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| Old GAAP | FRS 102 | Further Comment On Differences |
| Acquisition and Mergers | Business Combinations and Goodwill (S.19) | |
| FRS 6 did not define a business combination however it was taken to mean what has been set out in FRS 102. | A business combination is the bringing together of separate entities or businesses into one reporting entity (Section 19.3). Although not defined in FRS 6, it is unlikely to result in different conclusions being reached. | No differences are expected in this area as this definition was applied in practice under old GAAP so the same conclusion should be reached. |
| Indefinite lives for goodwill is possible. Where this arises annual impairment reviews are required. | All are assumed to have a finite life. | This is a significant difference. On transition to FRS 102 these assets will now have to be assigned a useful economic life and where this cannot be determined after all other options have been exhausted then it will have to be assigned a life not exceeding 10 years (5 years currently in Ireland but it will change to 10 years on adoption of the EU Directive 2013/34). This will result in an additional amortisation charge and will also require an adjustment on transition to FRS 102. Where the exemption not to restate prior year business combinations and goodwill is availed of, then no adjustment is allowed to be made to goodwill on transition, instead the intangible is amortised under the new useful economic life from the date of transition. The example attached provides the journals required where goodwill was previously considered to have an infinite life (Example 77 – Transition Adjustment For Goodwill Previously Determined Infinite Where Section 35.10(A) Is Claimed). |
| If unable to make a reliable estimate of the asset’s useful life – rebuttable presumption of 20 years. | If unable to make a reliable estimate of the asset’s useful life – should not exceed 5 years/10 years in the UK (currently 5 years for Ireland however subject to the enactment of the EU directive 2013/34 which is expected in 2016, this will increase to 10 years). This will result in increased amortisation for companies and consideration required as to the life of previously determined goodwill with indefinite lives. On transition where lives above 5 years were determined it is appropriate to assume that this longer life is still appropriate (assuming it was appropriate under old GAAP), so the default of 5 years is not appropriate.
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Where the useful life of goodwill acquired prior or subsequent to the transition to FRS 102 has been determined and presumably there was a basis for this as required by old GAAP, it is unlikely that this will have any impact as it will continue to be amortised over the period determined under old GAAP. Where under old GAAP the default rate of 20 years was used as the useful life could not be determined and the carrying amount cannot be supported, then a transition adjustment will be required such that the default life of 10 years (5 years for Ireland) should be used. See attached an example of the journals required where a difference arises (Example 78 – Transition Adjustment For Goodwill Where Previously Used The Default). |
| Amortised on a systematic basis over the useful lives. | Amortised on a systematic basis over the useful lives. | No difference. |
| If having a useful life of more than 20 years tested annually for impairment. | Not applicable as all have finite useful lives. Only carry out impairment review if indicators exist. | Under FRS 102, where no indicators of impairment exist then no impairment review is required. This will reduce the workload for entities. This will not create any transition differences as where an entity has performed an impairment review under old GAAP, it would still be applicable under FRS 102. Hence no adjustments required as a result of this difference. |
| The period for allowing adjustment to the fair values on acquisition is the period up until the end of the first full financial year following acquisition. These adjustments can be made prospectively, no prior year restatement is required. Changes to estimated contingent consideration are adjusted prospectively. | The period for allowing adjustment to the fair values under Section 19 is the 12-month period after acquisition. These adjustments are adjusted retrospectively where the 12 month period flows into the following year (the financial statements are prepared and signed off for the year within the 12 month time line) and as a result a prior year adjustment is required. Changes to estimated contingent consideration are adjusted prospectively. | This is a significant difference. This difference will result in more prior period adjustments arising as a result of a change in the fair values where 12 months from the date of acquisition straddles two accounting periods and the financial statements are prepared and signed off for the year within the 12 month time line. Where a change to fair values were made since the date of transition (i.e. in the first/comparative year after transition) and these were made in a different accounting period prior to the 12 month period elapsing, an adjustment will be required on transition. See attached an illustrative example of how this would be accounted for. Note this example is an illustration of a restatement where a business combination arose since the date of acquisition, it does not show transition adjustment, it merely shows how a prior year restatement would be posted (Example 79 – Subsequent Adjustment To Fair Values At The Acquisition Date And Amortisation Of Goodwill And Fair Value Uplifts On Acquisition). |
| Detailed disclosures required including: · details of provisions for reorganisation and restructuring costs that are included in the liabilities of the acquired entity, and related write downs made in the last 12 months; · details disclosed if provisional fair values were utilised and disclosures of subsequent material adjustments to the fair values with corresponding adjustments to goodwill were required to be explained; · details of profit after tax and minority interest for periods from beginning of the year to date of acquisition; · previously for group reconstructions there were detail disclosures however Section 19.25 only requires the method of accounting, and the date of the combination. | Disclosures required however none of the disclosure required across. | These are merely disclosure differences and therefore no transition adjustments are required. Refer to the detailed section of this guide for the disclosures required and the examples of such disclosures. They are similar to old GAAP but with reduced disclosures as mentioned across. There are significantly less disclosures for group reconstructions. |
| Recognition of contingent assets to determine fair value at the date of acquisition is allowed, however probability should be more than 90% to recognise such an asset. | Recognition of contingent assets is prohibited when determining fair value at the date of acquisition. | Where the exemption in Section 35.10 is availed of no restatement will be required to goodwill on business combinations entered into prior to the date of transition. However in this case where the contingent asset is still held (and it is still contingent) on the balance sheet then a journal will be required to: Dr Contingent asset Cr Profit and loss reserves Being journal to derecognise the contingent asset on transition in the opening balance sheet. If the asset is now certain and recognised in the subsidiaries’ financial statements at the date of transition, no adjustment is required as goodwill cannot be adjusted. In practice, little impact expected. Where this exemption is not claimed but the asset had been subsequently derecognised or received prior to the date of transition no adjustment is required. However where since the date of transition, a business combination occurred where a contingent asset was recognised at fair value under old GAAP and this is material, an adjustment will be required to derecognise this asset. The journals required in the consolidated financial statements (excluding deferred tax which has been shown in a separate example) would be to: Dr Contingent asset Cr Goodwill Being journal to derecognise the contingent asset in the period in which the acquisition arose. Dr Goodwill amortisation P&L Cr Goodwill Being journal to reflect additional amortisation on the uplifted goodwill. These journals will then need to be posted to reserves in the following year. |
| No deferred tax recognised on differences between acquisition fair value and tax base (only recognised if there was a binding sale). | Section 29 states that deferred tax is recognised on differences between acquisition fair value and tax base (including revaluations and intangibles ‘created’ as a result of the combination but excluding goodwill) even if these are permanent differences. Deferred tax is set against goodwill. | This is a significant difference and will result in a transition adjustment being posted on transition where an entity has had business combinations in the past and the fair values differed from the book values and intangibles were recognised as part of the combination. This deferred tax is required to be recognised even where the exemption contained in Section 35.10 not to restate prior year business combinations is claimed. See attached an example of the journals required on transition where the exemption not to restate is claimed (Example 80 – Adjustments For Deferred Tax On Business Combinations Prior To Date Of Transition Where Transition Exemption Availed Of). See example attached detailing the adjustments where a business combination was entered into pre the date of transition and the exemption not claimed (Example 81 – Adjustments To Business Combinations Where It Occurs Before Date Of Transition But Exemption Section 35.10(A) Not Claimed). Where the transition exemption is not claimed, an adjustment will be required for all deferred tax, intangibles, etc., whether that be since transition or before transition. See example attached detailing the adjustments where a business combination was entered into since the date of transition (Example 82 – Adjustments To Business Combinations Where It Occurs After The Date Of Transition). |
| An intangible should not be recognised separately from goodwill if fair value cannot be measured reliably but also subject to the constraint that, unless the asset had a readily ascertainable market value, the value was limited to an amount that did not create or increase any negative goodwill arising on acquisition. | Section 18.8 deals with intangible assets acquired in a business combination. An intangible should not be recognised separately from goodwill if fair value cannot be measured reliably, otherwise, recognised at fair value at the date of acquisition as long as it is identifiable. | This difference means that the recognition of intangible assets was previously capped where it would result in negative goodwill. Where this is the case and the exemption not to restate prior business combinations is claimed, then no adjustments will be required. However, where since the date of acquisition such a situation has arisen a transition adjustment will be required. |
| Exemption available for group companies who cannot determine the assets and liabilities of the scheme between the entities, then all group companies can account for the pension scheme as a defined contribution scheme. | Section 28 – Employee benefits – potential for defined benefit to be included on acquisition where previously it was treated as a defined contribution scheme under old GAAP (and therefore not incorporated into the goodwill fair value calculation). | Where the transition exemption not to restate goodwill on prior year business combinations, no adjustment will be required on transition. Where an entity has previously taken a group company which had such a scheme, a fair value exercise would need to be performed. Where this exemption is not claimed an adjustment will be required to be made to goodwill. |
| The fair value to be placed on any inventory on acquisition 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. | Where such inventory exists and a business combination arose, differences will arise. Even where the exemption to not restate goodwill on business combinations entered into prior to the date of transition and where this inventory still existed at that date a journal would be required to recognise this in P&L reserves (not goodwill as goodwill cannot be adjusted). The journals required would be to: Cr Profit and loss reserves Dr Inventory Being journal to recognise inventory at fair value at date of acquisition. Where it exists in business combinations entered into since transition previously accounted for under old GAAP an adjustment will be required to goodwill net of deferred tax. Although not shown in the attached example, the journals required will be similar (Example 83 – Adjustments For Deferred Tax On Business Combinations Prior To Date Of Transition Where Transition Exemption Availed Of). |
| Not applicable. | Section 35.10(a) provides an exemption not to apply section 19 – business combinations and goodwill to business combinations, prior to the date of transition. Goodwill cannot be adjusted on transition where this exemption is taken. | Where this exemption is not availed of all prior business combinations must be restated, an entity cannot pick and choose business combinations to restate. 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. See example of the journals and calculations required in this case (Example 84 – Adjustments For Deferred Tax On Business Combinations Prior To Date Of Transition Where Transition Exemption Availed Of). |
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