comparative information that does not comply with the financing transaction requirements of Section 11 in its first year of adoption:

(a) shall apply its existing accounting policies to the relevant financial instruments in the comparative information and is encouraged to disclose this fact;

(b) shall disclose the accounting policies applied (in accordance with paragraph 1AC.3); and

(c) shall treat any adjustment between the statement of financial position at the comparative period’s reporting date and the statement of financial position at the start of the first reporting period that complies with paragraph 11.13 as an adjustment, in the current reporting period, to opening equity. The present value of the financial asset or financial liability at the start of the first reporting period that complies with this FRS may be determined on the basis of the facts and circumstances existing at that date, rather than when the arrangement was entered into.

OmniPro comment

This exemption cannot be chosen by Republic of Ireland companies at the time of publication of this guide as the EU Directive 2013/34 has not been enacted. This is expected to be enacted in early 2016.

Section 1A of this website outlines the exemptions available to small companies and what is considered a complete set of financial statements for a small company. Section 382 and 383 of the Companies Act 2006 (UK Companies Act) defines a company as a small company if it meets two out of the three of the following criteria:

Turnover-not more than FC10.2 million

Balance sheet total not more than FC5.1 million

Average number of employee not more than 50

(note these thresholds take effect from 1 January 2016 however early adoption is possible under FRS 102)

Section 35.10(u-v) exemptions allow a small entity to:

Not restate the comparative figures disclosed in the first set of financial statements prepared under FRS 102 for the following:

(For example, assume Company A has a year end of 31 December. The date of transition would then be 1 January 2014 and the comparatives would be for the year ended 31 December 2014. In this case the opening balance sheet and the comparatives would not need to be adjusted for:

Financial instruments required to be held at fair value under Section 11 and Section 12 of FRS 102. Examples of what would need to be fair valued under these sections are:
Fair valuing forward foreign exchange contracts;
Fair valuing interest rate swaps;
Investments where the entity does not hold a significant influence (usually less than 20% owned) which can be measured reliably (i.e. publically traded shares);
Sales and purchases to/from related parties (as defined in Section 33) where payment is beyond normal business terms;
Loan to/from related parties which are at non-market rates.

The small entity will measure the above assets/liabilities in line with the accounting policy adopted under old GAAP.

Where this exemption is claimed the small entity will post the carrying amount through the current year by posting it to opening retained earnings. When measuring the assets/liabilities at that date, a small company can determine the market rates on the loan based on the market date at that date. There is no requirement to try to determine these rates at the time the loan was initially entered into.

Optional exemptions – Small entities – financing transactions involving related parties

Impracticability

Extract from FRS102: Section 35.11

35.11 If it is impracticable for an entity to restate the opening statement of financial position at the date of transition for one or more of the adjustments required by paragraph 35.7, the entity shall apply paragraphs 35.7 to 35.10 for such adjustments in the earliest period for which it is practicable to do so, and shall identify the data presented for prior periods that are not comparable with data for the period in which it prepares its first financial statements that conform to this FRS.

If it is impracticable for an entity to provide any disclosures required by this FRS for any period before the period in which it prepares its first financial statements that conform to this FRS, the omission shall be disclosed.

OmniPro comment

Appendix I of FRS 102 states that ‘applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so’. Where an adjustment is not made due to it being impracticable then this must be disclosed.

Optional exemptions – Service concession arrangements, Arrangements containing a lease, Extractive activities

Extract from FRS102: Section 35.10(i), Section 35.10(j), Section 35.10(k) and Section 35.10(s)

35.10(i) Service concession arrangements

Accounting by operators A first-time adopter is not required to apply paragraphs 34.12I to 34.16A to service concession arrangements that were entered into before the date of transition to this FRS. Such service concession arrangements shall continue to be accounted for using the same accounting policies being applied at the date of transition to this FRS.

35.10(j) Extractive activities

A first-time adopter that under a previous GAAP accounted for exploration and development costs for oil and gas properties in the development or production phases, in cost centres that included all properties in a large geographical area may elect to measure oil and gas assets at the date of transition to this FRS on the following basis:

(i) Exploration and evaluation assets at the amount determined under the entity’s previous GAAP.

(ii) Assets in the development or production phases at the amount determined for the cost centre under the entity’s previous GAAP. The entity shall allocate this amount to the cost centre’s underlying assets pro rata using reserve volumes or reserve values as of that date.

The entity shall test exploration and evaluation assets and assets in the development and production phases for impairment at the date of transition to this FRS in accordance with Section 34 Specialised Activities or Section 27 Impairment of Assets of this FRS respectively, and if necessary, reduce the amount determined in accordance with (i) or (ii) above. For the purposes of thisparagraph, oil and gas assets comprise only those assets used in the exploration, evaluation, development or production of oil and gas.

(s) Designation of previously recognised financial instruments

This FRS permits a financial instrument (provided it meets certain criteria) to be designated on initial recognition as a financial asset or financial liability at fair value through profit or loss. Despite this an entity is permitted to designate, as at the date of transition to this FRS, any financial asset or financial liability at fair value through profit or loss provided the asset or liability meets the criteria in paragraph 11.14(b) at that date.

35.10(k) Arrangements containing a lease

A first-time adopter may elect to determine whether an arrangement existing at the date of transition to this FRS contains a lease (see paragraph 20.3A) on the basis of facts and circumstances existing at that date, rather than when the arrangement was entered into.

OmniPro comment

The above exemptions are straight forward and can be applied by entities.

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